Generic Drug Pricing and the Ghost of Senator John Sherman

In 1890, Senator John Sherman of Ohio sponsored legislation titled the “Sherman Act.” The two-page bill was a sweeping antitrust effort to break up monopolies and promote fair and robust competition among the various players in the marketplace. The bill outlawed any “contract, combination in the form of trust or other-wise, or conspiracy, in restraint of trade or commerce…”

The Act was effective throughout the trust-busting era in the late 1800’s and early 1900’s. However, it has been used sparingly since then. That changed in early May 2019, when the Attorney General for Connecticut, alongside 43 other state Attorneys General, sued 20 generic drug manufacturers and various individuals associated with those companies for violations of the Sherman Act. 

Details of the Complaint

The Connecticut complaint covers 33 counts related to violations of the Sherman Act and a 34^th count that covers violations of state laws in the 44 plaintiff states. For more than 500 pages, the lawsuit details numerous occasions over the last seven to eight years alleging a “horizontal conspiracy” among the various defendants to allocate market share and fix prices on hundreds of generic drugs.

The complaint alleges ‘price fixing’ among the generic pharmaceutical companies. According to the complaint, generic manufacturers who marketed the same medication would work together to establish a “fair share” of the marketplace. The complaint says that the manufacturers would honor that fair share agreement by failing to provide competing bids to customers of competitors or offer “cover bids” that were purposefully set at a rate higher than the competitor. The complaint also alleges that manufacturers of the same generic drug would communicate and coordinate price increases, with some increases topping well over 1,000%. It is important to note that, according to the allegations in the complaint, it was not always the same companies working together, but was based on the particular generic drug and which manufacturers were involved in producing the drug.  The more salient points involving texts and emails have been redacted from the filing that is publicly available. The complaint also alleges much of the communication was handled verbally by telephone or in person at various trade shows, industry events, private dinners, golf outings and other social functions. The investigation leading to the complaint began in 2014 and is ongoing today. If the allegations are true, they paint a disturbing picture of collusion and conspiracy among a large segment of the generic pharmaceutical industry.

A Closer Look at Generic Drug Spend

In February 2018, the Pew Charitable Trust published “A Look at Drug Spending in the U.S.,” outlining the historical drug spend and projecting the trend over the next few years. The report shows that 2014 and 2015 were the two highest growth years in prescription drug spending in the last decade. Interestingly, those two years correspond with the majority of the price fixing activity alleged in the complaint against the drug manufacturers. The growth in drug spending noted in the Pew report has also been a catalyst for a growing number of legislative initiatives in state houses across the country focused on drug price transparency, as policymakers attempts to wrap their heads around increasing drug costs in their state-run systems.    

Generic drugs currently represent about 90% of the drugs sold in the United States but only account for 22% of the spend, according to the 2019 Access and Savings Report released by the Association for Accessible Medicines (AAM), a trade association for generic and biosimilar drug manufacturers. That same report notes that generic drug savings totaled $293 billion in 2018 and have saved the health care system nearly $2 trillion dollars over the last decade. Of the 20 manufacturers listed in the complaint, 10 are members of AAM, according to the AAM website. 

Healthy competition is critical to making any market work. Price fixing and colluding on market share is an antithesis to healthy competition. The AAM Code of Ethics summary of guiding principles states that member companies are committed to “Vigorous competition, which is the lifeblood of the generic drug and biosimilar industry. Competition allows our companies to drive enormous savings and pass them on to patients, taxpayers, and healthcare payors. Our Companies believe in the ethical value of access to affordable medicines and compete vigorously to provide them to patients.”

Generics have played a valuable role in reducing drug costs for the health care and workers’ compensation systems. For many payers and PBMs serving the workers’ compensation market, the often-inexplicable increase in generic prices in recent years has been tough to battle and offset, but through rigorous pricing and utilization controls, much of the generic price inflation for employers was absorbed. 

Where Do We Go From Here?

Moving forward, the civil litigation will wind its way through the courts and, hopefully, the truth will come to light. Whatever the outcome of the legal action, there will likely be some lasting impacts on how drug manufacturers conduct business. This will also likely spawn more legislative activity at the state and federal level to increase scrutiny on manufacturers. Once the litigation resolves, we will hopefully see real and robust competition among manufacturers and lowered prices on generic drugs.

There are some lessons for all of us in the workers’ compensation system to learn. The ghost of John Sherman continues to look down on American business and demand ethical behavior from its participants. We need to adhere to the tenets of healthy and vibrant competition promoted by the Sherman Act. We should all be singularly committed to creating a highly competitive and innovative marketplace that provides quality care to injured workers and increases value to employers for their workers’ compensation programs.

Brian Allen is a nationally recognized policy expert for workers’ compensation and insurance issues across the country. Allen currently serves as Vice President of Government Affairs for Mitchell’s Pharmacy Solutions team. In this role, Allen provides insight into new legislation and regulations in the industry, authors articles and blogs for industry publications and frequently speaks at conferences across the country

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