Issue Area

Abuses of Government Programs and Regulations

The biopharmaceutical industry and certain related supply chain participants have become skilled at “gaming” the system in ways that result in higher prices for patients and outsize profits for themselves. 

Although circumvention of the FDA-granted period of marketing exclusivity is the most costly to the healthcare system, abuses of the 340B program and exploitation of the Orphan Drug Act have also created opportunities for healthcare companies to generate billions of dollars in profit at the expense of patients.

For decades, the innovator companies have successfully delayed or impeded generic and biosimilar competition through patent hedges, protracted litigation and settlements with generic drug companies. These actions undermine the intent of the government-granted monopoly for newly approved drugs.

This government-mandated exclusivity (which extends 7 years for NCEs and 12 years for biologic drugs) rewards innovation by preventing generic and biosimilar competitors from being approved—effectively allowing a time-limited monopoly in exchange for discovering and developing innovative and value-added drugs. In practice, however, a drug’s market exclusivity is frequently determined by the expiration of the primary patent rather than the FDA mandate—and is often extended multiple times as a result of additional patents or tweaks to formulations. As described in the previous section, the manufacturer has nearly full discretion over the price at which the drug is launched into the market and frequently accelerates price increases as the prospect of generic competition nears.

Key Facts & Figures
34%

For the largest global pharmaceutical companies, more than one-third of US pharmaceutical revenues in 2019 (34%) were generated by products whose marketing exclusivity or primary patent have already expired.

Over 50%

Four companies generated over 50% of their 2019 US revenues from products with expired exclusivity: Abbvie (73%), Amgen (59%), Biogen (86%) and Roche (55%).

Excessive patents, litigation and settlements extend lucrative monopolies beyond FDA exclusivity.

Many of the top-selling drugs in America are direct beneficiaries of their manufacturer’s success in extending monopolies, with layers of patents and multi-year litigation that keeps approved generics and biosimilars off the market. The larger the drug’s revenues, the safer the franchise because the potential damages could be devastating to would-be competitors if they launch “at risk” and the courts uphold the originator’s claims. As a result, the two parties may reach anti-competitive settlements because it is more lucrative for generic competitors to be paid to delay entry than try to compete or to lose the case and wait even longer.  

Layers of patents and multi-year litigation often keep FDA-approved generics and biosimilars off the market.

Some of the most striking examples of this practice – and the value it can create for the manufacturers – include: Abbvie’s Humira, $14.9 billion (62% of US sales in 2019); Amgen’s Enbrel, $5.1 billion (31% of US sales) and Bristol Myer’s (formerly Celgene’s) Revlimid, $7.3 billion (30% of US sales).

  • For the largest global pharmaceutical companies, more than one-third of US pharmaceutical revenues (34%) in 2019 were generated by products whose marketing exclusivity or primary patent have already expired
  • Four companies generate over 50% of their 2019 US revenues from products with expired exclusivity: Abbvie (73%), Amgen (59%), Biogen (86% including recently overturned patent for Tecfidera) and Roche (55%).

Expansion of 340B program indirectly raises costs while providers and pharmacies profit.

Section 340B of the Public Health Service Act was originally conceived nearly 30 years ago as a program allowing certain hospitals that cared for low-income or uninsured patients to obtain drugs for their patients at substantially reduced prices. Toward that end, the program requires pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounts that generally range from 30-40% off list price (capped at the Medicaid price). In recent years, drug purchases under the 340B program have been growing in excess of 25% per year and now account for 8-10% of the drug market by some estimates. According to Adam Fein, the program has grown to ~$36 billion and is now approximately the same size as the Medicaid outpatient drug market.

While noble in concept, much of the growth of the program is a result of massive consolidation among hospitals, providers and pharmacies, which has enabled many providers and pharmacies outside of the intended scope to procure drugs at the mandated 340B discount.  As there is no requirement to pass the lower price on to patients (many of whom are insured), the contract pharmacies and hospitals often profit from the spread between their procurement cost and reimbursement they receive. 

Why Does this Matter?

Since the 340B program drives down the acquisition costs of drugs but not their reimbursement, it can influence the costs of patient care in several ways. Several studies have concluded that the availability of profits from administering expensive drugs is known to alter physician prescribing behavior toward those products with higher profit margins. Moreover, when the cancer drug or medication is administered in hospital-based infusion suites, the overall cost to both the insurer and the patient can be dramatically higher. The 340B discounts are largely a diversion of funds from the manufacturers to the hospitals, clinics, and contract pharmacies that dispense and administer the drugs. As a result, the manufacturers have an incentive to offset these revenue losses by raising list prices so that the net revenues can be preserved.

Share

Research & Insights

We conduct non-partisan, independent research, and make our work accessible and informative to policymakers and the general audience alike. Browse our featured research or explore our work by article type.

Expansion of the Medicare 340B Payment Program
As the 340B program expands, it continues to draw national attention.
JAMA Viewpoint 12/11/2018
Impact of President Trump's Proposed 340B Hospital Eligibility Threshold
Research tells us 9% of hospitals would lose their 340B eligibility under Trump's drug pricing plan. Essentially all are in Medicaid expansion states.
Drug Pricing Lab 05/11/2018
The 340B Program: Hospitals Profit by Reaching Affluent Communities
The 340B program is being converted from one that serves vulnerable patient populations to one that enriches hospitals and their affiliated clinics.
Health Affairs 10/01/2014
Cost Consequences of the 340B Drug Discount Program
Unintended consequences of the 340B drug discount program alter physician prescribing habits, widen the disparity in hospital profits, and increase list prices of drugs to compensate for revenue losses.
JAMA Viewpoint 05/15/2013
The Conflict Between QALYs and Well-Funded Patient Advocacy Groups
The goal of a QALY is to figure out how much any given drug is worth to a society so that we, as a society, have a benchmark to evaluate the price of pharmaceutical products.
Relentless Health Value 12/10/2020
Remdesivir Less Expensive for "Government Programs"? Not So Fast.
Two options are proposed if Gilead wishes to offer the discounts to the full array of government programs.
Drug Pricing Lab 07/01/2020
Blueprints for Indication-Specific Pricing
Several approaches that rewire existing reimbursement conventions as alternatives to facilitate ISP are proposed.
Drug Pricing Lab 05/19/2020
Pharmaceutical Products and Their Value
Steep increases in prices and spending on prescription drugs in the United States have triggered public outrage and questions about their value.
Value in Health 03/29/2020
Drop in Cancer Deaths Reflect Failures of Our Society. Really.
Despite declining cancer death rates, the nation still presents societal failures to improve the state of our population's health.
The Boston Globe 02/21/2020
Dissecting PhRMA's Opposition to H.R. 3 Lower Drug Costs Now…
Dr. Peter Bach responds to PhRMA's stance of opposition to H.R. 3 Lower Drug Costs Now Act of 2019.
STAT News 10/11/2019
Time to Throw in the Towel on Biosimilars
Peter Bach and Mark Trusheim of MIT Sloan School of Management underscore the drawbacks of Washington's preferred solution to introduce competition for biologics, the biosimilar model.
The Wall Street Journal 08/21/2019
Mortgaging New Treatments Kicks the Can on High Drug Prices
The launch price for one-time gene therapy Zolgensma presents various implications.
Morning Consult 07/09/2019

Featured News

See All News
The New York Times 03/10/2016

Medicare Tries an Experiment to Fight Perverse Incentives

Margot Sanger-Katz discusses how doctors are incentivized to prescribe more expensive treatments, and how CMS is devising new payment strategies to combat the practice.
Read Article
Newsletter

Stay up to date on our work and news