Brand Name Prescription
Drugs Antitrust Litigation
(1999)
Presented By:
Zhou Ge & Stephen Stults
Pharmaceutical Market




2003 US market value of US$217.5 billion
Accounts for 47% of world market
8.4% forecast annual growth rate 2003-2008
Projected 2008 market value US$325 billion
(Datamonitor,
Industry Profile Pharmaceuticals in the United States,
November 2004, datamonitor.com)
History of the Industry
 Up to the 1970’s the health care industry
was quite fragmented
 Individual insurance companies would pay
for drugs on behalf of patients and had little
bargaining power with drug companies
 Doctors decisions on what to prescribe were
made on a case by case basis
History of the Industry
Emergence of managed health care in late
1970’s concentrated buying power
– Managed care providers would represent many
insurance companies when contracting patient
services and purchase of prescription drugs
– Doctors now were limited to what they could
prescribe based on the rules of the health care
provider
Formularies of Drugs
A formulary is a list of prescription drugs
(established by a hospital or managed care
organization) that may be prescribed
– Doctors can only prescribe drugs on this list
– Certain drugs can be given preferential status
on this list
– Some drugs may even be given exclusive
status for a therapeutic class
Increased Buying Power
Managed care is able to exert greater
bargaining power as they…
– represent larger patient groups
– are able to influence doctors prescribing
habits based on status on formulary
– can stimulate competition among drug
manufacturers for patients business
Greater Concentration
Percentage of privately insured population
under managed care
 1980 about 5%
 1987 about 25%
 1997 over 75%
Today about 170 million, or 65%, of Americans
are covered by managed care providers
(Cutler and Sheiner, National Bureau of Economic Research, Managed Care and the Growth of Medical Expenditures,
working paper 6140, August 1997)
Distribution
Distribution to managed care providers and retail
pharmacies are handled by drug wholesalers.
Discounts are given to managed care providers and
to other large buyer groups such as HMO’s and
hospital groups.
Discounts are given in forms of chargeback, where
the manufacturer will pay the wholesalers back,
and through rebates.
The Trial
The Trial
 Retail drug stores claim that pharmaceutical
manufacturers
– Price discriminate against retail drug stores
(violation of Robinson-Patman Act)
– Conspired with distributors to refuse discounts to retail
drug stores
(violation of Section 1 of Sherman Act)
 Separate trials were scheduled for the violations of
the separate claims
Some reach settlement
 The plaintiffs were some 40 thousand retail
pharmacies which were subsequently
consolidated into one class
 17 pharmaceutical manufacturers were being sued,
of which 11 chose to reach settlements totaling
US$700 million
– a defendant will settle if it believes that
(Prob. of loosing x damages) + legal fees
is greater than settlement amount
Conspiracy
The charge of manufacturers and distributors
conspiring to refuse discounts to retail drug
stores was tried under the Sherman Act.
The Sherman Act requires that there be proof
of “unlawful concerted action” by all
defendants.
The case went to trial in the fall of 1998.
Focus of Trial
 Focus was on whether manufacturers colluded in
their refusal to extend the same price discounts to
retail drug store
– Plaintiffs claimed that trade association meetings
provided opportunity for collusion
– An opportunity for collusion relies on speculation, and
fails to prove that there was an actual collusive
agreement
 Discounts arose out of defensive measures to
prevent lost sales in the managed care sector as
such buyers became more aggressive
Status of “Price discrimination” Case
 Some of defendants have reach settlements
with plaintiffs
 A trail has not be on schedule.
PRICE DISCRIMINATION &
PRESCRIPTION DRUGS:
THE ROBINSON-PATMAN ISSUE
Conventional Robinson-Patman Act Case:
Buyers are in head-to-head competition but
some of them pay a higher price than their
rivals pay.
Plaintiffs Claim:
This is just their situation.
Defendants Claim:
 The favored consumers are not in head-to-head
competition with retail pharmacies.
 As discussed earlier, retail pharmacies are
dispensing agents rather than intervention agents.
Defendants maintained :
 Rebates and chargebacks should be viewed
as “Functional Discounts”: payment for a
marketing function.
 Their discount to managed care and hospital
consumers began as a defensive reaction,
named “Meeting Competition”.
What is “Functional Discounts”?
 Different from the “quantity discount”:
Prescription drug discounts are paid for
intervening on a large scale in the
prescription process, not for dispensing
large quantities of prescription drugs.
For example
American Association of Retired Persons
(AARP) operates one of the largest mailorder pharmacies. But, it did not receive
rebates or chargebacks because it does not
control prescription patterns.
Supports to the discount
interpretation-1
 If volume discount were granted to a large
drag store chain, this would not increase
total sales of any particular drug. Because
retails, even large chains, do not have
formulary control.
Supports to the discount
interpretation-2
The rebates and chargebacks were arrived at on a
contract-by-contract basis:
 one discount for listing a brand name prescription
drug on a formulary
 A large discount for giving that drug preferred
status on a formulary
 An even large discount for an explicit market share
achievement
Supports to the discount
interpretation-3
 Retail pharmacies are offered discounts for
products where they are positioned to
influence the interbrand choices of
consumers.
 For example: multisource drugs, over-thecounter medicines and consumer medical
products.
What is Meeting Competition?
Under the Robinson-Patman Act, a seller is
permitted to charge a lower price to one
consumer if the lower price is offered to
meet the low price of a competitor. This is
called the “meeting competition” defense to
a charge of price discrimination.
How to check the “meeting
competition”?-1
We cannot simply to compare nominal price:
 Because two offers with different nominal
prices may be viewed as equally attractive.
 For example : different price for different
quality; lower price of new supply for
switching cost; attractive price in order to
meet the price of bundle.
How to check the “meeting
competition”?-2
 In this case, it is offering a price low enough
to get on a formulary.
 Because firms are profit maximizers, they do
not want to discount much more than to
meet the competition.
Third Degree Price
Discrimination, Prescription
Drugs, and Consumer
Welfare
 The manufacturers’ pricing practices are
best explained by the theory of third degree
price discrimination.
 Retail pharmacies’ demand are less elastic
because they cannot maintain formularies or
steer prescriptions to particular drugs.
Plaintiffs’ Discount:
 Uniform pricing would cause all prices to fall
to the levels paid by the most favored
customers.
 Uniform pricing would increase aggregate
economic welfare.
Defendants’ Discount:
 Such a ruling would cause prices to seek a
higher, uniform level.
 Uniform pricing would decrease aggregate
economic welfare.
Why third degree price
discrimination may increase
aggregate economic welfare?
One reason:
 Ramsey pricing principle: In markets where scale
economies are so great that marginal cost pricing
is neither feasible or desirable, welfare-maximizing
prices in different segments vary according to the
inverse elasticity rule.
 Danzon (1997) argued further, in the
pharmaceutical industry, scale economies lodged
in low marginal production costs and high, fixed
research and development costs. So, Ramsey
pricing is optimal. Price discrimination that arise in
competition are better than uniform prices.
Another reason:
 More elastic managed care occurred, result in
discounts from the manufacturers.
 The demand elasticity outside the managed cares
are not affected, so the discount paid to managed
care did not cause price increase for any patient.
 Price fall in one segment but did not rise in
another segment. The effect of discrimination
prices on aggregate economic welfare would be
positive.
REFLECTIONS ON
BNPDAL
The last quarter-century of antitrust
has stressed consumer welfare
and economic efficiency more than
protecting small firms.
Retail pharmacists’ problem
 Is not manufacturers’ refusal to discount, but
their own reluctance or inability to “moving
market sharing”.
CONCLUSION
CONCLUSION-1
In the 1970s and 1980s, the price
competition is more intense.
The reason is :
Managed care organizations, along with
hospital and nursing homes, began to direct
groups of patients to particular firms to
secure lower prices.
CONCLUSION-2
 Retail pharmacies, merely dispense the
product but do not prescribe or control its
use.
 The retails cannot leverage this competition
to their advantage.