Drug Pricing, Shame, and Shortages

By Nicholson Price

Drug prices have been making waves in the news recently.  The most recent case is the huge price hikes of the EpiPen, which provides potentially life-saving automatic epinephrine injections to those with severe allergies.  Mylan, which makes the EpiPen, has raised its price some 450% over the last several years.  The EpiPen is a particularly problematic—and media-friendly—story because the emblematic use case is the kid in school who can’t breathe because she came into contact with peanuts.  Jacking up the price on something that’s not optional—for parents and for schools—seems heartless.  Thoughtful pieces have pointed out how the EpiPen price increases demonstrate problems with our health care system and drug/device approval system in general.

Other big recent cases that have hit the news include huge increases in the price of insulin, and, of course, Turing Pharmaceuticals’/Martin Shkreli’s ~5000% price hike on the drug Daraprim.  The EpiPen and Daraprim are especially notable because patents mostly aren’t involved—the effective monopoly appears to come from the delay or challenge in getting generic products approved by FDA (although the EpiPen itself also seems tough to make).  And, of course, drug prices aren’t regulated in the US the way they are in much of the world.

These stories seem crazy, cruel, and fascinating.  And they raise (for me, anyway) the question: what’s changed?  This seems like a relatively new phenomenon.  But FDA’s had a backlog for a while, and drug prices have long been unregulated.

Is it shame?  That is, did drug firms previously worry about reputation costs of rapid price increases, and now, for whatever reason, they don’t?  (When one of these stories comes down, Congress says it’ll hold hearings, or Hillary Clinton tweets about the problem, and stock prices drop; sometimes just talking about drug prices can lower drug prices).  Maybe the it’s been a slow push on the boundaries of social acceptability until we’ve now finally hit the squeak point.  Or is this about what happens when financial reasoning dominates, and clever finance guys see an unrealized opportunity?  That’s certainly an offered defense: Valeant Pharma head Michael Pearson, after many drug price hikes, described “a duty to shareholders to wring the maximum profit out of each drug.” Martin Shkreli agrees. The other justification is that price increases are driven by increased R&D costs, but that seems hard to square with dramatic jumps, and there’s other evidence that drug firms focus much more on what the market (and Congress) will bear than on recouping costs.  Another factor may be that the price-jump issue is more salient with the rise of high-deductible plans, since patients are more likely to shoulder increased costs rather than insurers taking the whole hit (Mylan blames the Affordable Care Act for the hullabaloo).

I honestly don’t know the answer, and would love to hear other possible explanations, or if any of these ring particularly true.  (Really!  Email me!)

Here’s one more thought that I haven’t seen yet.  A few years ago, we started to hear stories about drug shortages.  Only one or a couple of manufacturers would make a certain drug—often low-cost, generic, injectable drugs—and if that manufacturer ran into any supply-chain or production problems, the amount of the drug would simply not be enough to go around, and we saw genuine shortages.  (I argued that a lack of innovation in manufacturing was at least partially responsible for the underlying manufacturing problems).  The issue of shortages seemed weird: in a modern economy, we’d expect scarcity to lead to price increases and then the entry of other producers, not shortages.

These two issues—monopoly rents/price jumps for generic drugs, and shortages of generic drugs—are linked by the common backdrop of sole manufacturing coupled with higher-than-expected costs of entry (whether regulatory or technical).  And here’s the odd thing.  A few years ago, when shortages came into focus, a big argument was essentially this: prices on generic drugs are low, and can’t go up for various reasons, so manufacturers don’t spend money on quality, and no one else enters the market.   Here, we’ve got the same fact pattern of solo manufacturers of drugs without patent protection, but what we see instead is that prices are so unconstrained that we get huge price hikes!  That’s strange.  Here are a couple of potential implications:

  • The recent price hikes seem to cast doubt on the earlier narrative that laws/regulations blocked price increases (or maybe that’s where we should look for changes to explain the recent price hikes).
  • If prices for older drugs can more easily rise (for whatever reason), we’d expect to see shortages decrease. And in fact, that’s what we’re seeing—shortages are substantially down (PDF) from the 2014Q3 high.  (I definitely don’t have enough information to draw any causal relationship there).
  • Some legislative solutions aimed at decreasing shortages (see Rachel Sachsnice description of the CREATE Act) should, by promoting market entry and allowing importation of drugs, impact both shortages and price increases.

Overall, it seems pretty clear that the classic story of generic drugs (patents promote innovation, then generics enter, prices drop, and everyone can get the drugs easily) is really only true for a subset of cases (great overviews here and here).  It’s a fascinating and important question as to why that story fails for a substantial set of important drugs.

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