Why We’re All Talking about Drug Prices Inaccurately: The EpiPen Controversey
For a critical lens on how drug pricing is set, click here. All views are my own.
Mylan CEO Heather Bresch has been vilified by the press these past few weeks for the 400% increase in the price of an EpiPen pack. From all of the headlines and coverage this has gotten, you might think that Bresch suddenly decided to hike the prices to $600 a pack overnight, taking financial advantage of the medical needs of the millions who have no choice but to carry an EpiPen on them at all times or risk a life-threatening event. But in actuality, the increase in the price of the EpiPen has been happening steadily — over the course of nearly a decade, in fact. Moreover, chances are that many people who use EpiPen are not the ones who will be affected by the price increase.
Gradual price increases or not, there is an issue with drug pricing in the U.S. But there is a larger issue with how we talk about drug pricing in the U.S., and especially how the media and politicians talk about it.
It’s All About Affordability, But What Does that Mean?
Price is often associated with affordability. And typically, rightfully so. When gas prices rise, for example, it’s directly less affordable for consumers. However, this isn’t the case for drug prices, thanks to health insurance, which pays for much of all healthcare costs and leaves consumers with only a small portion they are responsible for, known as “out-of-pocket” (OOP) expenses. But we can’t look solely at changes in OOP costs.
That could understate the true overall impact of rising drug prices if the insurer is absorbing the brunt of the increase. Conversely, narrowly focusing on OOP costs could also exaggerate the impact of rising drug prices if what is really going on is that the insurer has decided to cover a smaller percentage of the cost of a particular drug than before.
Looking Behind the Curtain of Rising Prices
As I illustrate in the map, there are a variety of factors that not only contribute to a) drugs being more expensive, but contribute to b) why drugs feel more expensive.
Drugs Being More Expensive
Not all drug pricing headlines are created equally. Recent scandals from Turing to Valeant Pharmaceuticals highlight the real threat of reckless and egregious drug pricing increases. Others, however, reflect genuine improvements in care. The reality, however, is that most increases lay somewhere in the middle of this ethical spectrum. To delineate between the good and the bad, it’s important to consider the factors below.
- Monopolistic Acquisitions of Older Drugs — An increasingly popular strategy, most notably flaunted by companies like Turing and Valeant, revolves around acquiring the research and drugs of other pharma companies. These companies are collectively known as “platform” companies in reference to its finance-driven approach of acquiring undervalued drug assets. This may be fine when pursuing drugs that still have research potential, but raises flags when pursuing older, off-patent drugs. Moreover, many such drugs often fade out of the commercial limelight and are manufactured only by 1–2 companies. Predatory acquisitions of such drug assets may lead to monopolies, resulting in excessive price increases of the drug without health insurers being able to negotiate elsewhere.
- Patent Evergreening — “Evergreening” refers to any strategy used to try to extend the life of a patent. For a pharma company, extending the patent by even just one year can protect an entire year of unimpeded sales for its product. Patent extensions may be legitimate if through research, companies discover new uses or improvements to an existing drug. The gray area emerges when companies patent new delivery mechanisms or “extra-strength” doses, which albeit may offer improvements to a patient’s health, may not warrant warrant additional years of patent exclusivity. While patents do indeed spur significant innovation, competition from generics is necessary to lower prices. Drawing a clear line in that gray area will be important.
- Rising Bar of Clinical Evidence — Clinical research is becoming more costly, difficult, and risky. As drugs today get better, the threshold for demonstrating clinical success rises. Trials are also riskier as research enters more daring diseases like cancer where everything from recruiting patients to navigating patients through complex study protocols (e.g. biopsies or other diagnostic tests) is a rising challenge. And as research risk rises, so do profit expectations, and therefore pricing benchmarks.
- Rise of Biologic and Specialty Drugs — Biologic drugs, as defined by their synthesis from live organisms, are rising in popularity. They range from insulin used by diabetics to monoclonal antibodies used to stimulate the immune system’s defense in cancer. Such drugs are often made up of complex proteins and enzymes, and cannot be synthesized like the chemical-based recipes of traditional small-molecule drugs. As science and technology improve, so do the capabilities of researching more novel and complex biologics to tackle diseases. Unfortunately, manufacturing biologics is also more costly. And given their manufacturing complexity, it’s also difficult to create and prove an identical generic “copy.” And although the FDA is beginning to approve generics of biologics, known as “biosimilars,” their regulatory future is still uncertain.
Drugs Feeling More Expensive
Drugs feel more expensive when health insurers cover less of a drug. And as healthcare costs rise, health insurers look to shift the burden of expenses onto its patients through higher deductibles or premiums. Deductibles refer to the amount you have to pay before coverage kicks in. And since 2010, average deductibles have increased over 67%. As more Americans enroll in High-Deductible Health Plans (HDHP), so does the feeling of cost. Under an HDHP, EpiPen, which may have been previously covered by a health insurer for a $50 co-pay, now costs $600 until the deductible is met. Premiums or the monthly payments one makes to be covered are rising too, and have increased by about 27%. What’s ultimately driving this feeling of “cost” boils down to rising healthcare costs and insurers counteracting those costs by covering less of it.
- Rise of Innovative Treatments — Healthcare treatments are drastically improving. Unfortunately, such advancements in medical and pharmacological treatments are also considerably driving up costs. The scale of improvements these new treatments bring to patients (e.g. curing diseases that were previously incurable like Hepatitis C, stem cell or gene therapies) challenge and strain current pricing models.
- Riskier and Unbalanced Risk Pools—Under the ACA or “Obamacare,” individuals once formerly denied coverage because of sickly and costly pre-existing conditions can now acquire insurance. However as a consequence, these “high-risk,” sicker individuals often make pools of members more expensive to cover. And to counteract the high healthcare costs of such individuals, insurers may raise deductibles or premiums of their healthier patients as well.
- Federal Mandates on Coverage — The ACA also established nationwide standards for health insurance, which include an essential benefits list. Such requirements include providing baseline access to preventative care or ambulatory services, services that were once not deemed a necessity for coverage. Such federal (and state) mandates to enhance coverage further contribute to rising costs.
- Merger of Insurers and Doctors — Health insurers and doctors are aggressively consolidating into larger-scale businesses. Doctors, in an effort to negotiate better rates and navigate through increasingly complex regulatory guidelines, are merging. Enhanced negotiating leverage means insurers are being put on the defensive when setting reimbursement prices, further raising costs. In retaliation, insurers are also merging, which although may imply an ability to renegotiate rates downwards, also may help monopolize insurer ability to set high premiums and deductibles without healthy competition.
- An Aging and more Costly Population — Last but not least, people are living longer, leading to an increase in overall of healthcare utilization and cost.
Tackling the “Being” and “Feeling” of Expensive Drugs
Both drug prices “being” and “feeling” more expensive are major problems. However, many of these problems are rooted in wider systemic issues we have in healthcare today. And if we focus solely on a drug’s direct impact on OOP costs, we may miss other causal factors that equally, if not more severely impact how much we all pay for our drugs. And by ignoring these other factors in our dialogue, we may be ignoring potential solutions, too.