In 2021, the Biden administration issued a landmark Executive Order (EO) on competition. A major focus of the EO is the pharmaceutical sector in the U.S., where consumers pay prices for prescription drugs that are significantly higher than in other countries. In deploying a number of policy tools, the sector is a proving ground for the EO’s signature “whole-of-government” approach to promoting competition. However, the approach largely overlooks the critical role of merger control by the Federal Trade Commission (FTC) in the pharmaceutical sector. Merger control is the first line of defense in preventing harmful increases in market concentration that can enhance market power and reduce consumer welfare through higher drug prices, lower quality, and less innovation. In excluding merger control from the policy toolkit, the Biden administration has also missed an important opportunity to revisit the FTC’s longstanding, controversial policy for pharmaceutical mergers. That policy has been to approve virtually all mergers subject to divestitures, which has fostered higher concentration in critical drug markets. This analysis makes the case for why it is time for the Biden administration to take stock and consider a mid-course policy correction in implementing the EO in the pharmaceutical sector.
The availability and affordability of prescription drugs are an essential part of promoting the health, stability, and productivity of the U.S. population. Competition in pharmaceutical R&D that produces new branded drugs, and the entry of generic and biosimilar drugs, plays a leading role in ensuring that medications are accessible and affordable. But anticompetitive strategies can limit competition and reduce consumer welfare through higher drug prices, lower quality, and less innovation. These include “product-hopping” schemes and “pay-for-delay” agreements involving branded drugs coming off-patent, that stifle competition from generics and biosimilars. Pharmaceutical mergers involving generic drug manufacturers that significantly increase market concentration can also lead to outcomes that reduce consumer welfare.
Early on, the Biden administration recognized the challenges of promoting competition in the pharmaceutical sector. For example, the July 2021 Executive Order (EO), Competition in the American Economy,” sets forth a “whole-of-government” approach that is “necessary to address overconcentration, monopolization, and unfair competition in the American economy.” The EO shines a light on the pharmaceutical sector, noting that Americans pay “too much” for prescription drugs, and that they pay far more for drugs than in other countries.
Concerns over competition and drug pricing and access, of course, pre-date the Biden administration. Federal legislative proposals to protect competition and consumers target harmful conduct ranging from anticompetitive agreements that pay generic firms to stay out of a market, to excessive drug pricing. They include, for example, the CREATES Act of 2019, Protecting Consumer Access to Generic Drugs Act of 2019, and Prescription Drug Price Relief Act of 2019. California has also led state efforts to promote competition through legislation that makes pay-for-delay agreements illegal.
The Biden EO frames an ambitious suite of initiatives to address pharmaceutical competition by looking at domestic supply chains, prices paid by the government, generic and biosimilar competition, patent policy, and payment models. An array of executive agencies are tasked with implementation: Health and Human Services and Centers for Medicare & Medicaid Services, the Food and Drug Administration, and the U.S. Patent and Trademark Office. The Federal Trade Commission (FTC) is also charged with using its rulemaking authority to enforce methods of unfair competition or anticompetitive agreements involving prescription drugs.
The scope of the EO’s approach to pharmaceutical competition appears consistent with “whole-of-government.” Antitrust enforcement is clearly a major policy tool. However, the Biden administration omits a vital prong of antitrust enforcement merger control as a first line of defense in addressing pharmaceutical competition and drug pricing concerns. In doing so, the EO also misses an important opportunity to revisit the FTC’s longstanding, troubled policy for reviewing and remedying pharmaceutical mergers.
The omission of important policy tools, or lack of inter-agency coordination, has marked implementation of the whole-of-government approach in other sectors. For example, the U.S. Department of Transportation has not moved to redesign the airport takeoff and landing slot system, or to revisit its approval criteria for airline joint ventures. Both policies are central to promoting competition. The Federal Energy Regulatory Commission has given incumbent natural monopolies in electricity and natural gas precedence in expanding critical infrastructure, a policy that limits competition from other important market players.
This analysis unpacks why a lack of focus on merger control in the pharmaceutical sector is likely to limit the effectiveness of the whole-of-government approach under the Biden administration’s EO. It discusses why a focus on consumer welfare should be a critical policy “lens” through which to view important competition issues; the importance of revisiting merger control in pharmaceutical markets based on past enforcement failures; and the need for a mid-course policy correction.
