EpiPen craziness

My attention has been drawn to the Mylan labs controversy regarding its EpiPen product. This story epitomizes what is wrong with the pricing mechanism which permeates much of health care delivery.

The obvious front page story goes something like this:  "Greedy pharmaceutical companies lead by greedy CEO's take advantage of the public to reap out-sized profits."  This in turn leads to a cry for Federal intervention to fix this problem.

Is this really the problem and is the proposed fix going to be effective in solving the problem. I often hearken back to the words attributed to Albert Einstein who has been quoted " If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution." (Whether he actually said this is another story but beside the point). If we don't have the problem adequately defined or even worse, incorrectly defined, it is not likely that that the problem can be solved except by the injection of dumb luck.

It should come as no surprise that a profit seeking entity will be motivated by generating a profit and it will do whatever that is legally within its power to maximize its earnings.   Companies that sell any product or service will try to optimize the price structure. Companies that do a bad job at this tend to disappear. There are pressures to keep prices high enough to cover costs, the reasons being obvious. There are also pressures to pressures to keep prices low enough to compete with other parties who seek to take market share by offering the same or similar product or service at a more competitive price.

The case of the EpiPen is one of a failed market, one that has failed because a third party has intervened. That third party is the Federal government in the form of the FDA. The FDA has a mandate to protect the public from unsafe and/or ineffective medications and devices. Who can argue with that mandate? As usual, the devil is in the details and with any intervention targeted to add value to the public, there is always the possibility that the unintended consequences of the best intended actions end up creating new problems.

Epinephrine, the drug platform behind the EpiPen has been around for more than 100 years. It is inexpensive to produce. The delivery device has been around for decades and vastly cheaper earlier versions are sold outside of the US for pennies on the dollar. Multiple Mylan competitors have attempted to bring alternatives to market in the US for years. Mylan, in some sense partnering with the FDA, has done the most reasonable thing to maximize their shareholder value. In the absence of competitive pressure to keep prices low it would be irresponsible not push the envelope on price and fulfill their fiduciary duties to their shareholders.

The FDA combines the worst of the precautionary principle with a blindness to cost. I do not have inside information on the specifics of decisions to impede the deployment of competitive products and I do believe there is a specific conspiracy. It is likely simply to convergence of perverse incentives within the agency which which prompt employees to avoid risks associated with approval of competing products. The net result is the cost of the injector rising from around $50 for a single unit to over $600 for the obligatory two pack.

A second but related element is the role of health insurance in the evolution of this problem. While the EpiPen is in the news, the peculiarities regarding its pricing is fare from unique in health care. Perverse pricing of health care related goods and services are more the rule rather than the exception. The perverse pricing structures are a consequence of the use of third party payment mechanisms which result is large segments (but not all) of the public being insulated from the cost of given goods and services. Her lies the source of so many issues we face in health care. Even in the absence of any competitor, there are limits in terms of how much Mylan could charge for the EpiPen and the presence of a large insured population allowed them to push the price hikes much harder than if the public had to pay out of pocket for the EpiPen.

When going back to define which problems we are facing, I believe the crux boils down to the role of insurance and its effect of shielding the paying public from awareness of the cost of delivery of goods and services. The question should be, should we insulate people from the costs of health care delivery and if so, which ones and when? One reason that the EpiPen cost could rise so steeply is that during the time where the cost increases were going into effect, much of the buying public was insulated from the cost. As Holman Jenkins wrote in his WSJ article (Jenkins):

Well, in the rest of the economy, when a consumer is spending out of his pocket, he has incentive to judge whether the service he’s buying is worth the price he’s being asked to pay.
Now you know why we offer coupons and rebates to individual consumers. This is our way of trying to re-desensitize customers to the price of EpiPen in order to counter the efforts of insurers to re-sensitize them by hitting them with copays and deductibles.
Then why does getting our coupons and rebates involve rigmarole? Because certain consumers won’t make the effort, and then we get to keep the money that would otherwise go to defray their out-of-pocket costs.

Extrapolate the EpiPen phenomena to the entirety of the health care economy. Jenkins goes on to do this...

It’s a great game and we have fun playing it. On average, however, it probably does not increase the health-care industry’s profit margins or the public’s health—but only the share of national income diverted to health care from everything else: beer nuts, wedding presents, automobiles. Our industry’s share of GDP is 17%, up from 13% two decades ago. Hooray, that’s $700 billion a year.

  Obviously, there are catastrophic events where insurance has a vital role. Heck, that is the purpose of insurance.  However, when the desire to insulate the public from the cost of mundane and predictable services they can and should plan for, and to use insurance to meet those ends leads to outcomes which become catastrophic when considered in aggregate. Where well functioning markets are relentless in driving down costs, regulated health care markets drive up costs, even of old products with little or no commensurate value added to the public. Despite the best of intentions, the results are not what virtually anyone desires, unless you are Mylan Pharmaceuticals benefiting from a governmental facilitated monopoly.