Gouging

Jumping to the defence of pharmaceutical companies over their pricing policies isn’t fashionable – and a lot of the time, it’s not going to end prettily.  But it’s perfectly coherent to think that the profit motive is one of the motors of innovation, and that it’s part of the quid pro quo for spending money on drugs that may do nothing; in fine, that the profit motive may actually be a necessary part of getting the good stuff we want.  To an economist, the phrase “normal profit” means the minimum profit necessary to keep a firm going – where average revenue equals average total cost.  But if that was all that was on offer, there’d be no incentive to enter a market in the first place: if you’re (on average) in the same place as you were before entering the market, why bother?  So it’s reasonable to think that there ought to be some level of supernormal profits.  They help ensure we get a world that’s better tomorrow than it was yesterday.

On this account, the problem is not with making a supernormal profit – oh, all right then: what in everyday English we’d simply call a profit – but with gouging and/ or profiteering.  The question that needs to be addressed is one of what level of profit, and what kind of return on investment, is reasonable.  In some sectors of the economy, it may be quite high.  For example, if I can manufacture a luxury good for which people are willing to pay through the nose, and make a stonking great profit from it… well, all hail me.  In other sectors, this will not be the case.

The determinants of the level of acceptability will depend on all kinds of factor.  It’s a complicated question, and it may defy satisfactory answers from time to time.  All the same: one doesn’t have to be able to say that or why x is good in order to be able to say that y stinks.  The story about EpiPen pricing that’s emerged over the last week or so is one such case.

Here’s the story: EpiPens deliver a dose of adrenaline, and are therefore very useful in cases of allergic reaction.  Adrenaline is not expensive, but delivering it via a syringe is cumbersome; EpiPens make it much simpler.  Mylan Pharmaceuticals obtained the rights to the device in 2007; since then, the price has risen by somewhere between 400 and 500% in the US (different sources offer different amounts; but a pack of two EpiPens costs about $415 in the US, and about $85 in France).  That’s bad enough on the face of it, though Mylan CEO Heather Bresch does apparently have a defence, as Fortune explains:

[I]f Mylan were to actually reduce the price of EpiPen, it would have ramifications other than just lowering what individuals pay for the drug.  Insurers would probably also want to pay proportionally less in reimbursements.  That could have a domino effect on the other middlemen between Mylan and the patient, such as drug distributors, pharmacy benefit managers, and pharmacies, who might also have to settle for less revenue per EpiPen sale.  Some might not want to carry EpiPen at all if it weren’t profitable to sell, which could make it harder for patients to get the drug.  And it would almost certainly take longer for Mylan to negotiate a new arrangement – and by then the EpiPen controversy might have blown up further.

“Here’s the perverse thing: Had we reduced the list price, I couldn’t ensure that everyone who needs an EpiPen gets one,” Mylan CEO Heather Bresch told CNBC Thursday. “So we went around the system.”

Let’s assume that that’s factually correct.  (I don’t understand the rationale that low prices would mean less availability, but there’s a lot about the American health insurance market that I don’t understand.)  If we grant that for the sake of the argument, it only works as a defence on the back of a deeply dysfunctional healthcare system – one in which the profit motive has become not a, but the determinant of action.  That brings us to the question of what’s reasonable.  And in the background, we’d have to admit that Mylan would miss the bigger picture: one company’s unreasonable behaviour might be reasonable in an unreasonable market.

Yet there’s more to the story than that.  Two things stand out as being particularly… let’s say, noteworthy.

FIRST.  Before Bresch became Mylan’s CEO, she was involved in campaigning for a legal requirement for schools to keep EpiPens.  This is probably an admirable enough piece of legislation, but, still: there’s something a bit fishy about the sole manufacturer of a good campaigning for it to be mandatory in schools, and then overseeing a price hike.  One might wonder whether something’s being required by law ought to bring with it at least some kind of alteration to the IP rights held by Mylan that ensure it is currently the sole manufacturer of the EpiPen.  The licence should have been opened up.

SECOND.  The second thing brings us back to the incentive point.  Let’s allow for the sake of argument that pharmaceutical companies have to be given the chance to make not just supernormal profits, but large supernormal profits on successful drugs – maybe to cover the costs of unsuccessful ones, maybe because we’re simply feeling charitable.  The interesting thing about Mylan is that its contribution to the research that gave the world the EpiPen appears to have been… um… not huge.

Sheldon Kaplan [was] an engineer for NASA before inventing the EpiPen.  His surviving family members say he was never paid royalties for the device he invented, and never became famous for designing a product now used by millions.

After working at NASA, Kaplan started working for Survival Technology, Incorporated in Bethesda, Maryland.  Kaplan sought to create a device intended to quickly inject a user suffering from anaphylaxis — a potentially fatal allergic reaction — with an emergency dose of epinephrine.

In 1973, when Kaplan was finalizing the design concept for the EpiPen, he was approached by the U.S. Department of Defense, which was looking for a device that could quickly inject an easily deliverable antidote for nerve gas.  Kaplan’s design was for a device that a person could easily stick into one’s thigh, prompting a spring-loaded mechanism to push a needle containing life-saving medicine into the user’s bloodstream.

Kaplan’s invention became known as the ComboPen, and was initially used by the Pentagon before becoming available for use by the general public several years later as the EpiPen.  However, Kaplan left Survival Technology, Incorporated shortly after creating the EpiPen to become a biochemical engineer, and didn’t follow the success of his invention.  He lived out his life in a typical suburban home with two modest cars in the garage.

“My husband was always looking for a new challenge, and he tended not to look backward,” Kaplan’s 71-year-old wife, Sheila, told the Times.

“[Kaplan] felt he had a legacy, that he made a difference,” Michael Kaplan said. “My dad was an extremely talented engineer, an analytical guy who delighted in solving technical issues.”

Mylan obtained the patent in 2007.  So it looks like here’s a guy who invents something useful, with a helping hand from the government.  To make things absolutely clear, this means that the notionally expensive research costs were already covered, and that – at least morally – the public sector has a decent stake in EpiPens.  Mylan’s behaviour, if this account is true, implies that they’re not only cleaning up on the back of someone else’s work – which gives the lie to the incentive argument in this case – but are cleaning up on the back of someone else’s work AND public money.

And this is why, on the face of it, it looks like Mylan is gouging the public twice.  Once because of the money people are having to cough up to pay for a fairly elementary device; and once because that device was developed with public support to begin with.

How squalid.