Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

The Pharmaceutical Price Gouging Epidemic

by Jack Shumway

 

In the past two weeks, the famous EpiPen has become the latest high-profile subject of an ongoing uproar over pharmaceutical “price gouging,” a tactic recently employed by Martin Shkreli of Turing Pharmaceuticals, when he increased the price of a 62-year-old drug by more than 4000% overnight. Mylan, a worldwide leader in the pharmaceutical industry and the current owner of the EpiPen line, has increased the life-saving drug’s cost by 500% since it acquired the rights to market and distribute EpiPens from Merck KGaA in 2007.

While this price hike pales in comparison to that of Turing’s, an estimated 3.6 million Americans were prescribed an EpiPen in 2015 alone for asthma and (often life-threatening) allergies, making it one of the most widely-used prescription drugs in the country. And because many EpiPen users own several devices and deductibles have been growing steadily, the ostensible increase from $100 to $500 is a fraction of the sum that must actually be paid by the client at the doctor’s office.

The reaction towards Mylan has been pronounced and angry, provoking legal action from both citizens and public officials. On Tuesday, a class-action lawsuit was filed against Mylan, which is also undergoing an investigation by New York’s attorney general into a contract with a local school system that may have included “potentially anti-competitive terms.”  From the surface, these new cases feel far-fetched even while their outcomes remain unclear, because Mylan has perceivably done nothing outside of the law, or even conventional industry practice.

Because of the giant sums required to develop new drugs and push them through the FDA approval pipeline, the government provides drug manufacturers like Mylan with long-lasting copyright claims before competitors are allowed to make cheap “generic” versions to encourage continued investment in new cures and treatments. While industry players often cite hikes as essential for covering the cost of previous failed investments and those in future drugs, the policy leaves many companies with virtual monopolies over certain areas of illness.

Even so, these extraordinary price increases are largely unique to the United States. In places with nationalized healthcare like Europe, Canada, and Australia, governments consider the market for cures and protected drugs as basically non-competitive and set determine prices bureaucratically, much like the United States regulates water.

In contrast, the United States government has no legal authority to regulate drug prices under the country’s privatized system, allowing drug manufacturers to set their own prices and maximize profits like the vendor of any common commodity. Some partial exceptions indeed exist for particular federal programs, like Medicaid’s 23% discount on brand-name drug prices.  But federal law prevents Medicare, the country’s largest insurance plan, from any sort of bulk discount negotiation with drug makers, even while often being required to supply the best (and most expensive) treatments. Further, given the plentitude of insurance companies that exist, any one of them has little sway over the prices set by pharmaceutical behemoths.

The result of this structure, however startling or enraging it may be to the public, comes as little surprise from the perspective. Another high-profile price increase will inevitably follow Mylan’s, because for a monopoly without legal barriers, facing tremendous profitability, how couldn’t a company’s pricing conversation gradually drift toward “how high can it go?”

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