The truth behind why Daraprim can cost whatever its CEO wants it to

Five reasons drug companies are getting away with charging a fortune for needed medications.

 Angie Aker
09.23.15

A greedy, cocksure CEO set off a nation of people tired of mysterious and unchecked drug pricing.

Have you ever suspected that drug manufacturers have been given complete license to charge whatever they want?

You wouldn't be wrong.

Since he got us talking about this, we have to thank Turing Pharmaceuticals CEO Martin Shkreli. He raised the price of the drug Daraprim from $13.50 to $750 per pill.

The justification for the cruel hike?

"It's a more appropriate price."

GIF from CNBC.

What does that even mean? How does a drug manufacturer decide what is an appropriate price?

Well, there are a lot of missed could-be checkpoints in the American health care system that give manufacturers utterly unfettered license to charge whatever they decide.

A quote from The Economist puts into sharp perspective just how ambiguous the process is: "One economist at a closed-door session of pricing experts at [the American Society of Clinical Oncology] dryly remarked that she could find no economic theory to explain how companies price their drugs."

As Jessica Wapner, a researcher and writer on biomedical issues, puts it in her blog: "Drugs cost what the market will bear. It's that simple. Drug prices are set at whatever the market will bear."

Here's why.

Price Gouge License #1: Pharmaceutical companies can advertise directly to Americans, unlike in many other countries.

Image by Pfizer.

In the 1980s, pharmaceutical companies were growing tired of doctors being the gatekeepers between patients and newly available drugs. The first commercial marketed to the general public was in 1986 for Seldane. The profits for Seldane soared beyond anything the marketing team had imagined, and other companies soon followed suit. And in 1997, the FDA further loosened its rules on television ads for prescription medicines, which truly opened the floodgates.

FUN FACT: The only two developed nations that allow this kind of "direct-to-consumer" drug advertising are the United States and New Zealand. It is specifically banned in other countries.

Price Gouge License #2: The pharmaceutical industry has a distinct lack of competition, and in fact is monopolistic by design.

Innovation needs to be rewarded, goes the reasoning. And that point is easy to see. Without some incentive, there are a lot of lifesaving and quality-of-life-changing drugs that would never have been invented.

The good old days. Image via March of Dimes.

But it also stands to reason that innovation can be rewarded at scale and for a finite time, not at ever-increasing margins forever and ever. That's just not sustainable, and it practically begs for some intervening agency to act. As drug companies look for more ways to expand their profits each year — 73% of Americans polled in 2015 already think drug prices are too high — something has to give. Profits can be had, and even attractive ones at that, without carte blanche for the kinds of excesses we're seeing:

"Gleevec, from Novartis, possibly the greatest cancer drug ever invented, cost $24,000 a year when it was introduced in 2001; now it costs $90,000 per year, a quadrupling in price." — "60 Minutes" via Forbes, 2014

FUN FACT: According to a Kaiser Foundation report in 2005, 10 pharmaceutical companies accounted for 60% of U.S. pharmaceutical sales in 2004. It's as if a cluster of multinational corporations have an unwritten understanding that they can just stay in their lanes and get while the getting's good.

Price Gouge License #3: The complicated insurance setup in America gives manufacturers an advantage versus a single-payer situation where prices can be negotiated.

Image via iStock.

Other countries with socialized, single-payer health care systems are able to negotiate prices with drugmakers. Since all the power is collectively concentrated in the one single-paying entity, it forces the drug companies to play nice — or at least act in good faith.

FUN FACT: In 2003, a new act meant to "modernize" Medicare and bring prescription coverage into the mix prohibited Medicare (the largest customer in the American drug industry) from being able to negotiate prices with drug companies.

Price Gouge License #4: There are complex, private pricing strategy sessions that don't get revealed to the public.

We all know what happens when the process of how the sausage gets made never sees the light of day. It can result in some pretty rotten stuff being channeled to consumers.

But Jessica Wapner sheds a little light on what factors come into play in these sessions:

  • How many patients are buying the drug
  • How many are likely to be insured privately or through the government, or are uninsured
  • Length of an average treatment course on the drug
  • How high the stakes are for what the drug treats (desperately needed or only mildly beneficial)
  • How many years the drug will have exclusivity in the market (meaning no generics)
  • Budgeting for patient assistance programs ("If you can't afford your medication, drug company X may be able to help")

That's right. Those drug assistance programs aren't a kindly, out-of-their-own pockets, benevolent gesture. The companies get their money for them — they just tack it on top of what they're already charging.

FUN FACT: There are special forecasting companies that help drug manufacturers evaluate the field and arrive at complex equations regarding prescription prices.

Price Gouge License #5: Many consumers are shielded from the reality of drug prices because of insurance.

That means they keep buying the drug even if their copays go up (making concessions in other parts of their budget as long as they can), which reinforces to the manufacturer that their pricing practices are working. People will just pay it. They will find a way. And though some can't or don't find a way — and sometimes wind up giving up lifesaving drugs out of financial defeat — the sheer numbers don't usually rise to the proportions needed to signal to drug companies that they've made a pricing error.

Because they're still making a profit.

The highest performers in the health technology category in 2015 were Pfizer, Merck, and Johnson & Johnson.

Image via Forbes with permission.

Is there any good news out of all of this?

Yes! Increased attention on drug prices during the last year is culminating in a lot of "we're not gonna take it" talk from politicians and the media. President Obama is attempting to get Medicare negotiation rights for the most expensive drugs.

And I'll say it again: We should thank Martin Shkreli for his severe overreach in pricing Daraprim because it refocused the nation on a huge problem we've all lived with for far too long. I doubt he's very popular with his industry brethren right now — they avoided pitchforks for a long time before he came along. And in response to the public's backlash and, I'm personally betting, pressure from within an industry anxious to avoid intervention, Shkreli did finally say he will reduce the cost.

The pharmaceutical industry is banking on being too difficult to figure out for the average Joe to fight back against. That's why it's important to share this and get people thinking.

The price of drugs, if left unchecked, will eventually debilitate us.

It doesn't have to be this way.

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According to the Institute of Justice, which is representing Jim Ficken, he had a very good reason for not mowing his lawn – and tried to rectify the situation as best he could.

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The world can't get enough Michelle.

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The world officially loves Michelle Obama.

The former first lady has overtaken the number one spot in a poll of the world's most admired women. Conducted by online research firm YouGov, the study uses international polling tools to survey people in countries around the world about who they most admire.

In the men's category, Bill Gates took the top spot, followed by Barack Obama and Jackie Chan.

In the women's category, Michelle Obama came first, followed by Oprah Winfrey and Angelina Jolie. Obama pushed Jolie out of the number one spot she claimed last year.

Unsurprising, really, because what's not to love about Michelle Obama? She is smart, kind, funny, accomplished, a great dancer, a devoted wife and mother, and an all-around, genuinely good person.

She has remained dignified and strong in the face of rabid masses of so-called Americans who spent eight years and beyond insisting that she's a man disguised as a woman. She's endured non-stop racist memes and terrifying threats to her family. She has received far more than her fair share of cruelty, and always takes the high road. She's the one who coined, "When they go low, we go high," after all.

She came from humble beginnings and remains down to earth despite becoming a familiar face around the world. She's not much older than me, but I still want to be like Michelle Obama when I grow up.

Her memoir, Becoming, may end up being the best-selling memoir of all time, having already sold 10 million copies—a clear sign that people can't get enough Michelle, because there's no such thing as too much Michelle.

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When it seems like the world has lost its mind—which is how it feels most days these days—I'm just going to keep coming back to this study as evidence that hope for humanity is not lost.

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France has started forcing supermarkets to donate food instead of throwing it away.

via EarthFix / Flickr

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Dolphin and orca captivity, for sure. They'll probably shake their heads at how people died because they couldn't afford healthcare. And, they'll be completely mystified at the amount of food some people waste while others go starving.

According to Biological Diversity, "An estimated 40 percent of the food produced in the United States is wasted every year, costing households, businesses and farms about $218 billion annually."

There are so many things wrong with this.

First of all it's a waste of money for the households who throw out good food. Second, it's a waste of all of the resources that went into growing the food, including the animals who gave their lives for the meal. Third, there's something very wrong with throwing out food when one in eight Americans struggle with hunger.

Supermarkets are just as guilty of this unnecessary waste as consumers. About 10% of all food waste are supermarket products thrown out before they've reached their expiration date.

Three years ago, France took big steps to combat food waste by making a law that bans grocery stores from throwing away edible food.According to the new ordinance, stores can be fined for up to $4,500 for each infraction.

Previously, the French threw out 7.1 million tons of food. Sixty-seven percent of which was tossed by consumers, 15% by restaurants, and 11% by grocery stores.

This has created a network of over 5,000 charities that accept the food from supermarkets and donate them to charity. The law also struck down agreements between supermarkets and manufacturers that prohibited the stores from donating food to charities.

"There was one food manufacturer that was not authorized to donate the sandwiches it made for a particular supermarket brand. But now, we get 30,000 sandwiches a month from them — sandwiches that used to be thrown away," Jacques Bailet, head of the French network of food banks known as Banques Alimentaires, told NPR.

It's expected that similar laws may spread through Europe, but people are a lot less confident at it happening in the United States. The USDA believes that the biggest barrier to such a program would be cost to the charities and or supermarkets.

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Plus, the idea may seem a little too "socialist" for the average American's appetite.

"The French version is quite socialist, but I would say in a great way because you're providing a way where they [supermarkets] have to do the beneficial things not only for the environment, but from an ethical standpoint of getting healthy food to those who need it and minimizing some of the harmful greenhouse gas emissions that come when food ends up in a landfill," Jonathan Bloom, the author of American Wasteland, told NPR.

However, just because something may be socialist doesn't mean it's wrong. The greater wrong is the insane waste of money, damage to the environment, and devastation caused by hunger that can easily be avoided.

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