Product Hopping: Federal and State Approaches
Introduction
By any measure, the generic drug market is a success story of American health care policy. Largely spurred by the enactment of state drug substitution laws and an accelerated regulatory pathway for generics in the 1970s and ’80s, generic drug competition saved American patients $313 billion in 2019 alone.1 In fact, a U.S. Food and Drug Administration study found that drugs with six or more competitors experienced price reductions of over 95 percent.2 At a time when skyrocketing drug prices are a cause for national concern, the importance of competition in the pharmaceuticals market could not be greater.
Yet the brand-name drug companies that have profited handsomely from high-priced medicines have sought to take advantage of legal and policy strategies to protect those profits. Chief among those strategies today is a technique called “product hopping,” in which a company seeks to transition or ‘hop’ the market for a particular drug from one formulation over to another one. Generally, this is a two-step process wherein a manufacturer develops a new formulation of an existing, often best-selling drug and then convinces patients to switch to the new formulation, thereby disrupting generic competition over the old one. The practice is prevalent: one study estimates that new formulations are introduced for about half of all new small-molecule drugs. It is also costly, as one study indicates that five major examples of product hopping cost the U.S. health care system $4.7 billion a year.
The conventional response to product hopping has been antitrust enforcement, and while that avenue has been effective, it is also limited. And while patients, pharmacies and insurers who have charged pharmaceutical firms with anticompetitive product hopping have enjoyed successes, there have also been failures. Commentary on the matter has been no less divided, all of which suggests a need to go beyond antitrust law as a response.
Accordingly, this paper identifies several policy approaches that would limit the effects and prevalence of product hopping at both the federal and state levels. It posits that since it requires a combination of patent exclusivity on the new formulation of a drug and the imposition of a regulatory cost on the original one, solutions must target either the patent exclusivity arm or the regulatory cost arm. And moreover, the effectiveness of those solutions depends upon how well they are able to minimize the confluence of patents and regulation that enables product hopping. In particular, solutions worth consideration include improvements to FDA review of drugs, expansion of state generic substitution laws, strengthening of the patent examination processes and clarification of government patent licensing authority.
