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The bizarre reason two competing drug prices rose in tandem

Washington Post illustration; iStock

In 1998, the drug company Amgen launched a transformative arthritis treatment called Enbrel. At the end of 2002, federal regulators approved a similar drug called Humira.

The drugs work in fundamentally the same way. They are approved for many of the same ailments. They have been hugely valuable to patients — and big drivers of profits for the two pharmaceutical companies that make them. Humira brought in $14 billion last year for AbbVie. Enbrel was the top moneymaker for Amgen, with $5.4 billion in revenue.

But the similarities don't end there. They've also undergone closely timed list price increases, nearly identical in magnitude, for more than a decade — more than tripling in price since they were launched.

Pharmaceutical companies often hike the list prices of brand-name drugs over time. But this odd price dynamic, in which competing drug prices rise around the same time, also occurs. There's nothing inherently illegal about it, but some legislators are starting to raise questions about whether a similar pattern of price hikes on other sets of drugs could be a sign of an antitrust violation.

Last week, Sen. Bernie Sanders (I-Vt.) and Rep. Elijah E. Cummings (D-Md.) requested a federal investigation into whether closely timed price hikes on competing insulins could represent “possible collusion.” The announcement came on the heels of a Bloomberg report that criminal charges could soon be brought against executives at generic drug companies for price fixing on two dozen drugs.

Bernie Sanders wants the feds to investigate these drug companies for possible price collusion

“We are concerned that the potential coordination by these [insulin] drugmakers . . . may indicate possible collusion, and we believe this egregious behavior warrants a thorough investigation,” the lawmakers wrote to Justice Department officials.

The three companies that make insulin have strongly denied that they have colluded and stressed that they set their prices independently.

Collusion is a serious charge that typically requires direct evidence, such as emails, meetings, or phone calls between executives showing they've agreed to fix prices. Though they are striking, drug price hikes in sync aren't by themselves evidence of collusion. Instead, they may reveal something fundamental and strange about how competition works in the drug industry.

“An oligopoly forms and they're not colluding, but they’re very interdependent on one another. So the decisions that one company makes about pricing will incorporate what other firms are going to do,” said Diana Moss, president of the American Antitrust Institute. “That level of interdependence often results in prices that are higher than competitive levels but don’t constitute collusion.”

Prices moving in lockstep

In late July 2004, Amgen's list price for four weeks' worth of Enbrel was $1,150.24. By mid-August, the equivalent dose of Humira was $1,150.24 for a typical four-week course of treatment. A year later, Amgen raised Enbrel's price 4.3 percent, and four days later, Abbott (now AbbVie) did the same with Humira. In May 2006, Enbrel's price inched up nearly 5 percent; in June, Humira followed suit. This pattern repeated in March 2007, January 2008 and late fall of 2008.

The price hikes, echoing each other in magnitude and timing, continued for years; although the price increases didn't stay identical, the equivalent doses for a month's worth of treatment stayed within $70 of each other, and price hikes of one were almost always shortly followed by the competitor.

This pattern — of one company raising a price and another shortly following suit — is known as “price leadership.”

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“Mere price leadership is not a violation, even if it leads to higher-than-competitive prices,” said Jonathan Baker, a law professor at American University. “That, alone, isn’t enough to infer an agreement” to fix prices.

Spokeswomen for Amgen and AbbVie said the drugs were in highly competitive markets and pointed out that insurers and patients don't pay the drugs' full list prices.

“AbbVie prices its medicines based on the value that those medicines bring to patients and the competitive environment,” Alissa Bolton, a spokeswoman for AbbVie, wrote in an email. “Manufacturers compete for their medicine’s appropriate place in a patient’s treatment plan and do so on the basis of clinical evidence, physician and patient experience and cost.”

Kristen Neese, Amgen's spokeswoman, said that the rising price was actually a sign of a competitive dynamic because drugmakers are increasing the size of their rebates to the pharmacy benefit managers who negotiate on behalf of insurers. When one company increases its list price and its rebate, she said, that puts pressure on the competitor to follow suit. Otherwise, the company that doesn't increase its rebate (and its list price) won't get favorable insurance coverage.

“Enbrel is in a highly competitive marketplace where several large products compete,” Neese said. “When one competitor raises the price, which effectively increases the rebate amount, other competitors may respond to that in order to remain competitive.”

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The investment research firm SSR Health provided the analysis of the list price increases to The Washington Post, which was supplemented by data from Truven Health Analytics. The increases are so closely correlated that they could not simply be random chance, said Richard Evans, an analyst at SSR Health.

“The odds of that occurring randomly is like being struck by lightning on the moon; it’s just never going to happen,” Evans said. “The more confidence the parties have they’re not going to — unless forced — price compete, the more likely they are able to elevate price in that market.”

The invisible hand of competition

The big caveat is that list prices are merely a starting point for backroom negotiations. These deals between pharmacy benefit managers and drugmakers can wring considerable price concessions from a drug's list price. The pharmaceutical industry argues that focusing on list prices is a red herring because they mask the discounts that drugmakers provide. Pharmacy benefit companies argue that these price deductions are passed on to insurance companies, saving the health care system lots of money.

Both arguments hold a kernel of truth. Despite the fact that list prices don't include how much is given up in rebates, the hikes do provide headroom for the net price to increase. Although rebates may bring down drug prices, they may not always be passed on to patients — especially as more health plans shift to high-deductible plans.

The steady uptick of list prices, nearly in sync, may hint at competition — of a sort.

Pharmacy benefit managers play competing drug companies off each other to win bigger rebates, and when there are two similar drugs, these middlemen have greater leverage because they can threaten to reduce their coverage so patients face a higher co-pay — or even remove them from their formularies, the list of covered drugs.

Despite the argument that the list price increases could be a sign of competition because of increased rebates, SSR Health found in a research note this summer that the net prices of Humira and Enbrel had risen “on par” with the list price gains in recent years, meaning that the price hikes weren't being washed out by increased rebates.

But that may be about to change. The heightened scrutiny of drug prices and intense bargaining by middlemen may also be squeezing drugmakers' ability to rely on price hikes as a source of profit. In a recent earnings call, Amgen reported that it sold less of Enbrel in the past quarter and expected “little benefit” from net price increases next year.

And competition for both drugs has recently arrived, with the approval of two copycat drugs called biosimilars. How much those drugs will bring down prices, however, remains to be seen.

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