A lawsuit filed by a group of 44 U.S. states against 20 generic drug makers alleging collusion and price-fixing has revealed how existing market-based, competitive mechanisms fail to protect consumers, according to experts. The complaint, filed in the U.S. District Court in Connecticut, says that drug companies have since 2012 discreetly engaged with each other on price fixing, and that it has escalated into “one of the most egregious and damaging price fixing conspiracies in the history of the U.S.” Teva Pharmaceuticals USA, whose parent company is based in Israel, has been named as the ringleader of the price-fixing.

Other companies named in the complaint include Pfizer, Novartis subsidiary Sandoz, Dutch drug maker Mylan, and India-based firms including Lupin Pharmaceuticals, Aurobindo Pharma, Dr. Reddy’s Laboratories and Wockhardt. Teva’s chief financial officer said at a press conference in Jerusalem that it “has not engaged in any conduct that would lead to civil or criminal liability” and that it plans to fight the lawsuit. The complaint also names 15 individual defendants who are current or former drug company executives.

“What’s particularly discouraging here is we rely on generics to control prices,” said Robert Field, professor of law, and health management and policy at Drexel University, who is also a lecturer in Wharton’s health care management department. He noted that the U.S. is the only developed country that doesn’t have government control on drug prices and instead relies on free market competition. “Now we’re seeing that market isn’t functioning.”

In fact, “we’re seeing an assault on two sides,” Field said. “One is the mechanisms that the branded companies use to extend their patent terms — testing on children, collusion sometimes with the generic companies to keep the generics off the market, and all sorts of legal loopholes that they have for adding additional patents for packaging, dosage and so forth. Now we’re seeing the generic companies not competing the way they’re supposed to.”

“What’s particularly discouraging here is we rely on generics to control prices.”–Robert Field

Generic drugs were supposed to be the answer to dealing with high prescription drug prices, noted Stacie B. Dusetzina, professor of health policy and professor of cancer research at Vanderbilt University School of Medicine. “So, this is a huge violation of the social contract between patients and these companies where we expect this to work.”

Field and Dusetzina discussed the generic drug price fixing controversy on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Soaring drug prices is one of the few issues that has received bipartisan criticism in Washington, D.C. “We all wonder why our health care, and specifically the prices for generic prescription drugs, are so expensive in this country — this is a big reason why,” said Connecticut attorney general William Tong. His office led the investigation, during which it filed 300 subpoenas and collected 18 million phone records, emails and text messages that “illuminate the level of collusion occurring between generic drug giant Teva and 19 other companies named in the lawsuit,” according to a report in the Hartford Courant newspaper.

The complaint alleges that the generic drug manufacturers engaged in “a broad, coordinated and systematic campaign to conspire with each other to fix prices, allocate markets and rig bids for more than 100 different generic drugs.” The drugs are used to treat ailments including diabetes, cancer, epilepsy, multiple sclerosis and HIV.

“Price fixing is always wrong and harmful, regardless of the product or service,” said Mark Pauly, Wharton professor of health care management, and also professor of business economics and public policy. “I do not know of any evidence that buyers of drugs trust drug companies on prices, any more than they trust phone companies or sellers of chocolate on prices.”

Letter and Spirit

Field said the Sherman Antitrust Act of 1890 is “crystal clear” in that it outlaws collusion among competitors. “And price fixing is perhaps the greatest sin that you can commit in terms of colluding,” he added.

The 1984 Hatch-Waxman Act (officially called the Drug Price Competition and Patent Term Restoration Act) aimed to balance two seemingly contradictory interests: encouraging drug innovation, and promoting competition between brand and generic drugs in order to lower drug prices, the complaint noted. The act succeeded in both of its goals: After the law was enacted, generic drugs have moved from being less than 20% of prescriptions filled in the U.S. to nearly 90% of prescriptions filled. A recent study found that, in 2011 alone, generic medicines saved $193 billion for consumers, the complaint said.

Alongside such statutes, the generic drug industry has operated for many years also with the informal understanding among manufacturers “not to compete with each other” and to instead settle for a “fair share” of the market for each, the complaint stated. By 2012, Teva and other drug companies had decided “to take this understanding to the next level: significantly raise prices on as many drugs as possible,” it alleged.

“We have people meeting on golf courses and at dinners to discuss price fixing in a way that harms consumers, and it’s unconscionable.” –Stacie B. Dusetzina

Between July 2013 and January 2015, Teva significantly raised prices on approximately 112 different generic drugs, the complaint noted. Of those 112 different drugs, Teva had colluded with its competitors on at least 86 of them, according to the complaint. “Teva had understandings with its highest quality competitors to lead and follow each other’s price increases, and did so with great frequency and success, resulting in many billions of dollars of harm to the national economy over a period of several years.”

The collusion occurred through phone calls, personal meetings on golf courses or at parties, and text messages, with a view to avoid leaving trails of evidence. “We have people meeting on golf courses and at dinners to discuss price fixing in a way that harms consumers, and it’s unconscionable,” said Dusetzina. The collusion was exposed after the State of Connecticut began investigating select generic drug price increases in July 2014.

Field said that the 44 states that have come together to frame the lawsuit appear to be following the models of the so-called tobacco litigation and the opioid litigation in the U.S. The 1998 tobacco settlement saw 46 states on one side and four tobacco companies on the other side. The more recent opioid litigation has 36 state attorneys-general joining forces against manufacturers and distributors. He expected the six states left out of the generic drug lawsuit to come on board at some point.

Pauly wondered why the federal justice department did not initiate action in the latest case. “Usually states do not concern themselves with prices charged, but I guess since states buy lots of drugs for the Medicaid program they finance, they had more interest in this one.”

Will Consumers Benefit?

Consumers could be made whole for any excess prices they paid if there were a record of who bought what drug and at what prices, said Pauly. It is more likely that drug firms will pay a fine to the states, who then could distribute it to buyers, but probably will use it for other purposes — as was the case with tobacco settlement money, he added.

Dusetzina did not see a way for consumers to recoup any of the excess amounts they have paid for their generic drugs over the years. Increases in their insurance premiums are also unlikely to come down, she said. “It’s one of those things that keeps going up.”

According to Pauly, insurance premiums will be higher if drug prices are higher. “I suppose they should go down after this conspiracy ceases, [but] I wonder if they will,” he said. “Generics are still a bargain for Americans — more so than in other countries where generic prices are higher and branded drug prices lower — so this matters.”

Building on a Political Issue

The timing of the complaint and its disclosures is “politically opportune,” said Field. “We have everyone from [Democratic senator] Elizabeth Warren to Donald Trump saying that we’ve got to do something about drug pricing, and now we find out that the cornerstone of our price controls — which is generic competition — is not functioning. There’s a chance we’ll get some actual action in Congress.”

While Field expected generic drug pricing to figure in the presidential election debates next year, he wondered if it would result in a temporary Band-Aid or “a fundamental rethinking of the way we get a handle on costs.” According to Field, the U.S. patents and generics systems “seem to be pretty severely broken.” The U.S. may want to explore the European model “of having the government more actively regulate the prices in one way or another,” he added.

“[Regulators should] investigate and detect price fixing. That is why we pay them.” –Mark Pauly

According to Field, it is high time policy makers and regulators act more strongly than in earlier times to contain high drug prices and cartelization. “There is a long history of antitrust enforcement in this area,” he said, adding that it has gone beyond pharmaceuticals. “We’ve seen collusion [in the past] between insurance companies and hospitals, and between hospitals and hospitals. [Government action] is going to have to be more direct and not passively thinking the market is going to work, when we now know that in many ways it doesn’t.”

The generic drug lawsuit opens the door for policy makers to address the drug pricing aspect of health care costs by involving other stakeholders such as health care providers and insurers, said Field. “If we go after them one by one they’re each going to get their hackles up and fight back,” he added. “What this [lawsuit] may do is incentivize us to come up with a model for the drug piece of it, and perhaps that can spread more widely.” Added Dusetzina: “It’s important that we try to use this [situation] to think about how our system can function better across the entire spectrum — from the time the drugs come on to the market through generic entry.”

Options for Regulators

What could regulators do in such cases? “Investigate and detect price fixing,” said Pauly. “That is why we pay them.” The U.S. does not need to have “a fundamental rethink” on controlling prices of branded drugs, said Pauly. “That market could be, and is, competitive if there is no conspiracy,” he noted. “The ‘rethink’ applies to the prices of drugs protected by government-enforced patents and exclusivity.”

“I do not see the need for new regulations here,” Pauly said. He advised “just vigilance to enforce existing anti-trust laws against conspiracies to divide the market and charge high prices.” If Teva and the other companies are found guilty of price fixing, they should be disciplined with substantial fines, he noted.

Identifying the right price for generic drugs is important for future regulatory action in this area, said Dusetzina. “We do pay low prices for generic drugs generally. But you don’t want to pay so little that companies don’t have any incentive at all to be in the market.” She noted that low drug prices have occasionally resulted in drug shortages or companies exiting a market because they can’t make a profit. “You have to balance wanting low prices for generics but also wanting enough competitors in the market.”