Monday, October 3, 2016

On Mylan’s EpiPen Pricing Controversy

Drugmaker Mylan is the latest pharmaceutical company to come under fire for it pricing policies. Mylan bought rights to the EpiPen in 2007. EpiPen is an epinephrine-filled auto injector that stops allergic reactions before the reaction can turn deadly. Since then, Mylan raised the price of EpiPen by some 400-500%.

While not mentioning Mylan by name, Rutgers University “senior policy fellow” Richard F. Keevey accused Mylan of “profiteering.” In a New Jersey Star-Ledger September 2016 guest column, A prescription to help reduce drug prices, Keevey noted “Recent actions by certain drug companies” which includes “significantly increas[ing] prices before [patent] expiration.” He then proposed a series of steps to restrict prices, including price controls and bans on direct-to-consumer advertising.

As I read this, I think “No good deed goes unpunished.” Note the focus only on price, with no credit for the life-saving benefits Mylan provides. My granddaughter, who had an ultra-severe dairy allergy, relied on EpiPen to keep her safe for years before she outgrew the allergy. The pharma/biotech industry converts the science of medicine into the products that alleviate suffering and save/extend lives.

More broadly, this industry drives down overall medical costs by keeping people out of hospitals and surgical suites. For example, Gilead Sciences’ hepatitis C drug cures 90% of the people it treats—the first such cure. The drug lists for some $80,000, dramatically lower than the hundreds of thousands of dollars that treatment of chronic hep-c costs. Liver transplants, which isn’t even a cure, alone cost $200,000. Gilead’s drug eliminates that and other costs and enables sufferers to lead normal lives. This cost-lowering effect is probably blunted by government programs that provide drugs at zero or greatly reduced consumer cost, which leads to overconsumption. But still, the effect is real.

Keevey writes that the high cost of drug development “does not explain the significant difference between costs in the U.S. versus the remainder of the world.” No. But price controls everywhere else does. By suppressing drug prices by government fiat, the rest of the world is free riding on American consumers who end up bearing the brunt of R&D costs. We Americans should be outraged—not at pharma/biotech companies, but at the wealthy freeloaders in Britain and France and elsewhere. They benefit from artificially suppressed prices on drugs that are available largely because Americans are footing the bill for their development. What will happen to drug innovation if companies lose their last bastion of pricing freedom? It can’t be good for innovation.

Remember the virtuous economic cycle of pharmaceuticals: temporarily high priced patented drugs lead to cheap generic drugs. Who would want to mess with that life-enhancing cycle, which benefits investors, pharma/biotech companies, and consumers high and low? But what about Mylan “inflating” the price of EpiPen? Shouldn’t cheap generics already be available to stifle the price hikes? To the extent markets are free, the trend is generally toward greater quality and lower prices. Market prices don’t always go in one direction, however. Sometimes, anomalies happen. Mylan’s “crime” was to discover such an anomaly—a seriously underpriced EpiPen.

But today’s healthcare markets are far from free. Mylan bought EpiPen and raised the price to a level that more accurately reflects its lifesaving value—or maybe it had help. Why was EpiPen lacking serious competition? Perhaps because the price was kept so low by the previous owner as to discourage competition. Or perhaps something is blocking the market. “While the EpiPen is patented,” reports patent attorney Brett Trout, “there are several competitive autoinjectors,” but “the government [through the FDA] is standing in the way of these competitive autoinjectors getting into the hands of the patients who need them.”

In a mixed economy, it’s hard to untangle the effects of coercive government interference into the market from free market effects. But one thing is sure: Mylan saw the opportunity, and capitalized on it, which they have a moral and legal right to do. Kudos to Mylan. What’s next? To the extent the FDA’s bureaucratic machinery allows, Mylan’s price hikes are attracting competition, as you’d expect. Far from being a villain, Mylan’s profit-seeking price hikes likely did us a favor long term. In the end, the price of epinephrine auto-Injectors will settle into a lower price range regulated by broader competition. The question is, why did it take so long?

Which leads to the one really big legitimate problem Keevey cites; the FDA. The FDA is responsible for slowing down the rise of competition for EpiPen, likely leading to artificially increased pricing power for Mylan. Keevey acknowledges this:

Reform the U.S. Food and Drug Administration approval process for generic drugs. There are 4,000 applications backlogged, with an average wait time of 27 months per application. Delays significantly limit competition.

A 4000 generic backlog! How much more are consumers paying because of that “significant” limit on competition? Reform the FDA? Lots of luck with that entrenched bureaucracy. Rather than lamely “reforming” the agency to reduce the wait time by a few weeks or months, just eliminate the FDA’s power to keep drugs off of the market. Instead, the FDA should focus on making sure drug companies honestly represent their products, including informing consumers of risks and side effects, and vigorously prosecute fraud. Otherwise, let doctors and patients decide. That will really increase competition.

Finally, the proposal to ban consumer advertising would trash the First Amendment and keep consumers ignorant. Other countries with fully socialized medicine love it because it keeps consumers ignorant so the are less likely to demand effective high-priced medicines, saving governments money. Cheaper to let people die than keep them alive. That seems to be where we’re heading in America. As Keevey reports, prescription drugs “adds significantly to the debt of the nation.” Why?

The federal government is the single largest purchaser of prescription drugs, through the Medicare and Medicaid programs, which are the largest cost center in the federal budget — 25 percent of spending, or $925 billion.

As government gobbles up healthcare spending, it gravitates toward coercively restricting pricing to control spending, both directly—Keevey calls for “a national body to set price ceilings for essential medicines”—and through restrictions on free speech. It is an all-too-common anti-rights cycle: Government regulations and controls lead to more regulations and controls to deal with the problem caused by the previous round of regulations and controls.

Banning advertising is a terrible idea and consumers should be outraged at the idea of being kept in the dark about available medicines, while assaulting America’s precious First Amendment, all in the name of saving the government and the big insurance companies a few bucks!

Mylan is not off the hook for bad behavior, however. As Trout reports, Mylan furiously lobbied the government to artificially pump up demand for EpiPen. But don’t blame lobbying, another First Amendment right. Blame the regulatory state, which attracts lobbyists like honey attracts bees.

I am not a constitutional expert nor an economist. But I am engaged and observant—and non-biased. Keevey’s apparent irrational bias against profit-seeking may limit his ability to see the big picture.

The pharma/biotech industry shouldn’t be shackled further with price controls or vilified as “profiteers” because its products are so valuable, or because companies capitalize on market opportunities (however they happen to occur). Nor should it be vilified for playing the unsavory crony game, which everyone now plays. Keevey’s price-control and other regulation-expanding “solutions” to the EpiPen saga are immoral and destructive and sidestep the fundamental problem—the FDA in particular and government's involvement in paying for healthcare.

Related Reading:

Close the FDA’s “Loopholes” of Statism, not Freedom


Mike Kevitt said...

The opportunity taken advantage of by Mylan was provided by the FDA, based on legislation going back to about 1905, maybe due to underfunding by Congress, underfunding in this perverted case being bad, not good. Governments don't provide markets. 'They' distort them. In this case, that's why Mylan had no competition. Entry of competition was effectively blocked by initiatory force from what's supposed to be government. The company that invented the EpiPen got around the blockade somehow, probably after years or decades of FDA blockage that shielded older inventions. So now, it's EpiPen's (Mylan's) turn at the trough. I don't blame Mylan. That's the regime (I won't say game; it's for keeps) wielded by crooks, meaning by initiatory force. Mylan has to work the regime for its existence.

New entities are trying to compete? They'll have to spend years running the blockade. Without FDA interference, Mylan might've never bought the EpiPen patent. The inventor would've kept it and the price would've stayed low because of actual competition from other inventions, or the inventor would've invented something even better. But, as it is, if new entities successfully run the blockade, they'll still have to have their turn at the trough, just like Mylan. That's the regime, set up by what's supposed to be law and government.

It was the same 150 years ago. Cornelius Vanderbilt had to play the regime several times to do what he had the individual right to do, and he won. (That wasn't the first time he upended someone trying to pull a fast one.) He built the N.Y. Central R.R. Read, "Notes On the History of American Free Enterprise", by Ayn Rand. Jeff Britting, of the Ayn Rand Archives, at the ARI, can fill you in. I assume he knows he can.

Mike Kevitt said...

I just remembered, you don't have to go to Jeff Britting to get filled in on "Notes On the History of American Free Enterprize"('z', this time). That article is in Ayn Rand's, Capitalism: the Unknown Ideal. That's where I last read it, long ago. I forgot. Previously, it appeared as a small pamphlet, and in one of her first two periodicals, The Objectivist Newsletter, and The Objectivist,. I don't remember which one.

Michael A. LaFerrara said...

Good points, Mike. I like your description of the FDA policies as a "blockade." It fits. Yes, I kinow about the Vanderbilt saga and AR's essay. Thanks.