This commentary originally appeared in Forbes on September 14th, 2016
Aphorisms like “the pot calling the kettle black” persist because they keep being proven relevant. Such is the case with politicians’ outrage over Mylan Pharmaceuticals’ price gouging for its life-saving EpiPen: their price has risen from less than $100 for a two-pack in 2007 to $600 today.
The government (“pot”) is loudly and very publicly calling Mylan (“the kettle”) “black”—at fault—for something the government itself did.
Epinephrine (Epi) is a naturally occurring hormone our bodies use for Fight or Flight. Epi makes our hearts pump harder, it heightens the senses, strengthens our muscles, and opens up the airways. In patients with sudden constriction of the airways, such as in asthma or respiratory allergies with anaphylaxis, Epi can be lifesaving.
Meridian Medical Technologies introduced the first autoinjectors of Epi for sale to the public in 1997. Mylan Pharmaceuticals became the sole seller and marketer in 2007. After multiple denials by the FDA of competing Epi devices and President Obama’s 2013 legislation forcing public schools to purchase EpiPens, Mylan gained market share to reach its present level of 90 percent.
Why can Mylan get away with a 500% price increase? Because it has a monopoly, one that is maintained by “the federal government’s own regulatory scheme” which allowed, in fact encouraged, “a billion-dollar market [to be] cornered by one supplier.” Government officials decry Mylan’s behavior to distract the public from government complicity.
Sanofi , Teva, and Adamis are three pharmaceutical companies that would like to compete with Mylan; however, they cannot sell Epi because they do not have the FDA’s okay. The feds keep changing their administrative rules and regulations. In fact, “the FDA maintains no clear and consistent principles for generic drug-delivery devices like auto injectors or asthma inhalers.”
Another barrier to competition is a patent process that allows companies to make minor changes to products with nearly expired patents so they can restore patent protection and protect monopoly.
Finally, cost raises the barrier to market competitors to unscalable heights. The cost to obtain FDA approval is $2.56 billion (in 2013 dollars). This expense will be passed on to consumers.
Collectively, the federal regulatory apparatus has allowed Mylan to preserve its monopoly. Mylan can charge whatever it wants for its product and earn obscene profits at the expense of price-gouged consumers. At the same time that the price of EpiPen increased 500 percent, Mylan CEO Heather Bresch’s annual compensation rose from $2,453,456 to $18,931,068.The consumer doesn’t pay for pharmaceuticals—insurance does, usually the government. So where is the incentive to economize? Economists call this “moral hazard,” where the person who spends has no reason to save money or demand value because he or she is spending other people’s money. If you wonder why the spending curve for healthcare keeps rising, look no further than the moral hazard.
Dr. Ezekiel Emmanuel, one of the architects of Obamacare, admits that a free—“uncontrolled”—market would bring down prices. Yet, his solution is more government control, specifically price controls.
What does history teach us about price controls?
The U.S.S.R., Cuba, Korea, Spain, and Venezuela amongst others have all used strict government price controls. The results were: shortages of everything, viz., long lines of Russians standing in the snow waiting for government-issued shoes or toilet paper; poor worker productivity; very low standards of living; and no innovation. This is precisely what we don’t want.
The solution to the exorbitant price of EpiPen is not public shaming, such as claiming that Mylan is “just the latest troubling example of a company taking advantage of its consumers.” The solution is not Mylan’s proposed coupon program or its introduction of a “generic.” Most definitely, the solution is not more government controls through regulation.
The answer lies in releasing market forces from government suppression. If government bureaucratic barriers were eliminated, sellers could compete, and the supply of goods would increase. If the government were not the third party payer for health care, that is, if consumers controlled their healthcare dollars, spending would drop. Prices would plummet from these market forces.
In a free market, Mylan might charge $600 for EpiPen but they would sell no units because people could buy a competitor’s medication for, say, $15. If politicians really want to help save Americans by making life-saving drugs readily available, they should get the government out of healthcare and unshackle the free market.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.