With Republican efforts to repeal and replace Obamacare dominating the headlines, you might have missed the hearing yesterday in the House Subcommittee on Health Care, Benefits, and Administrative Rules examining “the impact of voluntary restricted distribution systems in the pharmaceutical supply chain.” The hearing explored how some generic drug companies are pulling their products out of regular pharmacies and choosing to sell them through a single pharmacy outlet. In a regular competitive market, such a move would be catastrophic with competitors swooping in to fill the market void. But in this brazen era of generic drug company monopolies, restricting generic drug distribution is just the latest anti-competitive move we’re witnessing in the generic drug market.
During my college years, I worked for five semesters as a teaching assistant for an entry-level economics course. I spent much of my time explaining to frustrated freshmen how monopolies distort markets and damage consumers. One of the toughest concepts to grasp was that of a “natural monopoly.” Natural monopolies occur in industries where there are (1) disproportionately high-fixed costs of entry into the market, and (2) disproportionately low operating costs to stay in the market.
The example I used to explain the concept to the students was that of a large electric public utility, where the very high cost of placing a network of wires into the ground coupled with the relatively low cost of power generation virtually assured that there would be only one electricity provider in a community. No significant competitor would enter such a market because the incumbent provider, having already recovered its initial fixed-cost investment, could easily drive the new competitor from the market by collapsing existing prices just enough to cover its (the incumbent provider’s) operating costs. In such a situation, we cannot and do not expect competition to solve our monopoly problem. Instead, we collectively grant authority to public service commissions to regulate utility prices.
Were I teaching that undergraduate economics course today, we would certainly be discussing how monopolies arise through the over-regulation of markets, with the existence of generic drug company monopolies as prima facie evidence of the phenomenon. Generic drug companies, by definition, do not research and bring new drugs to market. Instead, they produce drugs whose pharmacological properties, efficacy and side effects are well known, whose patents have expired and whose formulas are owned by society at large.
The generic drug market should be among the most competitive markets around. But needlessly complex regulations, painstakingly slow generic drug approvals, and brazenly anti-competitive behavior of existing generic drug companies have resulted in “regulatory monopolies” that allow generic drug companies to rip off desperately ill people. The only reason Turing Pharmaceuticals can get away with charging $750 a pill for the lifesaving generic drug Daraprim, which costs less than a $0.01 per pill to manufacture, is because of the regulatory barriers that prevent competitors from entering the market.
Which brings me back to Wednesday’s hearing. The FDA requires a company that wants to market a specific generic drug to prove that its drug has exactly the same pharmacological properties of the existing drug on the market. This requires the new generic drug manufacturer to conduct bio equivalency testing comparing both the absorption rate and the blood stream availability of the active pharmaceutical ingredient for its new generic drug with the existing drug on the market. If the incumbent generic drug company plays keep-away with its drugs, preventing the aspiring competitor from completing the required bio equivalency testing, then it can maintain its monopoly position in perpetuity. This is why generic drug companies are voluntarily restricting distribution.
Dan Liljenquist is a former Republican state senator from Utah and former U.S. Senate candidate. He is nationally recognized for work on entitlement reform.