Ask the right questions even when there are no easy answers

Sometimes the hard thing to do is to ask the right questions. It’s tempting to use questions to prove a point, but in doing so, you give up your chance to actually discover the truth.

Case in point – yesterday’s hearing before the House Oversight and Government Reform Committee on price hikes for Mylan’s life-saving product, EpiPen. The price hikes deserve careful examination but Mylan CEO Heather Bresch does not deserve to take the heat for all the problems in our health care delivery system, such as the egregious practices by middlemen known as Pharmacy Benefit Managers (PBMs). Two messages are clear from the hearing – people are upset about the price hikes and the Committee did not seem to understand the reason why we have a complicated, complex, obscure distribution system which increases the cost of drugs.

{mosads}Let’s get the questions straight.

How does pricing work? Drugs are not priced like other commodities. Something like oil or wheat, which is a uniform product, has a market price that is based simply on the demand and supply curves (absent subsidies or price controls). And something like ibuprofen or loratadine (Claritin) has a price you pay at the store which reimburses the shopkeeper for the cost he or she incurred to buy that product, plus their margin. Pharmaceutical drugs do not work like that. The market functions on a rebate system in which pharmaceutical manufacturers give some amount back to the PBMs based on existing contracts. The PBMs can then pass those savings on to consumers, although the evidence suggests they keep the cash for themselves.

Who benefits? Heather Bresch continually tried to clarify this by saying “the amount Mylan receives,” for EpiPen is $274 for a two-pack. Through a complex stream of channels, Mylan returns ($608-$274) to other parties, a total of $334. This is not profit. The $274 they keep is comparable to what we could call “price” in a market like wheat or oil. That $334 is not theirs to keep and it is not like mail-in rebates you get when you buy a TV. If you are questioning Mylan and Mylan alone for its role in the price increases of Epi-Pen, you should view the price of EpiPen as $274.

Where does the other $334 go? We cannot say for sure who gets what due to lack of regulation and transparency. But it is divided between PBMs, wholesalers, insurance, and pharmacies, with the majority of it going to PBMs. The PBM market is an oligopoly: three companies, Express Scripts, CVS Caremark, and Optum Rx, control over 70% of the market. In 2015, PBMs made $11.7 billion in profit and revenue increased at a whopping annual rate of 20% over the last 5 years. Mylan may have a monopoly over this particular drug, but PBMs exist as an oligopoly in the entire drug delivery system. It could be the case that PBMs also receive $274 for an Epi-Pen two-pack, despite the fact that they do not make the drugs, sell them to the patient, or counsel the patient on how to use them.

Mylan did not create the system it exists in. Lack of regulation, a choice made in large part by the legislative branch of our government, has allowed incentive structures to be created which resulted in the system we have today. PBMs are one of the least regulated and most opaque sectors in the health care industry. And Mylan has to deal with them and many other actors on the supply chain long after this scandal has passed. Because prices in this industry are largely contract-based, Mylan calling out PBMs could have ramifications that actually cost patients more money in the long term.

Why doesn’t simple economics work? Several members invoked “basic economics” to say that since the quantity of EpiPens increased in the market, price should have gone down. This is simply not the case. The market is complex due to unique relationships between parties on the supply chain, the presence of market power by Mylan, and the market power held by PBMs. But if we were to pretend for the sake of argument that the market was a simple supply and demand relationship, the charge that prices should go down still would not hold water. In the case of EpiPen, the supply curve and demand curve both shifted, yielding a new relationship that certainly resulted in an increase in quantity. However, because both curves shifted, the effect on price would be ambiguous.

Heather Bresch had the misfortune of bad timing; Americans are angry about rising health care costs and their representatives in Congress just want to do right by their constituents. But in many ways, Mylan acted rationally in a free market system. Of course there is a difference between rationality and morality. But when you have a for-profit health care system, you get what you pay for.