Evergreening insulin and market collusion

Yesterday I posted about price discrimination among pharmaceutical firms. However, engaging in price discrimination requires that firms have market power. One way that get market power is if the government grants them an exclusive licence to sell their product, such as through a patent. That market power is time-limited though, because patents expire. Unless, that is, you can argue that you have discovered a new use for your invention. So, pharmaceutical firms spend a lot of time and effort on trying to find new uses for their drugs (see my previous posts here and here, about Viagra), so that the patent can be renewed. This is called evergreening.

Evergreening is pretty widespread, and not just for well-known brand-name drugs. Consider the example of synthetic insulin, as described in this article by James Elliott and Elizabeth Pfiester:

Why aren’t we seeing more companies making insulin? There are many reasons for this, but patent evergreening is a big one. Patents give a person or organization a monopoly on a particular invention for a specific period of time. In the USA, it is generally 20 years. Humalog, Lantus and other previous generation insulins are now off patent, as are even older animal based insulins. So what’s going on? Pharmaceutical companies take advantage of loopholes in the U.S. patent system to build thickets of patents around their drugs which will make them last much longer (evergreening). This prevents competition and can keep prices high for decades. Our friends at I-MAK recently showed that Sanofi, the maker of Lantus, is no exception. Sanofi has filed 74 patent applications on Lantus alone, that means Sanofi has created the potential for a competition-free monopoly for 37 years.

So, don't expect cheap generic insulin to come onto the market for some time. Elliott and Pfiester also reveal a number of other reasons why insulin is expensive, including:

• Just three firms (Eli Lilly, Novo Nordisk and Sanofi) control over 90% of the insulin market worldwide, giving them a cosy oligopoly and a lack of competition on price;
• Collusion (as you would expect in an oligopoly), such as firms paying others not to enter certain markets ("it is actually legal for one insulin producer to pay another one not to enter the market"); and
• Price fixing (again, what you would expect from an oligopoly).

Evergreening is no surprise, since the incentives for that practice are created by the patent laws. However, taking advantage of market power through colluding on prices or market-splitting is illegal in most Western countries. Given that these practices raise prices, reduce the availability of insulin to patients, and reduce total welfare, it is surprising that the pharmaceutical firms can continue to get away with this. When it comes to health policy, this is surely some low-hanging fruit that can be picked to improve health cost-effectively (at the least, by lowering the cost to health funders, who can then divert more resources to other categories of health spending).

In the U.S. though, one problem that is not acknowledged in the Elliott and Pfiester article is that the health insurers, who fund much of the health system in the U.S., have very little incentive to reduce costs. The insurers don't care if the pharmaceutical firms are driving up prices, because the costs are simply passed onto consumers in higher health insurance premiums.

[HT: Marginal Revolution]

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