Statement by Consumers Union in Support of Generic Drug Legislation Before the U.S. Senate Health Committee

Written Statement of

Janell Mayo Duncan
Legislative Counsel
Washington Office
Consumers Union

Before the

Health, Education, Labor and Pensions Committee
United States Senate

Closing the Gaps in Hatch-Waxman: Assuring Greater

Access to Affordable Pharmaceuticals

May 8, 2002

Mr. Chairman and members of the Committee, Consumers Union (1) strongly supports Senate measure S.812, the "Greater Access to Affordable Pharmaceuticals ("GAAP") Act." This legislation, introduced by Senators Charles Schumer and John McCain, is designed to restore competition to the prescription drug market by preventing many of the anticompetitive tactics employed by brand name drug companies, and some generic drug companies, to keep lower-priced generics from coming to market.

Consumers and patients need access to affordable medicines. Existing therapies are of little value if people cannot afford them. We know these consumers exist -- they are the poor, the uninsured, and the underinsured. They are the elderly and disabled who lack a Medicare prescription drug benefit. In total, over 38 million people (including about 8.6 million children) lack health insurance today. (Tables 1, 6; Health Insurance Detailed Table: 2000, U.S. Census Bureau.) We need to increase access to lower-cost drugs for all consumers if we are to have any hope of creating an affordable Medicare prescription drug benefit. The Congressional Budget Office ("CBO") estimates that wider use of generic drugs could reduce drug costs by $8 to $10 billion dollars per year. ("How Increased Competition from Generic Drugs has Affected Prices And Returns In the Pharmaceutical Industry," The Congress of the United States, Congressional Budget Office (July 1998) ("July 1998 CBO Study").)

In 1984, the "Drug Price Competition and Patent Term Restoration Act," more commonly known as "Hatch-Waxman" patent reform legislation, sought to strike a balance between brand name drug companies seeking increased patent life due to the long time it took for United States Food and Drug Administration ("FDA") to approve a new drug, and generic companies that wanted to increase competition by bringing generic alternatives to market.

Hatch-Waxman initially resulted in a win-win situation for consumers. The Act provided incentives for generic drug manufacturers to bring products to market -- and they did. Since passage of Hatch-Waxman, the generic share of the drug market has increased from about 19% to 42%. (Schacht, Wendy H., and Thomas, John R., CRS Report for Congress, "Patent Law and Its Application to the Pharmaceutical Industry: An Examination of the Drug Price Competition and Patent Term Restoration Act of 1984," updated December 18, 2000, at 31-32; See also Prescription Drug Trends, a chartbook update, The Henry J. Kaiser Foundation, November 2001, at 36. ("Kaiser Chartbook Update").)

The Act also included patent extensions as incentives for brand name companies to develop new products -- and they did. After passage of the Act, brand name companies spent more than they did before passage. (Hunt, Michie I., "Prescription Drug Costs: Federal Regulation of the Industry," (September 2000), at 60.)

Why is access to generics drugs so important? Cost. Health care costs have been spiraling out of control for consumers and employers, with prescription drug spending now the fastest-growing part of these costs. (Altman, Stuart H., Ph.D., "Controlling Spending for Prescription Drugs," New England Journal of Medicine, Vol. 346, No. 11, March 14, 2002, at 855.) From 1990 to 2000, per capita spending on prescription drugs increased by 206.6%. (Carey, Mary Agnes, "Analysts See a Seismic Shift in Health Policy Debate," CQ Weekly, March 23, 2002, at 794.) Although generic drugs comprise over 40% of the market, generic sales represent less than 10% of the cost of total spending on drugs. (July 1998 CBO Study.) As mentioned above, the CBO study shows that if consumers buy more generic drugs, overall drug costs could decrease by $8 to $10 billion in a year. (Id.)
Wider use of generic drugs could save money for existing government programs, such as Medicaid, and could make a Medicare prescription drug benefit an achievable goal. It is only by reining in prescription drug expenditures that we can expect Congress to successfully tackle the challenge of shaping a Medicare prescription drug benefit that provides a meaningful, affordable benefit to all beneficiaries. The Congressional Budget Office projects that spending on prescription drugs by Medicare beneficiaries will increase from $87 billion in 2002 to $248 billion in 2011. (Crippen, Dan L., Director, Congressional Budget Office, Testimony on Projections of Medicare and Prescription Drug Spending before the Committee on Finance, United States Senate, March 7, 2002.) Ten-year costs are projected to total $1.6 trillion between 2002 and 2011. (Id.)

The Schneider Institute for Health Policy at Brandeis University recently estimated the potential savings that would result through increased use of generic drugs by seniors.(2) (Ritter, Grant, Thomas, Cindy, and Wallack, Stanley S., The Schneider Institute for Health Policy, Brandeis University, "Greater Use of Generics: A Prescription for Drug Cost Savings," (2002) ("Brandeis Study").) This study assumed a current generic use rate of 34.5% for this population. The methodology calls for a modest increase in generics: up to the generic use rate for health plans with the highest generic drug usage, i.e., 51%.(3) Researchers calculated that by increasing the use of generic drugs by older Americans from 34.5% to 51%, per capita savings in 2000 would be $270 per person over 65 -- and over $350 in 2003. Total expenditures would shrink by $14 billion in 2003, and $250 billion over a ten year time period (2003 to 2012). They further estimated that this savings would translate to a $50 to $100 billion savings over 10 years for the Medicare prescription drug plans under consideration by Congress. (Id.)

Consumers often question whether generic drugs are an appropriate substitute. The FDA will only approve a generic drug if there is "no significant difference" between the brand name and the generic. The two drugs must be "bioequivalent." In addition, an FDA study of 273 drugs approved in 1997 found only a 3.5% difference between generic and brand name drugs. This difference was no greater than the variance allowed between batches of the same brand name drug. ("The Stalling Game," Consumer Reports, July 2001, at 37.)

Despite the clinical effectiveness of generics, and their benefit as a lower-cost alternative, recently the win-win situation experienced by consumers after enactment of Hatch-Waxman reform has been turned on its head. Brand name drug marketing is up (direct-to-consumer ads are at an all-time high), anticompetitive tactics are up, and innovation is down. According to an April 19, 2002 article in the New York Times, the pipeline -- the number of promising new drugs -- is shrinking. ("Despite Billions for Discoveries, Pipeline of Drugs is Far From Full," New York Times, April 19, 2002.) Brand name companies are devoting too many resources to retaining market share for existing therapies. According to a Kaiser Family Foundation Report, "major pharmaceutical manufacturers spent more than twice as much on marketing and administrative activities as on research and development (R&D) (34% compared to 14%)." In addition, for these companies, profits exceeded R&D (24% compared to 14%). (Kaiser Chartbook Update, at 13.) Finally, some generic companies have delayed bringing their drugs to market in a timely manner -- accepting payments from brand name companies not to compete.
When brand name or generic drug companies use anticompetitive tactics to stall generic competition, consumers lose out on substantial savings from lower-cost alternatives. For example:

· In 2000, the average retail price of a prescription for a brand name drug was more than 3 times the price of a generic drug ($65.29 vs. $19.33) (Kaiser Chartbook Update, November 2001, at 7);

· The generic version of a drug can cost substantially less than the brand name drug, often less than 50% of the cost of the brand name version (July 1998 CBO Study, at xiii); and

S.812, the GAAP Act, would prevent many of these anticompetitive activities. For example:

1. The bill would stop the filing of frivolous citizen petitions with the FDA designed to delay generic drug approval. Filing citizen petitions has been an important method for the public to raise concerns about FDA-regulated products -- but the process has been subject to abuse. This legislation would require an entity submitting a citizen petition to certify that the petition is well-grounded in fact, that all relevant information has been included, and that it has not been submitted for an improper purpose -- such as the improper delay of a generic drug application. In addition, the bill directs the Federal Trade Commission (FTC) to investigate citizen petitions that may have been submitted for anticompetitive purposes.

2. The bill addresses wrongful patent filings designed to prevent generic competition. Hatch-Waxman sought to assure brand name drug companies that their patented products would not be infringed upon by generic drug makers who "jumped the gun" and introduced a competing product before the drug patent had expired. The law requires the FDA to stay approval of any generic drug for 30 months if the brand name company sues the generic drug maker for patent infringement. Brand name companies have improperly claimed additional patents for their products (often for non-essential features of the drug product, such as color or shape of pill), and then brought patent lawsuits to trigger 30 additional months of competition-free sales. The bill would eliminate the requirement that the FDA stay approval of the generic drug. In addition, before a generic drug company is sued, the bill will allow the company to seek a court judgment finding that bringing its product to market will not infringe on the patent of the brand name drug company.

3. The bill would prevent brand name companies from delaying approval of generic drugs by challenging the "sameness" or "bioequivalence" of generic products. FDA will only approve a generic drug if it is found to be "substantially equivalent" or "bioequivalent" to the brand name drug it will substitute. Traditionally, this determination of "sameness" is made by measuring the level of drug in a patient's body over time, i.e, through the measurement of blood levels. Brand name drug companies have delayed the introduction of generic drugs where the FDA must measure bioequivalence by an alternate method (e.g., dermatological or inhaled drugs). This bill's modified definition will make clear that the FDA can evaluate and find bioequivalence through a method other than the measurement of blood levels.

4. The bill would provide "rolling exclusivity" to generic drug applicants, preventing generic companies from delaying the marketing of competing products by failing to bring a drug to market. Currently, the first company to file a generic drug application with the FDA can market its product free from competition from other generics for 180 days. If the first to file does not bring its drug to market, the 180 day clock never begins to run, and no other generic drug company can introduce a generic alternative. This legislation would increase competition by taking exclusivity away from any generic drug company that does not vigorously attempt to bring its product to market, or has been determined by the Secretary of Health and Human Services (in consultation with the FTC) to have engaged in illegal, anticompetitive, or collusive practices.

5. The legislation calls for additional study to determine the impact of the legislation.

The bill will require the FTC to submit a report to Congress within five years of the date of enactment, assessing whether the provisions of the Act are enabling generic drug products to come to market in a more fair and expeditious manner.

The GAAP Act is designed to restore "competition" in the prescription drug marketplace. Ultimately, this will benefit consumers by spurring brand name companies to increase innovation and by speeding the availability of lower cost drugs to all consumers once a drug patent expires. In addition, achieving wider availability and use of lower cost generic drugs is an absolutely critical first step in creating a meaningful Medicare prescription drug benefit. It is for these reasons that Consumers Union strongly supports Congressional action on this important legislation. Therefore, we urge the members of the Senate Health, Education, Labor and Pensions Committee to support this bill and report it out of Committee favorably before the Memorial Day recess.

Footnotes:
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(1) Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.

(2) Note that unlike the CBO estimates which include people 65 and over and the Medicare-disabled, the Brandeis study considers only those 65 and over.

(3) Considering that some health plans achieve generic substitution rates far higher than the 51% benchmark used in the Brandeis study, we believe even greater use of generics should be possible. Note also that the 34.5% estimate of generic use is for an adjusted sample that is restricted to drugs typically covered by insurance, and standardized to 30-day prescriptions. (Brandeis Study, at 7.)