What is 'Pay-for Delay," And How it Impacts Your Healthcare Costs

A new law being proposed by state representative Sean Scanlon and state comptroller is seeking to address prescription drug costs in part by addressing a long tradition by drug companies called “pay-for-delay.”

The relevant section of the new proposed legislation, HB 7174, would “require pharmaceutical manufacturers to send notice to the Insurance Commissioner regarding "pay-for-delay" agreements, and require health carriers and pharmacy benefits managers to reduce the cost of brand name prescription drugs that are the subject of such agreements.”

“Pay-for-delay” is a tactic used by major pharmaceutical companies to pay off generic medication manufacturers to delay their production. Typically, new medicines, once approved, have a specific period of time when they have the market exclusively, and generic competitors are not allowed on the market. This allows companies time to recoup the development costs of their drug, and make a profit.

But pharmaceutical companies have a variety of ways to delay competition once the patents and exclusivity time periods expire, one of which is a pay-to-delay” deal, essentially working out a deal with generic manufacturers to delay competition in the marketplace. This can extend the period in which the higher priced medication has the entire market for that drug.

While these deals can be direct payments, most often they come in the form of a distribution deal. In simple terms, a pharma company nearing the end of its patent protection can rant an exclusive distribution area to a competitor in exchange for that competitor not producing a generic copy of the initial drug. 

Typically, when the patent period ends and a competitor enters the market, the price of the drug drops significantly. If multiple generics enter the market, the price to consumers can drop as much as 90% due to increased competition. Clearly, this is something big pharma does not want to see.

The other means is simply attacking the generic manufacturers with lawsuits, often making claims of patent infringement over minor details of a patent on a drug. With release tied up in court, the pharma company delays competition.

With pay-to-delay, a recent example is that of the worlds top selling drug, Humira. Humira was initially a drug meant to treat arthritis, but has come to be effective treating a variety of illnesses. It cost was around $38,000 a year in the U.S., but half of that in Britain, and a third in Switzerland. The patent was set to expire in 2016, at which time “biosimilars,” essentially generic copies, would be allowed on the market to compete against a drug that was raking in between 14 and 20 billion in revenue each year worldwide for its’ maker, Abbvie.

What  drug company, like Abbvie, may do is file for a large number of patents on the manufacturing process, making it nearly impossible to duplicate the drug without infringing on a patent. Soon after, a host of lawsuits were filed, and then settlements that allowed generics and Abbvie to both make money, while keeping the cost of the drug high.

The deals made allow for a major drug to avoid competition from biosimilars, or generic drugs, for ears if not decades. Essentially they pay off the competition, avoiding the introduction of a generic to the market, in exchange for distribution rights or another means of sharing profits.

According to the bill filed by Rep. Scanlon and state comptroller Lembo this week, the plan would be for big pharma to first disclose the existence of a “delay” type deal and then to reduce the cost of the drug to 50% of list price for the duration of the delay.

While drug companies object to the term “pay for delay,” the Federal Trade Commission has had the practice in its sights for years.

“These drug makers have been able to sidestep competition by offering patent settlements that pay generic companies not to bring lower-cost alternatives to market,” stated the FTC. “These “pay-for-delay” patent settlements effectively block all other generic drug competition for a growing number of branded drugs. According to an FTC study, these anti-competitive deals cost consumers and taxpayers $3.5 billion in higher drug costs every year. Since 2001, the FTC has filed a number of lawsuits to stop these deals, and it supports legislation to end such “pay-for-delay” settlements.”

But those suits have as yet been unsuccessful in ending the practice, and Scanlons proposed law likely faces significant legal battles.

But those battles may be worth the cost of the fight. Last years price increase of Humira alone was 9.7%, and cost the U.S. healthcare system an additional 1.2 billion dollars.

Consumers may never see the cost of the drugs they are taking. But with drastic increases in health insurance costs each year, they are paying the price.