How Does A 600% Drug Price Hike Happen?
Price scandals in the pharmaceutical industry have garnered widespread media attention in recent weeks. Martin Shkreli, founder and CEO of Turing Pharmaceuticals, became a household name last year when Turing purchased the rights to an antiparasitic drug called Daraprim and immediately raised the list price of the drug from $13.50 per pill to $750, making it inaccessible to many patients.
More recently, Mylan has come under fire for apparently arbitrarily raising the price of its EpiPen, a treatment for severe allergic reactions, from $100 to $600. The price jump has led many to ask how these large pharmaceutical firms can justify sharp price increases on products that have already been in use for decades.
The most common explanation provided by pharmaceutical companies for their pricing is that they require substantial sums for research and development into new and potentially life-saving treatments, an explanation that does little to explain exponential price increases for drugs that have been on the market for years and are available in generic form.
Pharmaceutical firms do have a legitimate reason to expect that huge expenditures of time and money on research will result in a reward, which is why firms are awarded temporary patents on treatments that are new to the market. Companies continue, also, to invest money and resources into clinical trials of drugs they have already released when they develop them for use for new conditions or a new age group, which can result in an after-launch price increase. But neither of these justifications applies to the recent Turing or Mylan increases.
There are two major flaws in drug pricing in the United States. First, pricing practices are opaque, convoluted, and ripe for exploitation. There are several middlemen between the manufacturer and the ultimate consumer of a prescription drug, including distributors, insurance companies, and medical facilities that can distort the price of a drug. While a drug manufacturer might increase the price of a drug by 5%, the price could end up increased by 20% by the time it gets to the consumer. Pharmaceutical firms also roll the cost of direct-to-consumer (DTC) advertising, which is extremely controversial for good reason, into their budgets.
The second major problem with pharmaceutical pricing is that firms like Mylan exploit the government’s regulatory capacities to create and maintain de facto monopolies and use that position to jack up the price of drugs artificially. For example, with the EpiPen, Mylan spearheaded a piece of legislation that would require schools to have emergency allergy medications on hand, and ensured that the specifics of the regulation left the EpiPen the only eligible product. Only then, when they held a virtual monopoly, did they begin to increase the price of their product. Hopefully, the uproar over these recent pricing scandals will lead to much-needed reforms in pharmaceutical pricing transparency.