An economic consulting group recently published findings that a U.S. Food and Drug Administration (FDA)-proposed rule will increase annual healthcare costs by $4 billion. The FDA’s proposal, announced in November 2013, would allow generic drug manufacturers to update product labeling with new safety information even if the revised labeling differs from that of the reference listed drug (RLD). The proposed change was a direct response to the Supreme Court’s call for action in PLIVA, Inc. v. Mensing. The FDA estimates net annual costs will range between $44,000 and $385,000. Nevertheless, many critics suggest that the proposed rule would only serve to fund the plaintiffs’ bar at the expense of public safety. The alarming cost increases announced by this study provide further support for these critics, who largely believe that the FDA simply got it wrong this time.
Background on the proposed rule
In PLIVA, Inc. v. Mensing, the Supreme Court held that federal law preempted state law failure-to-warn claims against generic drug manufacturers because the Hatch-Waxman Amendments (“Hatch-Waxman”) require generics to use warnings that are identical to the brand-name’s. Recognizing generic preemption could leave some plaintiffs without a failure-to-warn claim, the Supreme Court nevertheless declared it “will not distort the Supremacy Clause in order to create similar pre-emption across a dissimilar statutory scheme. As always, Congress and the FDA retain the authority to change the law and regulations if they so desire.” In response, the FDA issued the rule currently under debate.
The proposed rule allows Abbreviated New Drug Application (ANDA) holders to update product labeling to reflect newly acquired information related to drug safety, regardless of whether the revised label is different from the RLD’s label. The proposal permits the ANDA holder to distribute the revised label at the same time as it sends labeling changes in a “changes being effected” supplement (CBE-0) to the FDA. Simultaneously, the ANDA holder sends labeling changes and supporting information to the new drug application (NDA) holder.
The NDA holder reviews the information and submits a revised label to the FDA indicating whether it supports the CBE-0 supplement. The FDA evaluates the proposed labels and determines which label should be approved. After that determination, the ANDA holder has 30 days in which to update its labels.
Results of study show $4 billion increase if rule enacted
On February 4, 2014, Matrix Global Advisors (MGA), an economic policy consulting firm, released its findings following a study of the proposed rule. MGA projected that the changes would add $4 billion annually in U.S. healthcare costs. The study called the $4 billion figure a “conservative estimate” which flies in the face of the FDA’s insistence that the rule would “generate little cost.”
First, MGA’s study contrasted the FDA’s stated purpose for the proposed rule—creating “parity” between brand-name and generic manufacturers’ labeling obligations—with what MGA believes is its actual purpose: fixing the “perceived inequality” in a consumer’s ability to sue drug manufacturers after the Supreme Court’s decisions in Wyeth v. Levine and PLIVA, Inc. v. Mensing.
Next, MGA compared the FDA’s economic impact assessment under the proposed rule with its own economic assessment. While MGA included product liability costs in its analysis, the FDA did not, even though it acknowledged the proposed rule may eliminate generic preemption. Instead, the FDA focused on increased costs associated with extra paperwork and added administrative burdens.
The study demonstrated the effects that small cost increases may have on drug spending and savings in the United States. In 2012, generics were responsible for $217 billion of savings, in a year where retail prescription drug spending totaled $263.3 billion. Without generics, retail prescription drug spending would have been $480.3 billion, equivalent to an 82-percent spending increase. Generic price increases that would result under the new rule reduce savings attributed to generics, add to total retail prescription drug spending and dramatically change the savings figures.
Finally, the study used brand-name product liability costs to project generic product liability costs. MGA estimated that in 2012 the cost of a brand’s product liability exposure equaled “0.4 percent of consumer spending,” or $758.3 million. Because brand drugs accounted for 16 percent of all prescriptions sold in 2012, or 652.5 million prescriptions, brand product liability spending was approximately $1.16 per prescription ($758.3 million divided by 652.5 million prescriptions). Multiplying brand product liability spending per prescription ($1.16) by the number of generic prescriptions in 2012 (3.4 billion) totals $ 4 billion in generic product liability spending. In light of recent healthcare reform and concerns over rising healthcare costs, these numbers are particularly disconcerting.
Critics of MGA’s analysis highlight its use of faulty assumptions. Multiple labels may not create confusion in the marketplace. In addition, the study assumes that generics’ product liability litigation costs are minimal. Yet pre-Mensing, generic manufacturers could not argue preemption in failure-to-warn claims, and the proposed rule simply returns generics to the status quo. Regardless of these assumptions, actual costs remain uncertain until a proposed rule is adopted. Certainly the rule will eliminate generic preemption which introduces an increased risk of a generic’s product liability exposure. Generic brands will likely face higher insurance premiums; may exit the market or decline to enter the market, causing decreased supply and increased prices; and must incur costs of duplicating brand manufacturer’s efforts to monitor safety-related issues.
Criticisms from lawmakers and industry
The MGA’s study was the latest in a series of highly critical reactions to the proposed rule. Both lawmakers and industry have criticized the proposal. Congressional Republicans urged the FDA to “reconsider [its] departure from decades of settled practice” surrounding generic labeling, and the pharmaceutical industry suggests the rule could result in fewer generic options for the public.
The GOP, through U.S. Sen. Lamar Alexander (the senior Republican on the Senate health committee), expressed its displeasure in a letter to FDA Commissioner Margaret Hamburg. The letter noted “grave concerns regarding a regulation . . . that would directly conflict with [Hatch-Waxman’s] longstanding policy.” In particular, Republicans identified three main problems with the proposed rule: (1) it directly conflicts with the statute, (2) it “thwarts” the law’s purpose, creating confusion and (3) it imposes “significant costs on the drug industry and healthcare consumers.”
Alexander suggested that allowing generic drug manufacturers to unilaterally revise their labeling contradicts Hatch-Waxman’s “sameness” requirement. As the FDA itself recognized, the “sameness” requirement is important because “[c]onsistent labeling will assure physicians, health professionals, and consumers that a generic drug is as safe and effective as its brand-name counterpart.” [As noted in FDA’s Abbreviated New Drug Application Regulations – Final Rule, 57 Fed. Reg. 17950, 17961 (Apr. 28, 1992)]. Eliminating the “sameness” requirement will cause confusion in the healthcare industry. Generic manufacturers will also be forced to engage in costly “duplicative testing,” thereby facing increased exposure to tort lawsuits.
The lawmaker’s concerns were echoed by the pharmaceutical industry, as demonstrated in an 11-page white paper issued on Jan. 29, 2014. In the white paper, the Generic Pharmaceutical Association (GPhA) reproached the FDA for ignoring Hatch-Waxman’s “delicate balance” between the brand-name drug industry and the generic drug industry. It predicted the increased cost burden will force some generic manufacturers out of the market.
The GPhA also accused the FDA of disregarding the possibility of generic drug shortages and higher costs. These costs would result from additional regulatory requirements and an exponential increase in “litigation risk,” which lends support to the conclusions reached in the MGA’s study.
Conclusion
Generic drug manufacturers will feel an immediate impact if FDA’s proposed rule is adopted. But the rule’s effects on government programs (such as Medicare), private insurers, doctors, patients and the general public will be much more far-reaching, leaving no one untouched by increased costs. As GPhA CEO Ralph Ness said, we should call on the FDA to “work with all stakeholders and identify a course of action that does not put patient safety or patient savings at risk.” As with any proposed rule, FDA welcomes comments and has extended the comment period until March 13, 2014. All affected parties are urged to submit comments at https://www.regulations.gov, for the Docket No. FDA-2013-N-0500.
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Erin Bosman and co-authors Jim Huston, Jessica Roberts, Julie Park and Sara Bradley are associated with Morrison & Foerster LLP. Bosman is chair of Morrison & Foerster’s Product Liability Practice Group, and has particular expertise in pharmaceutical, medical device, and consumer products. Morrison & Foerster as a whole boasts more than 1,000 lawyers in 17 offices in key technology and financial centers in the United States, Europe and Asia, with clients including some of the largest financial institutions and investment banks, as well as Fortune 100, technology and life-science companies.
