The obligatory outrage after reports that a company has raised the price of a lifesaving drug by 300% has become a tired trope of modern-day politics. Every time one of these stories goes viral, both Republicans and Democrats showcase their disgust, request federal investigations, and demand that something needs to be done to prevent price-gouging. But the economics of pharmaceuticals is a bit more complicated than the cliché of odious monocle-wearing suits condemning sick patients to suffer.
Free to Expensive
In 2012, Catalyst purchased the exclusive North American rights to Firdapse — a drug used to treat Lambert-Eaton Myasthenic Syndrome (LEMS), a rare neuromuscular disorder that is diagnosed in one out of every 100,000 people — from its developer, BioMarin Pharmaceutical. Two years later, Catalyst had to settle a $3.5 million class action suit after investors sued when they discovered a free alternative. The firm announced shortly after that extra FDA testing would be performed, leading a collapse in the stock and the elimination of 30% of its workforce. It was given FDA approval in November, as well as exclusive rights to market the pills for several years.
Now that it fully licenses the drug, Catalyst will charge $375,000 per year.
Recently, Sen. Bernie Sanders (I-VT), a possible 2020 presidential candidate, penned a letter to Catalyst, grieving that the price hike “is not only a blatant fleecing of American taxpayers, but is also an immoral exploitation of patients who need this medication.”
His remarks are part of a greater pattern over the last year of U.S. lawmakers initiating probes into the pricing practices of pharmaceutical giants. In the new session of Congress, Rep. Elijah Cummings (D-MD), Rep. Frank Pallone (D-NJ), and Rep. Diana DeGette (D-CO) commenced correspondence with leading drug manufacturers and asked for details as to how they set drug prices.
President Donald Trump has gotten in on the action, too. In March 2018, the president outlined a blueprint to “bring soaring drug prices back down to earth,” including abolishing foreign freeloading, mandating firms to disclose prices on television advertisements, and ending government negotiations for lower drug prices for Medicare.
“Everyone involved in the broken system — the drugmakers, insurance companies, distributors, pharmacy benefit managers and many others — contribute to the problem. Government has also been part of the problem because previous leaders turned a blind eye to this incredible abuse. But under this administration we are putting American patients first.”
While it is easy and possibly fun to rail against Big Pharma, it is the leviathan that’s the disease, not the cure. But this fact is not a headline grabber and does not appeal to emotions like blaming those greedy capitalists.
Economics of Pharmaceuticals
In a free market, competition is imperative. When there is a healthy dose of this practice, prices come down, product quality improves, and consumers benefit. However, when competition is absent, the opposite takes place, which then leads to monopolies, malfeasance, and misery.
Unfortunately, this is what regularly happens in the pharmaceutical industry. We witnessed this with Mylan’s EpiPen and Marathon’s deflazacort. Patents, the FDA, insurance, and monopoly privileges allowed these businesses to hike the cost dramatically from a few dollars to tens of thousands of dollars. It is only because of fierce public reaction that substitutes finally are being approved by regulators.
Since it is the only game in town, it can get away with triple-digit price hikes.
And this is what’s transpiring with Catalyst and Firdapse. Since it is the only game in town, it can get away with triple-digit price hikes. Because of this pharmaceutical monopoly privilege, drugmakers can squeeze every last penny from the consumer; if there were 100 other generic producers of Firdapse, then supplies would soar and prices would come down.
Another important element of this discussion is public financing: The cost of the drug is covered by taxpayers and not directly by the beneficiary. Without Medicare and Medicaid, it would be impossible for patients to fork over $25,000, $50,000, or $375,000 every year, which would prompt firms to charge less to boost sales and maximize profit margins. However, with public financing, these businesses utilize the government privilege of rent-seeking – boosting a share of current wealth without producing new wealth – instead of commerce to increase sales.
One way to slash drug prices is to permit the importation of pharmaceuticals. Today, the federal government bans importing certain drugs, which results in producers spiking prices. For example, Martin Shkreli became notorious when he increased Daraprim prices from $13.50 to $750, even though a generic version of the same drug is sold in India for pennies. Shkreli took advantage of rent-seeking and did not need to bribe politicians, lobby the state, or defraud customers to get rich.
Ultimately, it would be simpler to import foreign drugs instead of creating products for a minuscule percent of the population at a skyrocketing price. Moreover, since it can cost as much as $1 billion and take as long as 10 years to receive FDA approval, many U.S. firms do not bother entering the market.
Outrage Over Reason
How do you get your name in the national headlines? By being outraged – the angrier you are, the more publicity you get. Imagine if Howard Beale from Network didn’t shout “I’m mad as hell and I’m not going to take it anymore” to the camera? He would never have become a cultural phenomenon had he uttered, “I don’t need to tell you that things are better than they have ever been … we know things are good – better than good.”
The political arena wouldn’t be as nasty and theatrical if incumbents and candidates opted for reason over emotion and refrained from employing tired tropes of how upset they are. But that’s how the government operates and how politicians and civil servants stay employed: search for a problem, exploit the public’s anger, and proclaim you have the prescription to establish a utopia.
Big Pharma is a popular target for people who think they’re getting fleeced by the sins of the marketplace. We quarrel over prices, but we often forget how these companies save lives, fight illnesses, and ensure sick people can lead a healthier existence. There is a conversation to be had about the myriad of drugs we consume and the reasonable alternative of natural medicine, but we wouldn’t be living longer were it not for advancements in medical care.
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