Earlier this year, the United States Federal Trade Commission (FTC) released its “Report on Rebate Walls” to Congress, which gave an antitrust analysis of pharmaceutical manufacturer contracting practices, including rebate strategies. Rebate walls, according to the report, are situations in which a dominant pharmaceutical manufacturer uses rebate strategies in its contracts with third party payors to maintain market power, by giving its products preferred status in drug formularies and to prevent the sales of competing products.
The FTC made sure to note that the legality of a given rebate arrangement depends on a variety of factual issues present in the individual circumstances, going on to note that drug companies often use rebates as incentives to have their products included on a formulary or in higher tiers of the formulary. The rebates are typically “after-the-fact discounts calculated as a percentage of the drug’s list price.” The FTC noted that while the “precise form” of the rebate may vary, “rebate payments are often conditioned on the drug’s continuing to hold a preferred or exclusive position on a payer’s formulary.”
The FTC went on to say that some industry analysts and academics believe that rebates have become a “trap” for payers and providers alike, resulting in decisions being made about coverage and utilization based on financial incentives created by the rebate structure. For example, if a competitor’s drug is granted formulary access, the manufacturer may stop paying rebates (or even “claw back” previously paid rebates), forcing the third-party payer to pay the full list price of the manufacturer’s drug for any purchases of that manufacturer’s drug. If the third-party payer cannot switch a sufficient proportion of its covered patients to the lower-priced alternative, then granting that lower-priced alternative is not financially worth losing the original rebates. This can make it difficult because payers who wish to make the lower cost medication available may have to continue paying for the original product, without the benefit of rebates, for some portion of covered patients in the short term.
The FTC noted that as outlined above, rebates may “operate to increase overall drug spending,” particularly with respect to biologics, “given their generally higher costs relative to small molecule drugs.” The FTC also noted that the rebate walls may result in reduced incentives for biotechnology companies to develop new medications and/or invest in biosimilars, which ultimately hurts competition and the quality of care available to patients.
Antitrust Analysis
The FTC noted that antitrust concerns surrounding these rebate practices focus on their potential to create or maintain the market power of an incumbent pharmaceutical product. Depending on the circumstances, rebating strategies may be assessed under Section 1 or Section 2 of the Sherman Act and a prima facie claim of anticompetitive conduct under Section 2 requires showing two threshold elements: (1) monopoly power in a relevant antitrust market; and (2) the rebating conduct has foreclosed competition, while a claim under Section 1 requires an agreement and a showing of market power, not monopoly power.
The FTC was quick to note that the agency is not currently litigating a rebate wall matter, but it is actively litigating three cases in the health-care sector alleging other unlawful exclusionary conduct (Surescripts, LLC; Vyera Pharmaceuticals; and Endo Pharmaceuticals).
Conclusion
The FTC concluded that it will “continue to use its panoply of powers to promote competition in pharmaceutical markets” and will investigate and challenge “exclusionary conduct by pharmaceutical firms and third-parties that threatens to delay new entry, keep prices artificially high or deter innovation, and deny patients access to competing treatments.” The FTC also cited to the rulemaking group that was previously created to consider competition rules for unspecified pharmaceutical industry practices.