Authors: Dhruv Jayaraman & Varun Chandran
Editor: Harsh Didwania
Drug prices have been steadily increasing in America for decades. However, some drugs have skyrocketed in price, seemingly without reason. It has resulted in everything from orders by governors, to congressional hearings, to high profile fraud allegations. Here, however, we strip these back and look at the background to this inflation, particularly from 2007 onwards. We then move further to discuss possible solutions to the problem, including how governments and regulatory authorities should act moving forward.
A study in 2018 found that 1 in 4 patients in America ration insulin due to its cost (Teare, 2018). Unfortunately, it's not hard to see why; prices have risen from 7c per ml to 15c per ml between 2007 and 2015 (Belluz, 2019). The price of another lifesaving drug, the EpiPen, has shot up from $100 for 2 pens in 2007 to just over $600 in 2016 (Pflanzer, 2016). Here we identify and discuss the reasons for the exorbitant increase in the prices of the aforementioned drugs and how we can tackle them.
Insulin was first invented in 1922. The patent rights to it were sold at $1 after its team realised its life saving potential. Today, however, 3 companies (Sanofi, Nova Nordis and Lilly) dominate the market and have formed a natural monopoly around this product (Shure, 2019).
The epi-pen is an automatic injector of epinephrine. The price of an epi-pen was entirely reasonable until 2007, before the company producing it was acquired by Mylan. Again, the market was a monopoly. For a brief period, Sanofi offered a competing product, but it was recalled by the FDA and the market has returned to being a monopoly (Hadland, 2017).
Whilst both drugs may be lifesaving, with an inelastic demand curve, there are various other reasons for why the prices are irrationally high in America as compared to the rest of the world. They are explored below.
The first cause is a problematic patent law system. Patents are meant to expire after a certain period of time, usually 10-20 years. However, insulin manufacturers abuse this by utilising what is called ‘patent evergreening’, where incremental changes to a product are filed for a new patent, although there has been no change in the efficiency of their product. This allows for patents to last for far longer than they are supposed to (Rajkumar, 2020). Furthermore, both Mylan and insulin producers are happy to file patent infringement suits at the last minute (Hadland, 2017). This is so that the competitor cannot sell their products due to there being an interim injunction.
The next problem is a lack of a system to regulate the purchase and sale of drugs. When it comes to primary healthcare providers, particularly hospitals, countries like the UK, Australia, Singapore, and most of Europe negotiate drug costs for the entire country (Belluz, 2019). Thus, if a company does not meet the government’s target price, it loses access to the entire market. This serves as a strong incentive for producers to ask for a lower price. In the US, however, the system is entirely decentralised, and hence each hospital is left to bargain on their own, and as the drugs can be lifesaving, each individual hospital lacks bargaining power. This drives the price up.
American drug distribution is held back by several layers of monopolies, a consequence of which is that insurance companies are incentivised to increase the cost of drugs. Rather than paying the individual pharmacy, the insurer pays a Pharmacy Benefits Manager (PBM) , who negotiates the prices of drugs between insurers, suppliers and retail pharmacies (Shure, 2019) Suppliers then often rebate some of the cost of the drug back to the insurer/ PBM. Thus, the higher the initial cost of the drug, the higher the rebate. Both the PBMs and the insurance companies make more money from this, but the consumer gets no value from this rebate. Furthermore, as mentioned, there are monopolies at play as 3 PBMs control 75% of the market and 3 drug wholesalers’ control 90% (Rajkumar, 2020).
Next, on the note of monopolies, these are undesirable mainly because of the deadweight loss they cause to society. Furthermore, as these monopolies are in markets which are extremely inelastic, the deadweight loss is further exacerbated. This is illustrated below, where the output is Q1, where MR=MC, but the socially optimal level of output is Q*, where P=MC. This results in a deadweight loss of area ABC.
So how do we tackle this beast? What laws and regulations in place can be made to protect consumers, and hold companies accountable for their deeds?
The Federal Trade Commission must start to hold companies and monopolies accountable for their misdeeds. As a result of this, companies like Mylan and insulin producers across the United States are being forced to justify their exorbitant pricing. The FTC must be certain that the hike in price is due to gaining efficiency and not a bid to restrict output. Holding Mylan accountable for their greed is a positive step in the process to rein in price controls of pharmaceutical drugs. (Hadland, 2017).
The Federal Trade Commission can also look into the altered prices across different developed countries, and subsequently force firms into enacting a best price clause which forces them to select the best possible price that they offer other countries and then reinstate that price into the United States. When this law is applied to Mylan's EpiPen, it reduces the price of the EpiPen from $450 in the United States to $69 (Hadland, 2017), which is its price in the United Kingdom. This helps regulate efficiency and clear up market deadweight loss.
Another issue is the large bureaucracy in place in this industry. A combination of intermediaries, pharmaceutical sales representatives and firms all collude to aim to raise the price. Therefore, a clear change in each structural level of the pharmaceutical ladder would help identify a clear cause for where the price hike is occurring. In this manner we are able to structurally identify the cause for the price hike and then impose the relevant laws and regulations to control it as such.
Finally, we could look at dissolving patents that act as barriers of entry and prevent other firms from actively competing in these industries. Milan justifies its high prices due to its patent on the auto-injector that releases the EpiPen into the skin (Hadland, 2017). Regulations remove the patent on these goods, then other companies will be able to produce and manufacture these life-saving drugs at a much more reasonable price.
There has been some effort from both sides in trying to tackle this issue. The republicans tried to enact a fixed price for insulin, but only if insured and covered. This was shot down as it passed high costs on to the government/ insurance companies rather than tackling the root cause (Richtman, 2020). A plan to have a federally negotiated drug price system (Like EU/UK/Aus) was also shot down by republicans (Martin, 2020). At a state level, there have been some cross-party consensus on the issue (Schreiner, 2020 & Pugmire, 2019), but it does appear that federal level legislative changes will not occur.
To conclude, the pharmaceutical industry is a living breathing snake, and the continuous and consistent exploitation of their customers over life-saving medication is a human rights violation. The government must act accountable and look to preserve the best interests of its people and therefore start to investigate the companies that choose to raise these prices and avoid another Martin Shkreli situation from occurring. If left unattended, insulin and EpiPen can become the Daraprim (Khan, 2021) of the modern era. In a time where public health and safety are gaining traction, it is crucial for the government to leverage firms and preserve the common interest of the American people.
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