Vivian Huang

ECON BC1003
Professor Bushati
The recent controversy surrounding Mylans EpiPen price hike not only angered
Americans across the states, but also brought the governments attention to the rising prices and
costs of medicine. In the case of Mylan, EpiPen is considered a patent medicine, and with
millions of consumers prescribed with EpiPen, the firms place in this particular drug industry is
a monopoly from a microeconomic perspective. The companys ability to increase EpiPen prices
from $100 to $608 without fear of competition suggests its dominance in this field of the drug
industry. This also suggests that the company puts profit before consumer needs and well-being,
which is considered unethical practice.
In the midst of the outrage, Mylan offers generics at $300 to appease consumers and
government lawmakers. The net price, however, still increases via artificial price inflation.
Consumer needs, especially in medicine, are increasing and necessary, but prices are too high to
be affordable. The issue of high drug prices comes from the fact that the government has done
little to lower or cap spending on medicines...[and] American drug firms can set whatever official
price they like.
Because the government has no regulation on drug prices, consumers are often left with
no alternatives when large pharmaceutical companies, such as Mylan, increase drug prices for
profit. Recently through publicity and outrage, the government decided to step in and take
Mylans CEO in for a congressional hearing as a form of government intervention. The
governments role is to protect consumers from corporate greed.

Drugs in America

Seizure-inducing
A row over Mylans EpiPen allergy medicine raises fresh questions about how drugs are priced

Sep 3rd 2016 | NEW YORK | From the print edition

Stic
ker shock

JULIANA KEEPING is rushing to work in Oklahoma with two children in tow. Her three-year-old son,
Eli, has cystic fibrosis, a deadly lung disorder. He is too young for a drug called Orkambi from Vertex
Pharmaceuticals, a biotech firm, but one day it may keep him alive. His mothers question is why it
costs over $250,000. A charity helped pay for its development, she says, with some donations from
people who were D-Y-I-N-Gshe spells out the word. That is because she doesnt want her other
child to understand. She doesnt know her brothers disease is F-A-T-A-L.
Ms Keeping has started a petition against the price of Orkambi. She is not alone in her anger.
Americans are furious about the cost of medicines. Over the past week their ire engulfed Mylan, a
generic-drug firm, which had raised the price of its EpiPen, an injectable medicine that fends off
deadly allergic reactions, to $608, from about $100 in 2007. On August 29th Mylan said it would start
selling a generic version for half the price. The brawl is far from over. Both Hillary Clinton and Donald
Trump are proposing measures that would mean tighter price controls on drugs.
For pharma firms, this is a worrying prospect. To date the government has done little to lower or cap
spending on medicines. Across Europe governments control prices in one way or another, but

American drug firms can set whatever official price they like. Their single biggest customer is
Medicare, which spent a massive $112 billion on medicines for the elderly in 2014. The way it
operates rewards doctors for selling costly intravenous drugs. And it is illegal for Medicare to
negotiate with drug companies. Only private health insurers do so on the governments behalf, but
they are sharply constrainedfor example, they are required to pay for six broad categories of
drugs. The idea is that competition among insurers (and accompanying pressure to pass on savings
to consumers) will restrain costs, but it has not done so. As a result America spends 44% more on
drugs per person than Canada, the next-highest.
There have been plenty of rows over drug prices in the past, but matters are becoming more heated
now. For one thing, insurers are obliging patients to pay a greater share of the cost for their
treatment, so they notice higher prices. Ms Keeping has private insurance, but she still had to spend
nearly $3,000 last year on her sons care.
Prices are also rising rapidly. The average launch price of a range of cancer drugs, adjusted for
inflation and health benefits, grew by 10% each year between 1995 and 2013, according to a recent
paper from the Journal of Economic Perspectives. Prices for older, patented drugs are climbing,
too (see chart). Drugs firms used to say increases were due to inflation, says Steve Miller, the chief
medical officer for Express Scripts, a firm that manages drug costs for employers. Since there is now
little general inflation about, he says, its price gouging. The pharma industrys rationale, which is
that brilliant new drugs are worth it, is often faulty. Some new medicines are impressive, such as
Gileads $84,000 cure for Hepatitis C, Sovaldi, but others are not. Sanofi introduced Zaltrap, a
cancer drug, for $11,000 a month, despite the fact that it offers little more benefit than cheaper
drugs.

Price increases for generic drugs seem even more arbitrary. The most egregious case remains
Turing, a small company that bought an old HIV drug with an expired patent and boosted its price by
5,556%. Many in the industry branded its boss, Martin Shkreli, an evil anomaly. But the case of
Mylan shows that Turing was not quite the outlier it appeared to be. The larger firms chief executive,
Heather Bresch, heads the generic-drugs lobby and is the daughter of an American senator.
In the field of patented medicines, the industry points to the billions of dollars that are required to
develop new treatments. But many question whether drug firms profit margins, which greatly exceed
those of other industries, especially in the case of biotech companies, need to be as high as they
are. Theres limited evidence to show that spurring innovation requires that level of profit, says
Ronny Gal of Sanford C. Bernstein, a research firm.
What does the doctor order?
The Food and Drug Administration (FDA) has made progress in addressing some of these problems.
Last year it approved an impressive number of both generic drugs and innovative medicines. Still, it
could work faster, particularly when a generic has a monopoly.
Private insurers and pharmacy-benefit managers, such as Express Scripts, are old hands at
resisting high drug prices. They use co-pay schemes and other incentives to push patients towards

cheaper medicines. They also refuse to pay for some new drugs when there is a reasonable
alternative. This works quite well. The official or list prices for spending on drugs climbed by 12.2%
last year, according to IMS Health, a research outfit, but net spending, which includes the rebates
and discounts that employers and health insurers demand, rose by a more modest 8.5%.

A popular idea is to let the government negotiate prices of the drugs for Medicare directly with
pharma firms. The idea has support from both Democratic and Republican voters. But any legislation
might not pass, and it would be complex to put into practice. Furthermore, Medicare would need to
be able to refuse to pay for some medicines; neither Mrs Clinton nor Mr Trump have gone so far as
to suggest that. The public might object, too. The only thing that Americans detest more than an
expensive drug is a bureaucrat who says they cant have it.
Reform will of course be opposed strongly by the pharmaceutical industry, which has many friends in
Washington, DC. The chief strategy employed by drug companies to rein in costs for patients has
bordered on the devious. They offer coupons and other help to cover patients out-of-pocket costs for
expensive drugs. But the prices for insurers remain high, which raises costs for everyone. Now that
the threat of regulation looms, they may be willing to do better.