Extraordinary price increases for brand-name drugs can lead to substantially higher drug spending for public and private insurance plans, hospitals, and other providers that cover prescription drugs. Patients may also face higher out-of-pocket costs and reduced access to medically necessary and sometimes life-saving drugs. In addition, extraordinary price increases for brand-name drugs may contribute to overall drug spending, which has increased an average of about 10 percent a year since 2000. As reported during the Joint Economic Committee hearing, a small but growing subset of drugs have had very large and sudden price increases since 2000, raising questions about the competitiveness of the prescription drug marketplace. Brand-name drugs are drug products that have received FDA approval and typically have patent protection. After the patent and any applicable period of market exclusivity expires, these drugs are still considered brand-name drugs, but other drug companies may develop a generic equivalent—a similar drug that contains the same active ingredient, strength, dosage form, route of administration, and intended use. The FDA reviews and approves both brand-name and generic prescription drugs. Brand-name drugs may be supplied to health care providers from companies other than a drug’s manufacturer. For example, brand-name drugs may be repackaged from large drug inventories into smaller packages, and sold by a repackaging company using a unique national drug code (NDC). Repackagers include health maintenance organizations, pharmacies, and private companies. Repackagers are required to follow FDA guidelines, such as registering annually with the FDA and labeling drugs under the same brand name. Repackagers may obtain prescription drugs from wholesalers, and sell the repackaged drugs to health care providers such as hospitals or physicians who then dispense them to patients. Proponents of repackaged drugs believe that they offer convenience to patients and may reduce medication errors. However, some experts suggest that repackaging drugs may unnecessarily increase drug prices and profits. Repackagers may assign AWPs for repackaged drugs that differ from the AWP suggested by the drug’s manufacturer. Patents and market exclusivity protect prescription drugs by limiting competition for a set period of time. A drug manufacturer may seek a 20-year patent on various aspects of its new chemical entity from the U.S. Patent and Trademark Office. Once a patent is granted, other drug manufacturers are excluded from making, using, or selling the patented formula during the life of the patent. Companies that develop new brand- name drugs generally obtain a patent on the active ingredient used in the drug. Patents may be granted for other properties of a brand-name drug, such as its formulation and composition, and/or method of use. After receiving a patent on a brand-name drug, drug companies typically seek approval from the FDA for use of the drug to treat certain indications. Market exclusivity may be granted for approved drugs and is independent of the rights granted by a patent. The Federal Food, Drug, and Cosmetics Act authorizes various periods of market exclusivity for drug products. Generally, market exclusivities prevent the FDA from approving any application for a competing drug compound for a stated period of time. These exclusivities may relate to new chemical entities (5 years), previously approved drugs with a new application that is based on new clinical studies (3 years), generic drugs (180 days), drugs tested for use in children (6 months), and orphan drugs (7 years). Market exclusivity and patent protection may run concurrently. The Joint Economic Committee hearing in July 2008 identified certain brand-name drugs which treat rare diseases that experienced extraordinary price increases. Incentives are available for drug companies to develop innovative drugs for rare diseases (orphan drugs). In addition to the 7-year market exclusivity status, these incentives may include tax incentives of up to 50 percent of the cost of clinical research, and a waiver of FDA fees. Research grants are also available through the FDA for the development of drugs used to treat rare diseases or conditions. According to experts, the drug industry’s traditional business model is changing. In the past, large drug companies conducted research and development on several drugs, with the goal of releasing one or more “blockbuster” drugs that treat a large population and can earn billions of dollars. Recently, drug companies have increasingly focused on specialty drugs that target niche markets, or a smaller population of people with a narrow indication or medical condition. According to experts and industry representatives, the pace of consolidation among drug companies through mergers and acquisitions and transfers of drug ownership rights has increased. Fewer companies producing and marketing drugs can lead to greater market domination among certain companies and less competition. In addition, large drug companies have purchased other drug companies that specialize in manufacturing drugs targeting niche populations or drugs in similar therapeutic classes. According to some economists, the usual mechanisms that enforce market discipline may not work in the same manner in the health care market. In most markets—automobiles, for example—consumers are expected to be conscious of the price of goods. If a company raises the price of its goods, consumers would likely purchase fewer goods, causing the company’s revenues to decline. However, health care providers influence demand because they typically act on behalf of patients, who may remain unaware of drug costs. If the patient is insured and their medical bills are paid by a third-party payer, then demand may not be significantly influenced by changes in price to the extent that it might be in other markets. Some price restraint may be provided by pharmacy benefit managers and health plans that use drug formularies to negotiate price rebates on brand name prescription drugs. According to industry representatives and experts, drug companies may consider several issues when setting the price of a drug. These include: (1) the perceived value of a drug relative to its competitors, such as its ease of use; (2) the unique characteristics of a drug, such as its novelty, the frequency of administration, and safety; (3) the cost of therapeutically alternative drugs and alternative therapies, such as surgery, medical devices, and existing drugs; (4) the disease treated; (5) the size and characteristics of the patient market; (6) research and development, manufacturing, and marketing costs; (7) the willingness of customers to pay for the drug; and (8) the amount of reimbursement for the drug from third-party payers. To mitigate high drug prices some companies subsidize the price of some of their brand-name drugs through a patient assistance program to low-income uninsured or underinsured patients. While prescription drug pricing in the private sector is not subject to federal regulation, drug companies are subject to antitrust enforcement. The Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) enforce federal antitrust laws that prohibit activities such as mergers and acquisitions that may substantially reduce competition or create a monopoly. Companies are required to notify the FTC and DOJ of certain pending mergers, also known as the pre-merger notification program. In addition, the FTC has authority to investigate and take action against unfair methods of competition affecting commerce, including in the drug industry. Price fixing agreements between businesses, certain monopolies, and other anticompetitive conduct are subject to review and enforcement action. FTC officials indicated that the FTC has not brought a case against a drug company for charging extraordinarily high prices because such activity is not expressly prohibited by federal law, and because high drug prices in the absence of anticompetitive behavior are not per se illegal. The FTC has challenged anticompetitive patent settlements between brand-name and generic drug manufacturers. For example, FTC officials indicated that the agency has filed cases challenging “pay-to-delay” settlements in which a brand-name manufacturer shares a portion of its future profits with a potential generic competitor in exchange for an agreement to delay marketing the generic prescription drug. Finally, drugs must be manufactured in accordance with FDA regulations called good manufacturing practices, and the FDA inspects manufacturing facilities before a drug can be approved. Good manufacturing practices are designed to ensure the safety and quality of drug products and lay out minimum standards for the facilities and equipment used in manufacturing drug products. All drug manufacturers—including companies that acquire the rights to a drug from another manufacturer—are required to comply with good manufacturing practices. Between 2000 and 2008, 416 brand-name drug products representing 321 drug brands had extraordinary price increases. Most often, these extraordinary price increases ranged from 100 percent to 499 percent, but in a few cases were 1,000 percent or more. From 2000 to 2008, 416 brand-name drug products representing 321 drug brands had an extraordinary price increase. A number of these 321 drug brands had two or more extraordinary price increases between 2000 and 2008. The number of brand-name drug products that had these extraordinary price increases each year trended upwards, more than doubling from 2000 to 2008; however, they represent about half of 1 percent of all brand-name drug products. (See table 1 for the frequency of extraordinary price increases.) Most brand-name drug products that had an extraordinary price increase sustained the new price after the extraordinary price increase occurred. For example, following the extraordinary price increase, about 87 percent of the brand-name drug products remained at the increased price, or had another increase in price, and only 13 percent had a decrease in price. A number of these brand-name drug products had more than one extraordinary price increase. For example, 21 of the 416 brand-name drug products had more than one extraordinary price increase between 2000 and 2008, and 9 of those 21 brand-name drug products had more than one extraordinary price increase in the same year. The 416 brand-name drug products were sold by 91 drug companies, and 12 of these 91 drug companies sold brand-name drug products that had more than one extraordinary price increase between 2000 and 2008. Furthermore, 4 of these 91 drug companies sold brand-name drug products that had more than one extraordinary price increase within the same year. (See app.