Drug Price Wars, Episode V: Politicians Strike Back

Drug Price Wars logo-Episode VThe galactic pharmacoeconomics battle over the pricing of pharmaceuticals resurfaced recently as both Democrats AND Republicans took shots at the pharmaceutical industry with comments such as:

…they’re raising the prices dramatically, and the reason they’re raising the price dramatically is because they can…the market will bear it.” – Senator Marco Rubio, Republican candidate for president.[1]

There is no rational reason why Americans should pay by far the highest prices in the world for prescription drugs.” – Senator Bernie Sanders, Democratic candidate for president.[2]

When Jim Cramer asked a physician, Ben Carson, during the CNBC Republican Debate whether pharmaceutical companies had gone too far Dr. Carson answered with, “Well, there is no question that some people go overboard when it comes to trying to make profits, and they don’t take into consideration the American people.”[3]
Rubio’s comment strikes at the core of the argument I’ve tried to make in the past. As a country, we do not impose any restriction on pricing set by the pharmaceutical manufacturer. Now, that doesn’t mean drug companies are unlimited. Large government and private sector groups negotiate to bring a drug price down to provide access to the people they represent (Government = CMS, VA; Private = Aetna, Express Scripts, CVS, and so on). I continue to try and bring the discussion back to microeconomics. Let’s consider Porter’s 5 competitive forces applied to a drug company with an innovative new drug and discuss a reasonable strategy.[4] If the drug is the first of its kind then the rivalry of existing firms is non-existent. If the drug cures a deadly disease or can be used in a critical situation with little other therapeutic options then the bargaining power of the consumer is essentially zero. If the patient is represented by a large managed care organization then the bargaining power may be stronger, but then the managed care organization is forced to balance helping a small percentage of their total population with keeping costs low for the entire cohort. Given these market dynamics and a legal monopoly established through the US patent process, the drug company has an obligation to continue the innovator strategy of charging a premium price and maximize profit.

Senator Sanders has a longer history with this issue and is working with another veteran of the drug price wars, Representative Elijah Cummings. His comment regarding Americans paying the highest prices in the world shines a light on something that companies must realize: the world is connected more than ever before so segmenting markets is likely to be met with almost instant backlash. Thirty years ago, price segregation was easier since you were more likely to get your information from local or regional sources. Technology and social media allows us access to information on a global scale.

Note: I only used the first part of Dr. Carson’s answer to Jim Cramer’s question about price gouging because the second half was some bogus answer about too much regulation on small manufacturers that really made Dr. Carson sound like he had no idea about this issue. I wanted to give Dr. Carson the benefit of the doubt and focus on a piece of his first sentence: “some people go overboard when it comes to trying to make profits…” With this statement, I can’t help but reply with, “Where do we draw the line in terms of profit?” Doesn’t the law of infinite wants apply here? Drug companies make no claim to being in business to break even.

How do Americans decide that a drug is too expensive? I’ve discussed the Daraprim® fiasco when an opportunistic investment firm announced a price increase of $13.50 to $750/pill, which grabbed headlines. The one thing that rarely gets discussed is the fact that the media backlash for Daraprim’s price increase from ~$1 to $13.50 wasn’t even worth a random tweet from a big news outlet! If a gallon of gasoline increased 13-fold I’m pretty sure citizens would take to the streets and the United States would start bombing someone with oil. So why then can a drug company producing a cure for a rare infection decide to jack up a price by a factor of 13 and no one bat an eye? The lesson I learned from the Daraprim saga is that the point at which people notice you are gouging is somewhere between 13x and 5000x. If Turing Pharmaceuticals had just doubled the price of Daraprim to $26 would it have even made the back page of an obscure local newspaper?

Dr. Carson says there is no question that some people go overboard with profit, but what does that even mean? Will a presidential candidate please come forward with a suggested “overboard” line and let us know at what point a company is making too much money?

References

1. Walker J, Haddon H. Marco Rubio latest to speak out on prescription drug prices. Wall Street Journal, October 19, 2015. Available at: http://www.wsj.com/articles/marco-rubio-latest-to-speak-out-on-prescription-drug-prices-1445299557, accessed on October 30, 2015.
2. Loftus P. Bernie Sanders to introduce bill targeting high drug prices. Wall Street Journal, September 9, 2015. Available at: http://www.wsj.com/articles/bernie-sanders-to-introduce-bill-targeting-high-drug-prices-1441839693, accessed on October 30, 2015.
3. The third Republican debate transcript, annotated. Washington Post, October 28, 2015. Available at: https://www.washingtonpost.com/news/the-fix/wp/2015/10/28/the-third-republican-debate-annotating-the-transcript/, accessed on October 30, 2015.
4. Porter ME. Competitive Strategy: Techniques for analyzing industries and competition. New York, NY: The Free Press, 1980.

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Joey
Joey Mattingly, PharmD, MBA is an assistant professor at the University of Maryland School of Pharmacy located in Baltimore, Maryland. Joey has managed retail and long-term care pharmacy operations in Kentucky, Illinois and Indiana. Leading Over The Counter is a blog of Joey's views and opinions on the topics of pharmacy leadership and management and do not represent the University of Maryland, Baltimore. Joey can be followed on Twitter @joeymattingly.

2 Responses to “Drug Price Wars, Episode V: Politicians Strike Back

  • T Cutler
    2 years ago

    “… bogus answer about too much regulation on small manufacturers that really made Dr. Carson sound like he had no idea about this issue.” Not a bogus answer at all. In fact, you saying this makes it sound like you have no idea about this issue yourself. Exclusivity and rights to a drug are the reason why Turing was able to legally inflate their price. Both of those are mechanisms of law and government. There is nothing stopping anyone from physically manufacturing Daraprim, it’s an old drug and has no trade secrets or large corporate backed trials. However getting barred from selling it on the market it is enough reason to not manufacture it. Having a regulatory agency like the FDA has prevented bad manufacturing techniques, however the overall effect has been a net negative– near impossible barrier to entry for anyone to come into this business and an exponential cost to drug development. It has also doomed this industry to being a product-only offering.

    Also to Sen Sanders’ point “There is no rational reason why Americans should pay by far the highest prices in the world for prescription drugs.” There is a rational reason actually. It’s because most of the world has gone single-payer with national insurances capping the prices on drugs across the board. If everyone caps the price, companies will increase the price in places where it isn’t capped. That’s why America is getting hit with the prices.

    Everyone in healthcare is discontent with their jobs. Increasing oversight by governing bodies inhibits our freedoms to practice. Saturated jobs market. Tighter squeezes for reimbursement. These politicians are making the problem worse, and an uninformed public will ultimately vote their own demise. I don’t doubt the author himself is as miserable as the rest of us in his practice. I know I am.

    -T. Cutler, PharmD

  • Dr. Cutler,
    1. Thanks for your comment, I appreciate you taking the time to provide your thoughts on the matter.

    2. I stand by my claim that Dr. Carson citing over-regulation as a bogus answer in that context and if you watched the debate or read the transcript you could tell he was sticking to the ole “Too much regulation” jargon that often is used in politics. While I agree that regulatory burdens are an obstacle or barrier to entry in many markets, in the case of Turing Pharmaceuticals the purchase of licensing rights does not mean another company couldn’t submit an abbreviated new drug application to the FDA for a generic version of a drug no longer protected by a patent.

    3. To say the “FDA is a net negative” is an interesting statement. Please use an internet search engine to explore “The Jungle” or “Thalidomide” or “elixir of sulfanilamide.” Maybe this reading will change your assessment of the value added by the FDA.

    4. Yes, the US not imploring a cap on prices makes the US a vulnerable market to higher prices and I think you just made Senator Sanders’ point.

    5. “Everyone in healthcare is discontent with their jobs.” – I respectfully disagree.

    6. “I don’t doubt the author is himself is as miserable as the rest of us in his practice. I know I am.” – Dr. Cutler, I’m truly sorry you are unhappy in your practice. I love my job and feel blessed to go to work every single day. This has not always been the case though, so I will admit that I have had moments struggling with my decision to become a pharmacist. I challenge you to do some introspection and decide what it is you want out of your career and find out what really motivates you.

    While we may disagree about certain issues, I believe if we knew each other we actually would be friends and probably enjoy debating these political issues over a beer! I appreciate your passion and hope to encourage you to continue to fight for what you believe in.

    Sincerely,
    Joey

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