Real conservatives should fight anticompetitive abuse of FDA regulations
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There’s nothing conservative about supporting government grants of monopoly power, but you wouldn’t know that from the way some conservatives have reacted to the CREATES Act, a bill that would prevent drug companies from abusing the regulatory system to extend their monopolies beyond patent expiration. To hear these people talk, you would think that government-granted monopoly rights are the same as private property rights. Nothing could be further from the truth.

While property rights, rule of law, and free markets are key factors for economic growth and human flourishing, monopolies overcharge consumers and retard economic growth by misallocating resources. Conservatives have long opposed government schemes like taxi medallion programs that artificially restrict competition to a favored few. With the advent of ride-sharing services like Uber, consumers have seen firsthand the overcharge and lack of quality that comes with government-created monopolies.    

Government-granted monopolies can be beneficial in at least one situation, however. Patents provide incentives for the creation of life-saving drugs by allowing inventors to recoup their invention costs through monopoly pricing of their products. This benefit to inventors is, of course, a corresponding cost to consumers who must pay higher prices. And the resulting misallocation of resources means that people who critically need but cannot afford high-priced drugs won’t get them. We accept this high cost because we believe that if it were not for the incentive of drug patents, many new drugs would not be developed at all. We also know that once patent protection expires, generic versions can be purchased cheaply.

The point is that patent monopolies are tools for providing incentives to create. The goal is to allow firms to recover their R&D costs and enough profits to encourage a beneficial level of innovation, but not to allow perpetual monopolies. While firms know that they can’t have perpetual patents, they are quick to take advantage of regulatory systems to prolong their monopolies past the life of their patents whenever possible.

The CREATES Act remedies one such abuse of a regulatory system. FDA regulations facilitate fast entry of generic drugs to the market once a drug patent expires. To that end, FDA regulations require drug companies to sell samples of their patented drugs to FDA-approved generics upon request. Current FDA regulations also require that for dangerous drugs, drug companies must set up Risk Evaluation and Mitigation Strategies (“REMS”) and “Elements to Assure Safe Use” (“ETASU”) of the drugs. These programs include elements like restricted distribution and patient testing. Current law requires that drug companies with established REMS with ETASU systems allow generic sellers of the drugs to participate in these systems for a reasonable price, unless the drug company has a legitimate business reason for refusing. The problem is that while the law’s requirements are clear, there is no effective penalty for refusing to comply, and thus a growing number of drug companies have been effectively blocking generic entry by not sharing samples or allowing REMS participation.

The CREATES Act is narrowly tailored to solve this problem. Under the Act, if a drug company does not provide samples of the drug or agree to share its REMS program within 31 days and 121 days, respectively, then the generic may sue for injunctive relief plus a monetary award of no more than the drug company’s revenues for the drug in question during the period of noncompliance. This monetary penalty discourages gaming the system, but also allows drug companies to easily avoid liability simply by selling to those FDA-approved generic manufacturers who request samples. In addition, drug companies cannot be held liable if there is a shortage of the drug, if the terms requested by the generic are not commercially reasonable, or if the drug is available for purchase from wholesalers and distributors.

The likely effectiveness of the CREATES Act can be seen by the panicked attack it is receiving from some companies that have previously benefited from the lack of penalty for regulatory abuse of current law. Opponents have come up with several unpersuasive objections, such as the argument that the Act will cause a litigation boom. But this makes no sense. All drug companies have to do to avoid liability is share as directed by the law. Nor should credence be given to arguments that drug companies will be exposed to liability, reputational and otherwise, for sharing with untrustworthy generics whose drugs could harm patients. The FDA approves generics’ manufacturing facilities and requires generics to obtain special approval before requesting access to dangerous drugs. And, from a marketing standpoint, there would be nothing better to promote sales of a name brand drug than to be able to run advertising about the lack of safety of a generic.

While there are a number of weak arguments against the Act, the one that is the most ludicrous is that the Act is just a government seizure of property rights. This conflation of the supposed “right” to game regulatory regimes with the right to private property is both dangerous and wrong. Some liberals already argue that markets don’t work when it comes to drugs. These liberals are happy to use examples of high-priced, off patent drugs to support their argument, even though it is actually the lack of market competition due to regulatory gaming that causes the high prices. Conservatives should not play into liberals’ hands by treating monopoly pricing resulting from regulatory abuse as equivalent to profits achieved from private property or patent rights.  If they do, they risk wining the battle against the CREATES Act but losing the war against comprehensive, across the board regulation of drug prices.

David S. Olson is an associate professor at Boston College Law School. He teaches patents, intellectual property and antitrust law. 

The views expressed by authors are their own and not the views of The Hill.