Rebate Walls: The Antitrust Implications of Manipulating Insurance Formularies Against Generic Drugs

Christopher R. Leslie

The skyrocketing costs of prescription drugs have life-threatening consequences, forcing many patients to dilute their medicine, skip doses, or simply go without because they cannot afford their prescribed medications. In many cases, high prices for new drugs flow from patent protection, which allows patent owners to charge monopoly prices for pharmaceuticals while excluding rivals from the market.

In theory, a drug manufacturer’s ability to charge a monopoly price ceases when its patent expires, and generic versions of the drug can enter the market. Generic drugs are priced 75 to 90 percent below the cost of brand-name drugs before the latters’ entry-blocking patents expire. Federal and state laws encourage the development and dispensing of generic drugs. Most notably, Congress enacted the Hatch-Waxman Act to speed approval of safe generic drugs. And state legislatures enacted substitution laws, which facilitate pharmacists filling prescriptions with lower-priced generic drugs.

Because generic drugs offer significant savings to patients and third-party payors, brand-name drug manufacturers often lose significant market share when generics enter the market. Major drug manufacturers consequently have a significant economic incentive to block or delay the proliferation and distribution of generic drugs. Brand-name drug manufacturers have engaged in myriad types of anticompetitive conduct to impede competition from generic alternatives. For example, they have committed fraud against the Patent and Trademark Office, pursued sham infringement litigation against generic drug companies, and manipulated their delivery mechanisms to prevent generic drugs from being substitutable. All these types of anticompetitive conduct have been widely studied and litigated.

This Article addresses a less litigated form of anticompetitive conduct: rebate walls. Rebate walls involve the manipulation of drug formularies. A formulary is a health insurer’s list of the prescription drugs covered by a health plan. Insurers contract with pharmacy benefit managers (PBMs) to create and manage their formularies. Drug manufacturers construct rebate walls by paying PBMs to exclude rival drugs from their formularies, including by blocking access to lower-priced generic drugs. Removing generic drugs from a formulary has the purpose and effect of depriving consumers of a meaningful choice between a brand-name drug and a lower-priced generic version.

Courts have already condemned various acts and agreements by brand-name drug manufacturers designed to block market entry of generic drugs. Rebate walls have similar anticompetitive effects to conduct already held to violate the Sherman Act, such as product hopping and reverse payment settlements. This Article explains why courts should similarly condemn rebate walls. Recognizing how rebate walls improperly exclude rivals, raise prices, and consequently violate antitrust laws should bring down the prices of pharmaceuticals after their patents expire.