How Drug Makers Pay Competitors to Keep Drug Prices High

Understanding the Pay-For-Delay Tactic to Keep Rx Drug Prices High

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It’s no secret that prescription drugs are really expensive in the United States. Even if you have health insurance with prescription drug benefits, you’re not immune. The more your health insurance company has to pay for your prescription drugs, the higher it will set your cost-sharing fees like drug copays and coinsurance. Plus, high health care costs in general contribute to the increase in health insurance premiums.

There are lots of reasons prescription drug prices are high, but one is particularly exasperating: the pay-for-delay technique used to delay a brand name drug’s generic competition. Here’s how pay-for-delay works and why it costs U.S. consumers and health insurance companies big-time.

Understanding Brand-Name Drugs Vs Generics, Patents, & Prices

Let’s say Drug Maker A develops a new drug and brings it to market in the United States. For several years, this new drug is protected by patents, so Drug Maker A has the exclusive right to produce and sell it. Other drug makers can’t sell generic versions of that drug until Drug Maker A’s patents expire or are challenged and overthrown in court.

As long as Drug Maker A is the only one allowed to make and sell that drug, it can charge high prices. If you want Drug Maker A’s drug, you’ll either pay what Drug Maker A wants, or you’ll do without.

When Drug Maker A’s patents either expire or are thrown out in court, other pharmaceutical companies have the right to produce and sell less expensive generic versions of that drug.

The Federal Trade Commission estimates that, a year after a generic drug hits the market, the generic drug’s price is, on average 85% lower than the price of the brand-name drug before generic competition and that 90% of prescriptions filled for that drug are filled for generic rather than brand-name versions.

A wrinkle in the law says that the first drug maker that files for permission to produce and sell a generic version of a drug has a 180-day period of generic exclusivity. This means that no other drug makers (besides Drug Maker A) can sell the generic version of that drug for 180 days from the time the first generic version hits the market.

That’s where pay-for-delay comes in.

How Pay-For-Delay Works To Keep Drug Prices High

Let’s say Drug Maker B is the first generic drug maker to file for permission to sell a generic version of Drug Maker A’s blockbuster drug. (This could be because the patents are expiring or because Drug Maker B is litigating the validity of the patents.) Since Drug Maker B gets to be the only generic seller for 180 days, if Drug Maker B delays bringing the generic version to market, none of the other generic drug makers can enter the market either. A delay by Drug Maker B effectively limits generic competition.

With its blockbuster drug coming off patent soon, Drug Maker A knows generic competition will really eat into its profits.

It doesn’t want to lose the hundreds of millions of dollars in profits that its blockbuster drug brings in.

So, when Drug Maker B is granted first-to-file exclusivity, Drug Maker A cuts a deal with Drug Maker B. Drug Maker A agrees to pay Drug Maker B in exchange for Drug Maker B’s agreement to delay bringing its generic version to market. Since none of the other generics can come to market until Drug Maker B’s generic has been on the market for 180 days, this deal effectively stops all generic competition with Drug Maker A’s blockbuster for as long as the deal is in place.

Drug Maker A is happy because it’s still raking in top-dollar prices for its blockbuster drug, even though it has to pay Drug Maker B some of those profits. Drug Maker B is happy because it’s effectively earning millions for doing absolutely nothing, and when the deal expires, it still has its 180-day period of generic exclusivity.

The only ones who aren’t happy are the ones still paying brand-name prices for a drug that should have generic competition bringing its prices down, but doesn’t. That’s you, me, and our health insurance companies.

The FTC estimates pay-for-delay deals delay the onset of generic competition by an average of 17 months. That’s 17 months your health insurance company is paying $500 per month for your drug rather than $75 per month.

Pay-For-Delay Isn’t Always Paid in Money

Another wrinkle in the law allows Drug Maker A to license another drug maker to produce and sell its drug while it’s still on patent. When drug-makers do this, it’s called an “authorized generic version” because the patent-holder has “authorized” or licensed the right to produce the drug. Authorized generic versions are special in that they and the branded version are the only versions of the drug that aren’t subject to the 180-day first-to-file exclusivity rights of Drug Maker B.

Another type of pay-for-delay deal has Drug Maker A agreeing not to allow an authorized generic version to compete with Drug Maker B’s generic version during the 180-day period of exclusivity. This allows Drug Maker B’s generic to carry a higher price since the only competition is Drug Maker A’s branded drug.

Why would Drug Maker A agree not to license an authorized generic to compete with Drug Maker B’s generic during those first 180 days? Because Drug Maker B agrees to postpone bringing its generic to market. Any delay in competition, even just a few months, can mean millions of dollars in profits for a blockbuster drug with more than a billion dollars in sales per year.

Ultimately, those profits are coming from your pockets and the pockets of your neighbors.


Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions, an FTC Staff Study, January 2010. Federal Trade Commission.  Accessed May 30, 2015.

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