More Competition is the Best Cure

The most interesting thing about the PR disaster involving Mylan’s life-saving EpiPen is probably the least discussed—namely that drugs don’t cost what people think they do.

Faced with a barrage of criticism for EpiPen price hikes, from about $100 in 2009 to more than $600 today, Mylan’s CEO Heather Bresch explains that her company gets less than half of the list price and that the remaining dollars go to others, such as health insurers and PBMs—pharmacy benefit managers that negotiate deep discounts with drugmakers through large-volume purchases.

But that’s not the bad news that Ms. Bresch makes it out to be.  In fact, when insurers and PBMs negotiate discounts, those discounts are almost entirely passed along in the form of reduced cost for patients and employers who foot the bill for health care.  In the case of the EpiPen, Ms. Bresch notes that private purchasers effectively negotiated a roughly 50% discount off her list price for a drug—where her company, through a series of mishaps involving competitors, enjoys a singular position in the market.

But Mylan’s market dominance won’t last long.  At least one pharmaceutical company is pushing aggressively to bring a competing product to the market that is safe and effective and can be approved by the Food and Drug Administration (FDA).  When that happens, rest assured that prices will come plummeting back to Earth.

We’ve seen this play out before.  In 2014, there was massive public outrage over the cost of a revolutionary cure for Hepatitis C.  When Gilead introduced Sovaldi, it was roundly criticized for costing $84,000 for the 12-week treatment cycle.  But when private-sector negotiations soon lopped the price in half, that went largely unnoticed.  In fact, private sector negotiations were so effective, they actually resulted in a lower price for Sovaldi than many government-controlled health care systems pay.

Ms. Bresch will appear before the House Committee on Oversight and Government Reform September 21 to explain the cost of her company’s EpiPen epinephrine auto-injector (which helps people with severe allergies stave off anaphylactic shock).

We are sure to hear politicians on the left seize on singular and non-representative instances like this to push for greater control over our health sector, especially calls for government to use its buying power to “negotiate” prices directly with drug firms, especially for the Medicare Part D prescription drug program.  These proposals ignore the fact that government is a bully of a negotiator; it crushes innovation and even competition and is terrible at making complex decisions in real-time.

In fact, Medicare Part D has also benefited from private sector competition through consumer choice and price negotiations by PBMs and insurers.  The program has been a success by virtually every measure: beneficiary satisfaction, reduced hospital admissions because seniors have access to medicines, greater medication adherence, and massive cost-savings over original projections—both for seniors and taxpayers.  However, despite those extraordinary accomplishments, the idea the government could have it done it better by setting prices has inexplicable traction among those who want more government control – at any price.

The strength of the private market is that it can respond quickly, almost instantaneously, to new developments.  Yes, sometimes this means that companies raise their prices when their competitors suddenly disappear, but it also means that the market quickly and efficiently recalibrates once competition is present.  The most important result is that companies have a strong and continuing incentive to innovate—to bring new, better, and cheaper products to market.

That’s why competition is key and why the most efficient policy solutions would be ones that bolstered rather than restricted competition.  For example, streamlining and rationalizing the approval process at the FDA for combination products (like EpiPen) and ensuring the FDA has the resources to clear the backlog of generic drug applications would make major strides toward enhancing competition.

Competition isn’t just an abstract economic concept. Competition is what creates the incentive to develop new treatments and even cures.  Manufacturers compete to bring better products to market, health plans and PBMs compete to get employers’ business with lower prices, and employers compete to attract the best employees with attractive benefit plans.  As we’ve seen time after time in government programs, without that incentive to change and adapt, programs quickly become stale, outdated, and ineffective.

The EpiPen episode demonstrates that critics don’t really care about the price—since, in this case, the actual price was less than half of what they imagined and market competition will bring it down further.  They are simply looking to create reasons to replace a private market system that promotes competition and choice with a public system that promotes inefficiency and waste while crushing competition and choice.

The lesson from Mylan is clear: More competition is the best cure.