CHW LogoIt is sadly not uncommon, in a market economy, for a seller to take advantage of those with a desperate need in order to maximize profits.  War profiteering is one familiar example.   US Marine General Smedley Butler, in his 1935 book “War Is A Racket,” decried military contractors who, in the heat of World War I, jacked up their profits to as much as 1700%.  This seems completely outrageous.  So what do we make of Turing Pharmaceuticals, a start-up run by a former hedge fund manager, which bought the rights to a 62-year old drug called pyramethamine (used to treat parasitic infections including malaria)?  Turing raised the wholesale price of the drug, which costs about a dollar a pill to manufacture, from $13.50 (already a 1350% profit margin) to $750 (75,000%).

A slew of such multiple-order-of-magnitude price hikes in medications has occurred in the past couple of years.  High prices for pharmaceuticals are often defended on the basis of the expense of research and development, and the fact that so many prospective new drugs fail.  But how can one argue that in the case of a drug that has been on the market for six decades, during which time the pretty tidy 13-fold markup must have paid off the R&D costs?  Which, by the way, were incurred by someone else.

Medication prices are an important driver of the high cost of health care in the US.   Prices for pharmaceuticals in the US are more than twice as high as in the next highest nation.  And remember, unlike clinic visits or hospital stays, where there may be important differences that obscure such comparisons, here we are comparing apples to apples (or aspirin to aspirin): it is by and large the same drugs available in Milwaukee as in Milan or Munich or Madrid.

Every other nation controls its costs in one of two ways.  In many countries, where the government is the largest purchaser of medications because of some form of nationalized healthcare, it simply leverages that bargaining power to negotiate better prices with the pharmaceutical companies.  Interestingly, the government is also the largest purchaser of drugs in the US, too: between Medicare, Medicaid, the military, and the veteran’s health system.  However, when the Medicare drug benefit was created in 2003, Congress explicitly prohibited the agency from negotiating prices.  Another approach is to set price limits on approved medications, as is done, for example, in Switzerland.  While this might reek of big government, the Swiss are hardly known as regulatory fanatics.  Moreover, this is tolerated despite the fact that two of the largest drug companies in the world are based in Switzerland, where the pharmaceutical industry accounts for 6% of GDP (compared with only 1% in the US).  These companies can still make a very handsome profit, and support their research and development, but at about half the cost to the public as in the US.

Indeed, if the real reason for high drug prices is to support R&D, it would appear the US is subsidizing new drugs for the rest of the world, which would be problematic enough.  But even Martin Shkreli, the CEO of Turing who engineered the Daraprim price hike, admits it’s really just about making his company as profitable as possible.  That sounds like profiteering of the kind Gen. Butler warned about.  As far back as the Civil War, the False Claims Act (still on the books) was passed to prevent such behavior, and contractor malfeasance in the Iraq War led to the War Profiteering Prevention Act of 2007.  When will we see a Pharma Profiteering Prevention Act?

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