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Drug Price Hikes and the Misguided Profit Imperative

by Craig Klugman, Ph.D.

Headlines this past week were abuzz with news that Daraprim—a drug that has fought parasitic infections such as toxoplasmosis for 62 years—saw its price hiked by 5500%, nearly overnight. For decades Daraprim has been a front line drug available for $13.50 a table. When Turing Pharmaceuticals bought the company that makes the drug last month, the new owners raised the price to $750 per pill. Often used by HIV patients, the per year cost would be $634,500. As if that was not enough, the drug’s previous owners entered into an exclusivity arrangement with Walgreens, making Walgreen’s specialty pharmacies the sole place where the drug was available.

Cycloserine is a drug that fights multi drug resistant tuberculosis. When it’s owners sold the patent to Rodelis Therapeutics, the new company raised the price to $10,800 per package ($360 per capsule) from its previous $500 ($16.60 per tablet).

Valeant Pharmaceuticals bought the rights to two heart medications: Isuprel and Nitropress. They raised the price of Isuprel by 525% to $1,346.62 and of Nitropress by 212% to $805.61. Jazz Pharmaceuticals purchased the drug Xylem–used to treat narcolepsy–from Orphan Medical in 2005. Jazz increased the price 29 percent each year since 2011. Actor Gel–used for treating multiple sclerosis–dates from 1952 but in 2007, the price increased 1400% overnight and has been raised 19 times since then. Mylan manufactures EpiPen–used for severe allergic reactions–and increased the price about 27% from 2011-2015.

AARP reports that brand name drugs have increased in price an average of 12.9%. And for generic drugs, they report that price savings have slowed and 27 percent of generics saw increases of up to 1,000% over the last few years. Increases this much cannot be absorbed by insurance companies which are raising prices on premiums, deductibles, and co-pays for drug benefits. Drugs that used to cost $4 a month are suddenly costing $100 per month for consumers. If a person is on a fixed income, these increases can be devastating.

What accounts for the increase?

Sometimes prices increase temporarily because of a shortage of the elements in the drug. Some rare elements come from war torn regions where access has become difficult. Sometimes the shortage is because there is a lack of packaging available—for example, glass for a single dose vial might be in short supply but large glass containers are available. And yet in other cases the shortage could be because hospitals and pharmacies are simply carrying less stock as the prices have increased.

The most recent trend, however, has less to do with availability of raw resources and a lot to do with corporate culture. When a lucrative drug is nearing the end of its patent life, a company may tweak its chemical formula. This might mean making it long acting or adding another component. This slight alteration allows a new patent and a cash cow monopoly continues.

Other times when a lucrative drug is nearing the end of its patent, and generic drug companies are lining up to produce said drug, the patent holder will simply pay the generic company not to make the drug. The generic company will make a lot of money for doing nothing and the patent holder gets to keep selling its drug at a higher cost without fear of competition.

And in other circumstances, a company may acquire the rights to a drug or even just buy out the manufacturer. Looking for a return on investment, the new owners will simply raise the price. That seems to be what happened in the case of Daraprim, cycloserine, Isuprel, and Nitropress. Those drugs all saw price increases days after the sales went through. With fewer players in the marketplace, there is less competition, which translates into less pressure to have low prices. If you buy the competition, you can charge whatever you want.

Seventy percent of Americans take at least one daily prescription medication. Many of those prescriptions keep people alive and treat serious diseases and conditions. This is a captive consumer audience that has no chance but to pay for the cost of medication or pay for increases in their health insurance costs. This situation is not like increasing the price on widgets because one has cornered the market—this is playing with people’s lives. In a 2013 editorial protesting the high price of new cancer drugs, 28 experts in chronic myeloid leukemia wrote: “The doctrine of justum pretium, or just price, refers to the “fair value” of commodities. In deciding the relationship between price and worth (or value), it advocates that, by moral necessity, price must reflect worth. This doctrine may be different from the doctrine of free market economies where prices reflect “what the market bears,” or what one is willing to pay for a product. Which doctrine is better? One could argue that when a commodity affects the lives or health of individuals, just price should prevail because of the moral implications.”

In other words, one’s right to a profit do not outweigh a person’s right to have access to life saving drugs. With a newer drug, a company may be claiming that it needs to recoup the costs of research, development, and marketing. But a drug that is 62 years old has most certainly paid back those costs in full and more. The right to profit is a prima facie duty as shown by company programs to give access to people in need who lack means. The U.S. regularly limits the ability of companies to just raise prices. Consider utility companies who have ot have their prices approved by government or consumer boards. Companies are also not permitted to lie, cheat, or swindle, all of which would increase profits but rules and regulations prohibit such behaviors.

Pharmaceutical companies have a conflict of interest in their work. Or they should have a conflict of interest. On the one hand, they create drugs to save lives. And once you have the ability to save a life, if the patient wants the treatment, then there is a duty to do so. You can certainly be paid for such services and there is a just price that covers costs and even builds in a little profit. On the other hand, companies have an obligation to serve their shareholders and those groups want to make profits on their return. Shareholders are not (usually) investing to save lives, but rather to maximize returns. Of course if the price of the drug is so high that only very few can afford it, then it becomes less profitable. Right? Wrong.

If you sell a drug for $500 a package, then you need 200 patients to gross $100,000. But if you sell that same drug for just over $10,000 per package, then you only need 9 patients. Having only to sell to 9 people lowers the cost of doing business (marketing, packing, supply chain) and you make the same amount. The free market and the legal requirement for companies to earn a profit actually encourage such outrageous pricing.


What do do?

Senators Bernie Sanders and Elijah Cummings have called for a Congressional investigation into pharmaceutical pricing. Presidential candidate Hillary Rodham Clinton called Turing’s move “price gouging.” She has proposed limiting insurance plans to a maximum $250 charge per month on drugs for chronic conditions. Such a move would not help people who pay out of pocket for drugs without insurance. And the pharmaceutical industry will surely counter that this is an “overstepping” of government regulation that stimies the free market. A challenge is that by federal law, public insurance programs such as Medicare are not permitted to negotiate for drug costs—they must pay whatever the companies ask for. Thus, Clinton’s proposal leaves the 50 million Medicare beneficiaries out in the cold.

Another problem is the massive influence the drug industry has on the creation of laws and regulations through its lobbying efforts. As an industry, pharmaceuticals are the highest spender on lobbying efforts. In 2014, drug and device manufacturers spent $229 million dollars to influence policy. The industry was a major lobbying player in the crafting of the Affordable Care Act, a law that imposes some costs on them but also brings a potential $35 billion in new revenue.

Limiting lobbying dollars might be one approach, putting caps on out-of-pocket expenses is another tool. Such tweaks, however, do not deal with the underlying problem—profiting from suffering. The patchwork of drug companies, their influence, insurance plans, and haphazard regulations makes for an ungainly system. The marketplace as it exists says that not only is Turing’s unethical actions legal, but desirable. One solution is to remove the restraint on Medicare negotiating for drugs. The nearly 16% of Americans on Medicare are prohibited from being part of negotiated deals—that is not capitalism, that is enforced monopoly.

Second, there could be more oversight of mergers and acquisition in this industry. When a company can buy the competition, pressures for lower prices evaporate.

A third move would be to not only regulate the safety and efficacy of drugs, but also the pricing as is done in other countries. Given the uneven supply of drugs in recent years, we should consider regulating drug manufacturing like a utility. There could be a citizen board that would oversee pricing. If a company wanted to increase the price of its drugs, it would have to apply to this board, explain the reasoning, and be subject to the board’s approval. This is how power companies in many states have their rates regulated because the supply of energy is considered a necessity for life. So are drugs for many people.

A fourth option would be to create a single payer health system that negotiates contracts for drugs. There would still be Big Pharma and big pharmacies but costs would be negotiated by the government. Yes, this would limit profits, but it would also save lives. And even with limited profits, the companies would not be losing money—they may have to decrease the size of marketing divisions though.


Wrap up

In reaction to the outcry over the 5500 percent price increase, the owner of Turing Pharmaceuticals announced that he would lower the price, but has not said by how much. The Chao Center, part of the Purdue Research Foundation, has announced that it will take back the rights to cycloserine and has set a price of $1,050 per package ($35 per capsule).

These cases demonstrate that when it comes to health care, the free market does not work since it puts money above lives. Even the mildly regulated market we have, which is heavily tilted in favor of big pharma, puts money above lives. It’s time to put lives first and profits a distant second.

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