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Competition works best to control drug prices

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(Bloomberg View) — If you haven’t heard about EpiPen’s unconscionable price increases, you have probably been in an ashram. The price of these life-saving medical devices, which are used to quell potentially fatal allergic reactions, has quintupled over the last few years. The price increases have not come because the devices have gotten more expensive to make. Adrenaline, the main component of the EpiPen, is cheap, and the devices, while tricky to make, have been produced for quite a long time and do not involve some ultra-rare mineral or space-shuttle-quality precision engineering. They have not come because Mylan, the manufacturer, suddenly needs to get back all the money it spent on research and development. No, the company has increased the prices simply because it can.

The public outrage is high and growing, and Hillary Clinton has quickly moved to capitalize on it. On Friday, she released a plan to try to stop the prices of this and other generic drugs from suddenly rising to nosebleed levels. A federal panel would be established to examine price increases in the prescription drug and device market, and could take steps to combat them if they found the increases to be unjustified. The panel would have the power to authorize the re-importation of similar medicines from other countries, or could purchase alternative treatments (which would create a market for generics to compete the price down).

Is it a good plan? To know, we first need to understand why these increases are happening in the first place. No, don’t tell me “greed.” Companies are indeed greedy, but they are always greedy — it’s a constant, like the speed of light. You don’t see prices suddenly popping up because of a constant. You see prices suddenly popping up because something has changed.

Related: CVS Health has amped up pharma’s U.S. drug-price wars

And what might that something be? One thing that changed is that nine years ago, Mylan bought the rights to make the device. And Mylan decided to raise prices.

But that’s not quite enough of an answer. Companies often decide they’d like to raise prices. And yet, we rarely see markets where prices shoot up by a factor of five when there’s been little change in the underlying costs.

However, those markets have something that the market for EpiPens lacks: competition. People trying to produce a generic version of the EpiPen are held back by the difficulties of getting approval from the Food and Drug Administration.

There is an alternative device, the Adrenaclick. It may be harder to use than the EpiPen, but with EpiPens selling at $600 a pop, you’d figure that patients would be willing to go through some learning curve in order to save a lot of money. Unfortunately, here it interacts with two other features of our health care system: the need to get a prescription, and the need to get insurance to pay for it.

The Adrenaclick, which can be found for as little as $140 with the right discount coupon, according to Consumer Reports, is not on a lot of insurance formularies. And perhaps in part because of that, physicians don’t write prescriptions for it. They prescribe the EpiPen. Thanks to strict rules about substitution, if pharmacists get a piece of paper telling them to dispense an EpiPen, they cannot say: “Very good, Moddom. Would you like our top-of-the-line, gold-plated epinephrine-dispensing device, or would you like to take a look at some of our lower-priced offerings?” They have to give you an EpiPen. With no generics available, well, enjoy your $600 device that will only last a year before the drug inside degrades and you have to replace it.

EpiPen packaging (Image: NIH)One lesson, McArdle says, is that the cost of perfection is high. (Image: NIH)

What’s the solution?

These artificial barriers to entry are why we keep seeing huge price spikes for various drugs. Now, it’s worth noting that these spikes don’t necessarily last very long. With the exception of some new, expensive and very valuable drugs, such as Opdivo for cancer or Sovaldi for Hepatitis C — drugs for which there isn’t a good alternative — competition eventually becomes a problem for price-hiking drugmakers. Patients and doctors will eventually switch to another product if the price gets too high, and I’m sure that in the wake of all these news stories, there are now a lot more doctors asking patients whether they want an EpiPen or an Adrenaclick. Eventually, that competition should push the price down even if the government doesn’t do anything.

But if you’re a patient who’s looking at paying $600 for an EpiPen that you need to save your life, that’s probably not very comforting. You want a solution now.

Is Hillary Clinton’s solution the right one? Sort of. I tend to think that it overcomplicates things. Our health care system already has too many overlapping panels of bureaucrats trying to tweak the market. And I don’t favor either of the two simple, obvious solutions that I’ve seen proposed — a price-control board, or allowing re-importation of U.S. drugs from Europe (which is basically just re-importing European price controls) — because the relatively free pricing of the U.S. market provides the profits that support pharmaceutical R&D. Which has given us great, valuable drugs like Sovaldi and Opdivo.

What I do favor is the economist Alex Tabarrok’s proposal for drug reciprocity with Europe: If a drug or device may be sold there, then it should be approved for the United States as well. We don’t need to import their price controls, or impose ones of our own. We just need to import their competition. (Europe has many epinephrine pens on the market).

Beyond that, we should have a good long think about what the FDA does. A lot of the reason that it can be so hard to get new drugs and devices approved is that the FDA too often wants those drugs and devices to be perfect — at least as good as anything already on the market and preferably better. And it does not really consider factors such as “It’s cheaper,” or “It will keep the other companies honest” when passing judgment.

We should learn a lesson from this episode. But the lesson is not, “We need more government and less market.” The lesson is, “We need more market — which means we need better government.”

Megan McArdle is a Bloomberg View columnist. 


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