Now that the cost of EpiPens (auto-injectors for epinephrine) has become a national campaign issue, it might be worth thinking about why they’re so darned expensive—as much as $600 a pop, having risen from $94 for a two-pack over just nine years. Timothy Holbrook considers the question at RealClearHealth and comes up with a couple of explanations: patents and lack of competition, in turn a product of regulatory barriers to entry.
Much of Mr. Holbrook’s piece is a paean to the patent system as the engine of innovation. I think that’s a subject worthy of dispassionate investigation on its own and I’m skeptical that the matter is as cut and dried as Mr. Holbrook suggests. The research budgets of today’s major pharmaceutical companies do not rise with revenues but with inflation. IMO Big Pharma (as these large pharmaceutical companies are called) are best thought of as rent-seeking organizations with small research branches.
Do we really need patents any more? Or would society as a whole be better off with reduced barriers to entry via regulation that is less friendly to the large producers and more friendly to the small?
IMO the reason that the cost of EpiPens is so high is that it’s what the market will bear and until recently consumers didn’t see the rising costs. That changed as deductibles rose and now consumers are starting to complain.
Unfortunately, they’re complaining about the high cost of EpiPens rather than rising deductibles.
Maybe I’m misinterpreting your last statement, but I think I disagree. The high cost of Epipens really is a problem, and the rising deductibles are the means by which consumers learn of the problem. When the insurers negotiate the prices with the drug manufacturers or other providers, neither are acting in good faith (and as you often point out, there is a cartel situation, for instance with Epipens if no competition, the companies can name their price) so there is no true market situation until the consumer becomes involved.
What is the likely outcome of complaining about expensive EpiPens vs. the likely outcome of complaining about higher deductibles?
The basic problem facing U. S. healthcare policy is that healthcare is too expensive. The cost of healthcare is
What the consumers spend +
What the government spends +
What companies spend +
What insurance companies spend (in some cases)
Moving spending from consumers to the insurance companies or the government doesn’t reduce total spending. It just moves money from one pocket to another. I’m not saying that EpiPens aren’t too expensive. What I’m saying is that looking at EpiPens alone won’t address the problem.
There are a lot of meds like this besides Epi-pens. It happens mostly with injectable drugs that have been off patent for a while. They have a low profit margin. Companies compete until there is only one or two companies left who make the drug. Then some other group buys that drug and jacks up the price. We see this over and over. At our surgicenters I am using crappy drugs I haven’t used since I was a resident. There is a reason we have not used them in 30 years. They just aren’t as good. However, the drugs that work have gone from $0.50 a dose to over $100 per dose. So we use the cheaper, but worse drug.
It is only a barrier to entry issue if you consider foreign drugs. Most of those could be brought here w/o any issue, but some really do have some quirks.
Steve
What is the “correct” cost of an epipen?”
How does one know?
Guarneri:
Your point is a good one. There is no such thing as a “true price”. In the absence of government intervention prices are determined by supply and demand.
However, given the superabundance of government intervention, mostly in support of producers, particularly large companies, a 600% price increase over the period of 9 years in the absence of a marked increase in demand or producers’ costs does raise a suspicion of profiteering.
What is the likely outcome of complaining about expensive EpiPens vs. the likely outcome of complaining about higher deductibles?
Seems to me the likely outcome is pretty much exactly the same for both (that is, no change) but it’s the higher deductible that gets consumers to notice what they are being billed for and going “Gaak, you’ve got to be kidding me” so that at least people are becoming more aware.
Listening to this story in the car yesterday I was struck by the wide range of prices being quoted, with people paying $1,000 on the high end, who I think were schools that were probably buying them outside the conventional healthcare system. And now we have the company essentially offering to reimburse the consumers out-of-pocket expenses, and I have to wonder if this isn’t some form of insurance fraud. (Pssss. . . You select our product which we will charge at the highest rate, and whatever they pass on to you, we’ll cover. Deal?)
I understand the utility of price-discrimination and coupons, etc. But if we have a public policy geared towards universal health care, what is the proper role of price discrimination? What if this company was required to pick a price?
Does anybody really know what price it is?
Does anybody really care, about price?
I’m down with that, Dave. It was only partially an intentionally theoretical question. In the investment world the “last man standing” model is a well known approach. Find a dying product line and as the company essentially goes out of business over time the price for the declining, but rare, product is raised. We did it with power resistor components, and another time with mechanical relays.
Now, electrical components are not medicines. The ethical issues are different. But steve points out that doctors are opting for cheap vs perhaps the most efficacious drugs. And I wouldn’t dream to pontificate on the competitive issues surrounding non-mainstream drugs.
It could come down to the following: one mans gouging on price is another’s very availability of the drug. And what are the ethics of no availability? What’s the old saw? What’s the definition of an economist vs not one. Looking at both parties interests in a transaction, not just one? Shall we talk about trade now?
For the record. I find the rate of price increase for epi-pens intuitively too high. But I don’t know the details. Generally super normal profits attract supply.
I saw Boz Scaggs last weekend , PD. He has aged better than some old acts, like the warm up band.
Tonight is a Led Zeppelin knock off band. Ought to be interesting.
For s&g value, one online US vendor gives a rounded price of $33 for an atropine autoinjector (used to treat nerve gas and organophospate posioning), while prefilled ready to go Epinephrine syringe goes for about $10. BTW, do need Rx and other paperwork to order.
And then the market maybe working, CVS Caremark (who handle a lot of third party prescription fills) will only dispense Adrenaclick instead of the high cost brand to its beneficiaries. Be curious to see what the Indian Health Services, military, public health hospitals do.
“However, given the superabundance of government intervention, mostly in support of producers, particularly large companies,”
However, in nearly all of these cases where older generic drugs are having prices jacked up after being stable for many years, it is being done by smaller companies, sometimes created just to buy a drug and increase the price. Absent govt regulations, this happens anyway. This is your market at work. Get a monopoly on a product that is hard to replace. Note that the federal govt does not these drug prices and that private insurers are able to negotiate if they want. The price for Epi-pens is the market determined price.
Drew- In theory it should attract competitors, and eventually it might. But suppose you buy a drug selling for $1 a bottle and increase the price to $100 (true story). You know you can make a (small) profit at $1. Then you hear that a competitor is going to retool a factory and make it too. What is your response? Cut the price to $2. (Again, this has really happened.) The new company can’t make up its investment at that price, they could at $100, and they get out. In fact, knowing that most companies don’t bother trying to break in.
Of course, this doesn’t work for all drugs. It needs to be drugs for which there isn’t a good replacement. So it won’t work for current cholesterol drugs or anti-hypertensives just as an example.
Steve
In the case of the EpiPen, many schools are required to maintain an inventory which even when not used must be replaced twice a year. That’s a built-in market. And even generics require FDA approval. In other words you can’t just crowdfund your own company to develop and sell EpiPen equivalents. Not to mention that prescriptions often call for EpiPens by name rather than by function.
Another point I thought to mention was that the idea of a “list price” in healthcare makes a huge list of assumptions for which there is not much evidence. Basically, all prices are negotiated.
You didn’t finish your story, Steve. Intentional? You left it at a convenient spot to make a point? The only two price points available aren’t $2 or $100. There must be some point in between that would attract entrants, barring some sort of protective measures disrupting the market.
I hate to break it to you, but that’s how markets and price discovery work in all types of markets and products. How would you like it if I decided you and all your employees were profiteering at patient expense. You scoundrels. And I demanded that regulators decrease your wages by 90%. What do you think would happen? How would you recruit? Wanted: Mother Teresa’s. A “living wage” not offered. No bennies. No retirement. Others need not apply. Take your complaints to the regulators. ?????
Greg Mankiw has an excellent micro book. Buy it and read it.
The oil and gas extraction industry is proof that the theory of manufactures not entering the market is bunk. Oil prices per barrel were high enough to justify investing capital into the equipment, personnel, and leases, and because the profit margins were so high, there were people begging them to borrow their money.
Now that oil prices have dropped, many of the companies have gone bankrupt, but the wells still are producing to pay the creditors. So, the cheap oil continues, but the day oil prices rise one dollar over the break even price, every mothballed, cutback, or diverted extraction project will be back on track.
First, the oil and gas industry do not have as many barriers to entry as the healthcare industry does. Second, Adam Smith and all pre-Fed classical economist do not work in a credit backed financial system.
I would tend to agree with @Drew about there being some numbers between $2 and $100, but I am not a mathematician. @steve may know of the consensus of mathematicians, and there may be no numbers between 2 and 100. If you cannot trust the people who will benefit the most from a rigged system, who can you trust?
You miss my first point, on purpose I suspect. The current company making the drug has already shown it can make a profit at $1. The new company contemplating entry knows that. The new company has not spent years refining the process to be able to make the drug that cheaply. No matter what price they choose, the original company can (likely) undercut them. Unless the new company has very deep pockets, they aren’t going to risk entry. Or unless they can be sure that they will get some share of the market even at a higher price. Whatever price they choose between 1 and 100 (I chose 2 arbitrarily), they will produce at a higher cost than the original company. Remember that these are drugs that, by and large, have fairly small markets. There is no good substitute. Go read what the microfinance books say on this kind of situation. In short Drew, do you enter a market when your competitor can undercut any price you can hope to achieve, and has enough capacity to meet the needs of the entire market?
Of course, the two companies could just agree to both sell at 50 and split the market. That is what is most likely to happen.
Steve
I would never have thought making money was that easy. Why not teach all kids in high school this shit instead of the lies they get now?
Here you go. I think Dave was, in part, referring to this. As usual steve is flat damned wrong, claiming these situations “are the market.” Anyone with a lick of sense know that, no, the market must have been disrupted. The alternative makes no real world sense. In fact, it turns out that exactly what I repeatedly point out, that government is used to stifle or skew competition, is at play. Only one person here will be surprised. It’s only a wonder Warren Buffet didn’t get there first.
http://www.zerohedge.com/news/2016-08-27/epipen-scandal-worse-you-think-what-you’re-not-being-told
Blah! Blah! They donated to the foundation so now they can increase prices 600 per cent. Sure. Why didn’t they do that with all their products? Why didn’t ZH mention that the Milan CEO had her salary go from $2 million to $18 million while they raised the price of the pens. Total lobbying went way up and according to Open Secrets the last 4 years 67 per cent of that goes to the GOP.
Steve
Open question- Drew can probably answer this best, but any of you conservative types should be able to answer this. Why isn’t money considered an incentive, unless it comes in the form of taxes? A CEO will alter company behavior when faced with higher taxes, or lower to be fair, but would never alter behavior just to make themselves (and other officers) incredibly wealthy.
Steve
I’m not a “conservative type” but I think that managers will in fact act to maximize their own incomes, frequently even when it hurts their companies.
Where I suspect we differ, steve, is in that I believe that the conditions that made the price increases possible are a consequence of government action. Look at the maze of laws and regulations in just this single case: trademark, patents, occupational licensing, restrictions on the ability to purchase, federal subsidies, insurance regulation, and FDA regulation. With all that you can’t turn around and point to adverse operations of the market.
The short term solution might be some government action to remediate the harm of this specific case but the longer term course of action really must be to start unwinding all of the laws and regulations that caused the situation in the first place. You can’t subsidize everybody for everything.
Dave–Those were all in place before Mylan bought the company and started raising prices. The only thing that changed was that new laws were passed requiring (not 100% sure on this as some have said the laws just strongly suggest) that schools carry auto injectors. But they were already increasing prices before then (law passed late 2013).
BTW, let me correct something I got wrong up above. The CEO salary increased to $19 million, not $18 million.
https://www.rawstory.com/2016/08/how-mylan-spent-millions-creating-an-astroturf-movement-for-epipens-everywhere-and-then-jacked-the-price/
Steve
Mylan sued a potential competitor for patent infringement on the injector design after acquiring the EpiPen. That’s a perfect illustration of my point.
See also this report from The Hill:
Unmentioned is the benefit that Mylan receives from government contracts. It can take years to unseat a vendor from a government contract.