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Getting The Job Done Right: Strengthening The Senate Bill To Fully Protect Competition

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Soon after thanksgiving the debate on health care reform begins in earnest before the Senate. Competition issues, normally a backwater concern for Congress, will be front and center. The Senate will grapple with the difficult question: how to make competition work in health care markets?

If there is anything that the health care debate has made clear, it is that there is a lack of competition in health care markets, especially health insurance. Competition is the lodestar of the free market, and a solid dose of competition is essential to making health care markets work. Competition, however, requires three components that are largely absent from our health care markets: transparency, choice, and a lack of conflicts of interest. Some markets, like the market for health insurance, fundamentally lack choice, where dominant insurer often enjoy monopoly power. Other markets such as pharmaceuticals take advantage of regulatory structures to maintain market power, as in the case of brand-name drugs paying off generic drug manufacturers to stay off the market. And in other markets, a complete lack of regulation allows health care middlemen--like pharmacy benefit managers ("PBMs") --to engage in fraudulent and deceptive practices, all while earning sky-high profits.

The Senate health care bill released this past weekend makes a solid attempt at addressing these issues, but falls short in creating the regulatory structure necessary to ensure that these markets are fully transparent and competitive. The Senate will debate the proposed health care bill in the next several weeks but at the core of this debate will be how to reform these markets to restore competition to make markets function effectively so consumers can enjoy the savings and increased quality that come with true competition. I have three suggestions.

Inject Competition in our Broken Health Insurance Markets

There is little dispute that health insurance markets are broken, with rapidly escalating premiums, egregious and deceptive practices, and skyrocketing profits. Competition is markedly absent in most health insurance markets, which are overwhelmingly concentrated across the country. A 2007 study by the American Medical Association found that, in most markets, one or two insurers dominate, and a study this year by Health Care for America Now! found that consumers pay higher premiums in the most concentrated markets for health insurance.

A robust national public plan would be the single strongest competitive force in health insurance markets. The public plan would restore competition by providing a rival to these dominant insurers whose incentives are focused on creating coverage, not profits. The public plan's practices would stand in stark contract to the deceptive and exploitative practices that are widespread in the insurance industry. It would disrupt the market and set standards for transparency, disclosure, and eliminating conflicts of interest. Both the House and Senate bills contain this essential element to reform.

Another crucial step in ensuring that health insurance markets are competitive would be to fully repeal the McCarran-Ferguson Act, which exempts the insurance industry from the federal antitrust laws. Few industries deserve antitrust exemption, and health insurance is probably the last industry that should be shielded from these laws. The original intent of the law was to give insurers the ability the exchange information on risks and claims in a way that would help inexperienced new insurers enter the market. But under current antitrust standards, exchanging information in this fashion is not illegal, as Assistant Attorney General Christine Varney has clarified, and certainly does not warrant an all-out exemption.

The House enacted a fairly broad repeal of the McCarran-Ferguson Act with Congressman Conyer's bill, H.R. 3596. The Senate bill, however, is silent. Senator Leahy's bill, S. 1681, which would repeal the exemption and was passed by the Senate Judiciary Committee, should be enacted as part of the healthcare reform bill to give the federal antitrust enforcers the ability to address anticompetitive activity by health insurers. The Senate should supplement the repeal with provisions in Congressman Conyers and DeFazio's bill, which takes further steps to protect against anticompetitive and anti-consumer practices by clarifying the ability of the FTC to bring enforcement actions against insurers.

Some have questioned the need for eliminating this exemption, because the exemption has not played a role in many cases in the past. There are two answers. First, eliminating the exemption is important to protect competition after health care reform is enacted. if the exemption is left untouched, after health care reform restores some level of competition to the health insurance market, the McCarran Ferguson Act could be used to allow insurers to collude. Second, eliminating the exemption and clarifying FTC jurisdiction is important to enable the FTC to bring consumer protection actions against insurers.

Expand Access to Affordable Generics by Banning Patent Settlements

When generic pharmaceutical manufacturers successfully challenge patents, they can introduce generic equivalents to the market before the patent expires, providing consumers an affordable alternative. In 2008 alone, consumers and the federal government saved over $120 billion thanks to generic drugs. Unfortunately, regulatory structure currently provides a fertile medium to harm competition. A branded drug manufacturer can simply pay the generic manufacturer challenging their patent to stay off the market (an "exclusion payment"), leaving the branded drug to enjoy continued profits as a monopolist. If these payments continue, the FTC has estimated that the potential loss to consumers over the next ten years will exceed $35 billion.

Unfortunately the regulatory structure creates a set of perverse incentives in which generic drug manufacturers are almost more likely to enter into these settlements than to introduce a generic drug to the market. The regulations currently give the first generic manufacturer to challenge a patent the exclusive right to sell their generic equivalent for six months, and no other challenger has the opportunity to enter the market, even if it is successful in challenging the patent. Regulations which give the exclusivity period solely to the first-to-file generic create a bottleneck to all generic competition and, not surprisingly, many generic firms are willing to share the bottleneck with the branded firm in exchange for an exclusion payment.

The Senate bill does not address this failure in the regulatory structure or the use of these exclusion payments.. The House bill appropriately addresses this problem by making exclusion payments per se illegal under the antitrust laws. The Senate Judiciary Committee has attempted to deal with exclusion payments with S. 369, which is far more complex than the House bill: the bill, proposed by Senator Kohl and others, creates a relatively elaborate litigation process for the FTC to demonstrate that a settlement is illegal. That approach is well intended, but if there is no effort to grapple with the perverse incentives of the regulatory system, patent settlements will likely continue to block affordable generics from reaching the market as quickly as possible.

The better solution is to eliminate the underlying problem: the six-month exclusivity bottleneck. The Senate should enact S. 1315, introduced by Senators Kohl and Nelson, which would eliminate the perverse incentives of the regulatory system. This bill would correct the incentives by giving a subsequent generic challenger that successfully challenges a patent the opportunity to share in the exclusivity period. Not only would this eliminate the ability of a branded drug manufacturer to pay off a single generic firm to guarantee that they maintain monopoly power, but this would also encourage more generic manufacturers to challenge patents, increasing the odds that consumers will gain access to an affordable generic alternative as soon as possible.

A Lack of Transparency Allows Health Care Middlemen to Prevent Effective Cost Control

We rely on health care intermediaries to create networks and simplify the payment process for the countless individual transactions necessary to keep the health care market moving. Pharmacy benefit managers (PBMs) are middlemen that use the purchasing power of their members and large scale to negotiate rebates on drug purchases and, in theory, lower costs for enrollees. By managing formularies and making use of their bargaining power, PBMs have the potential to negotiate significant savings for health plans, government entities, and large employers who contract with them.

This potential is unfulfilled, however, because of a lack of competition and transparency. Prescription drugs represent the most rapidly growing segment of health care spending, and yet PBMs--which are involved in the bulk of prescription drugs purchases--are the only part of the health care market that is still unregulated. Without regulation and oversight, PBMs do not provide the service corporations, unions, governments and other plan sponsors hire them to do: to secure the lowest drug costs possible.

Moreover, without transparency, the activities of health care middlemen are fertile for fraud, waste and abuse. Over the past five years, PBMs' fraudulent and deceptive practices have resulted in five enforcement actions against major PBMs brought by a coalition of over 30 state attorneys general. For their illegal conduct, including drug switching, deceptive trade practices, repackaging, receiving kickbacks, and illegally retaining kickbacks, these PBMs have paid over $370 million in fines and penalties. As the National Legislative Association on Prescription Drugs, a bipartisan group of state legislators, noted: "We know of no other market in which there have been such a significant number of prominent enforcement actions and investigations, especially in a market with such a significant impact on taxpayers."

At the same time, the profits of the three major PBMs have nearly tripled over the past few years from $900 million to almost $3 billion annually. No other segment of the healthcare market enjoys such high profits while maintaining a record of such deceptive, egregious and anti-consumer practices.

Fortunately, a provision in the Senate bill authored by Senator Cantwell requires a certain level of disclosure by PBMs to plan sponsors in the Exchange. Transparency would force PBMs to be accountable for their actions and for drug costs. Congress can do more, though, to ensure that the incentives of PBMs are aligned with those of plan sponsors and that they make every effort to reduce drug costs rather than seeking ways to pocket savings that should be passed on to consumers and plan sponsors.

The House health care bill has stronger language addressing specific wasteful practices by PBMs that the Senate should adopt. For example, PBMs frequently switch plan members to drugs that may be more expensive to their plan sponsor so the PBM can collect a larger rebate check from that drug's manufacturer. The House bill requires that PBMs disclose when and why they might switch prescriptions in this fashion.

The Senate should take further steps to ensure that PBMs are fully accountable to plan sponsors. Plan sponsors should have the right to audit their PBM and learn what they paid the PBM for each drug and what the PBM, in turn, paid the pharmacy that dispensed the drug. Plan sponsors should also have the right to know what rebates the PBM secured on their behalf. To rein in prescription drug spending, Congress should give plan sponsors all the tools they need to determine if their PBM is saving them money and sharing those savings. Larger plan sponsors across the country already use these tools, and they've achieved significant savings by enacting transparency: TRICARE, the Department of Defense's health plan, anticipates savings of $1.67 billion by switching to a transparent plan, and the State of Wisconsin saved over $150 million by switching to a transparent PBM. The Senate should keep these savings in mind and enact stronger transparency provisions.

Conclusion

Today, the market for health care is structured such that conflicts of interest, a lack of choice and a lack of transparency significantly hinder meaningful competition. With health care reform, we can change that. Keeping consumers' interests in mind, Congress should take advantage of this opportunity by fully addressing the regulatory structures that fail to promote genuine competition.