Consumers, insurance companies and the federal government spend an extra $3.5 billion for prescription drugs every year because brand-name companies pay generic producers to stay out of the market, the head of the U.S. Federal Trade Commission said on Tuesday.

FTC chief Jon Leibowitz urged Congress to pass legislation, now pending in the U.S. Congress that would ban deals in which brand-name drug makers pay generic companies to delay production of cheaper versions of popular drugs.

Eliminating these deals is one of the Federal Trade Commission's highest priorities, Leibowitz said at the Center for American Progress, a think tank.

While a member of the U.S. Senate, President Barack Obama co-sponsored an earlier version of the legislation.

The FTC estimated that the federal government pays about one-third of all prescription drug costs, so eliminating pay for delay settlements would save the government $1.2 billion annually.

The FTC has challenged the deals in court, saying patent settlements were sometimes used to disguise payoffs that kept generic versions of drugs off the market. The agency has had mixed results in the courts.

The first known pay for delay was in 1994 when Bristol-Myers Squibb Co paid $290 million to Schein Pharmaceutical to delay the sale of a generic version of Bristol's anxiety drug Buspar.

The FTC has calculated that consumers could save even more if generic companies were allowed to make copies of expensive biotechnology drugs, something the U.S. Food and Drug Administration does not now allow.