“Parasitic trash”, “price-gouging CEO”, “garbage monster” and “everything that is wrong with capitalism” are just a few of the colorful monikers used to describe Martin Shkreli, former hedge fund manager of the now defunct Elea Capital Management, and, embattled past CEO of Turing Pharmaceuticals. The media dubbed him “Pharma Bro”, but in time, he seemed to become “… the most hated man on the internet…”
We all engaged in a collective head-shake as we read about how Shkreli boldly increased the price of the drug Daraprim by over 5000%. Overnight, the 62-year old drug that once sold for $13.50 per pill, and sells for $2.00 per pill overseas, now had a price tag of $750 for the exact same pill and the exact same dose.

Daraprim is used to treat the parasite, Toxoplasmosis Gondii, otherwise known as “Toxo”. Toxo is a common pathogen, often found in soil and cat litter. Most of us have been exposed to it, and already produce antibodies which fight it quite effectively. However, Toxo has two very sensitive and vulnerable patient groups. These include pregnant women and those with severe immunocompromise.

Among pregnant women, who may not already have Toxo-specific antibodies, Toxoplasmosis can cause severe birth defects and death to their unborn fetuses.

For those with severely compromised immune systems, including patients with AIDS, individuals with congenital or genetic immunodeficiency syndromes and patients who are being treated with long-term corticosteroids or any variety of chemotherapeutic agents, Daraprim can be life-saving.

Daraprim’s target populations made Shkreli’s move all the more repugnant.

Shkreli’s strategy had been simple. He purchased the license to an out-of-patent, well-trusted and much-needed drug and he repriced it. His goal was to maximize Turing’s profitability without having to invest in the research and development needed to bring a new drug to market.
But while we were still reeling at the ruthless audacity of Shkreli, it became known that Mylan Pharmaceuticals had gradually and insidiously increased the cost of the EpiPen 2-pack from about $100 in 2009 to $600 7 years later. Of course the EpiPen reveal made heads turn because it is an immediate life-saving measure for those who suffer from anaphylaxis, which is a life-threatening manifestation of an allergic response. The information came on the heels of Daraprim’s price hike, and made the public sit up and take notice.

Once we were finished shaking our heads, we were confused and puzzled. Certainly, federal laws should protect the American public from such obvious price-gouging. Like me, you were probably thinking that there was no way that this could be legal….

Or was it?

Yes. Indeed it was.

In fact, the practice is not entirely uncommon. In 2014, the House of Representatives reported that 10 generic drugs had undergone price increases in the previous year. These increases ranged from 420% to greater than 8000%. We just may not have known about it. In the case of Martin Shkreli, he had taken things to such an extreme, and was so brash in doing this, that he engendered the public’s attention and provoked its fury.

However, pharmaceutical repricing is often done and is entirely legal, and this is why:

A pharmaceutical company can increase the price of a drug according to the costs that it incurs in manufacturing that drug. This is all in a day’s work and simply a matter of doing business. The costs that are often referenced when repricing a drug can include, but are not limited to: total overhead; return to investors; marketing, employee training, wages and benefits; and professional insurance. Just as other industries can adjust their prices according to such costs, so, too, can pharmaceutical companies.

So, yes. This was legal.

But, keep in mind that what is legal is not always ethical.

There are many questions that often follow, and many lessons that we can learn when we understand the fundamentals of how Big Pharma works. Let’s start with one of the most obvious queries:

Why can prices be raised, and raised so drastically?

We do not typically see such sharp price hikes in other consumer products… not a brand of lipstick, a new disinfectant, a cell phone or a car. Therefore, when price changes that we see in other everyday items do not often represent a 20-fold or more increase, it seems particularly predatory to see it occur with products that are necessary to promote health and well-being.

Often times, it is the lack of competition for a new category of drug or for a new drug that allows this. In order to understand that phenomena, we need to ask the question of how prices of new drugs are determined.

The following are elements that are considered and used to arrive at the price of a new drug:
• Will this new drug save or extend lives?
• Will it treat a condition in a way in which it never has been? And will it eliminate or diminish
the need for costly hospitalizations and other procedural interventions?
• What is the price for the current treatment of the disease in question?
• What advantages does this drug hold over existing standards of treatment?
• Is this drug unique? Or are there others like it that are readily available? If it is not unique, then what is its existing competition?
• Research done by the pharmaceutical company includes:
• A market analysis to determine how many patients will take the drug and for how long.
• Discussions with insurance companies to find out whether or not they are already paying
for similar drugs.
• Discussions with healthcare providers to understand whether or not they would be likely
to prescribe the new drug to patients; or to continue to prescribe others that are already
on the market.
• Ultimately, the company will try to figure out what people will be willing to pay for the drug.
New, unique and innovative drugs, that are found to be effective, will often be sold at a premium. According to Pratap Khedkar, a consultant to the pharmaceutical industry, new and unique drugs can start off with a premium as high as 10-15%.

What happens when a drug is priced incorrectly?

As you might imagine, if a drug is too highly priced, physicians may be reluctant to prescribe it; and patients will be unlikely to purchase it. Conversely, if it is priced too low, especially as it relates to competitor pricing, it may be considered to be an inferior treatment, and would still fail on the open market.

The question for pharmaceutical companies is how to maximize revenue without over- or underpricing a drug.

One drug that sparked controversy when it first became available, in 2015, was Sovaldi, manufactured by Gilead Sciences, and which was touted as a cure-all for certain genotypes of Hepatitis C. It was sold at the tune of about $84,000 per bottle or $1,000 per pill, and drew enough criticism at its pricing that a Senate investigation ensued.

The Senate investigation found that Gilead’s pricing procedures were standard; and that Sovaldi’s price was reasonable due to the fact that, although each dose was costly, treatment was only needed for a limited time, typically 12-24 weeks. Although insurers were not thrilled to pay such a high cost in such a short period of time, the limited treatment period, the efficacy and curative properties of the drug, made it less cost-prohibitive than it originally appeared.

Why are other countries able to sell the same drugs less expensively?
Other governments use price controls to regulate what can be charged for the price of drugs. These controls include: legal restrictions on maximum pricing, government regulations and fines, and negotiated pricing. Further, in many other countries, it is the government that does the negotiating and purchasing of drugs, as opposed to the companies that are buying or importing them.

This is a tactic, however, that flies directly in the face of capitalism and the concept of a free market. It is more representative of a socialist economy, and therefore, would be difficult to implement in our capitalist society.

How does capitalism affect drug prices?

A lot of the answer to this relates directly to patents and how they are used. While the patent system was originally designed to protect unique ideas and intellectual property, one of its inadvertent effects is that it often keeps drug prices high.

A patent is a government-assigned license which is granted to the developer of any new technology, apparatus or innovation, so that that entity will have the exclusive right to sell, and therefore, profit from, the sales of that product.

In the case of medications, this allows initial drug prices to be high, and gives the manufacturer an opportunity to recover the high costs of their research and development, as well as all that was required to gain FDA approval. Under current patent laws, the manufacturer of new chemically based medications approved by the FDA, may sell their drug without any competition for 5-7 years. More complex biologic medications are granted patents that can last for up to 12 years.
Studies have found, however, that true patent lives often exceed these limits.

This can occur because manufacturers have crafted ways to extend the life of their patent by creating a new drug, similar to the first, but with a different dosage. Patients are then aggressively switched to the newly patented dose, so that by the time a generic patent is issued for the original drug, very few consumers are using it.

As a result, the cost of brand-name drugs has an overwhelming and disparate effect on total drug-spending. According to a 2016 article published in JAMA, brand name drugs which grant exclusivity to a particular manufacturer contribute to 72% of all drug spending, while accounting for only about 10% of all drugs dispensed.

Why do the costs of drugs vary from state to state and from pharmacy to pharmacy?

The answer to this is similar to that regarding why it is legal for pharmaceutical companies to raise the prices of drugs as they see fit. Much of it has to do with the simple cost of doing business… which is never simple.

Again, we see factors like: overhead, the cost of obtaining drugs from distributors and pharmaceutical companies, facility costs (rent or mortgage, insurance and utilities), employee wages and benefits, license fees and professional liability insurance, and, finally, profit margins.
A pharmacy’s profit margins vary, largely based upon what it must pay to acquire a specific drug. This information is often protected, and rarely shared. Many times, the amount that a pharmacy pays to purchase a drug is based upon quarterly discounts which are applied only after the contract to purchase is executed. The true cost of drug acquisition is very hush-hush, and often times, only the individual signing the purchase contract on behalf of the pharmacy and the seller know it.
Further, pharmacy costs are related to the amount that insurers will reimburse, which also varies widely from carrier to carrier and from plan to plan.

One regulation that is unknown to most consumers is that Medicare and certain other government programs are not given the latitude to refuse to cover some medications, as is a freedom granted to private insurers. The Medicare prescription drug law does not allow the program to negotiate for lower costs, while requiring it to cover most drugs on the market. Medicaid also has the onus of having to cover most FDA approved drugs.

It is quite likely that if these programs had the power to refuse to cover certain medications, costs might be driven downward in an effort to spur pharmaceutical sales.

So there are layers of factors that may impact the cost to you, the consumer.

Ultimately, what can you, as the consumer, do to minimize your out-of-pocket drug costs? I would recommend some of the following things:

1. When your physician is starting you on a new medication, ask him or her about whether or not the medication is branded or generic. Ask if it is new and a “one-of-a-kind” drug that may come with one-of-a-kind pricing. If it is not, ask about whether or not a generic will be comparable; or does your provider feel that the branded drug is superior to its generic counterparts?
2. Always try to find out if this drug is covered by your prescription plan. Most plans will have preferred formularies, which are lists of drugs that they will cover at the lowest cost to you. They often have low or no co-pays at all, as opposed to a non-formulary item for which you may have to pay the total cost. Many times, branded drugs will have far higher co-pays than do their generic counterparts. If the drug that has been prescribed to you is not among those found on your insurer’s formulary, then ask your provider if he or she will not mind prescribing a different one.
3. If the drug that you are being prescribed is considered medically necessary and there is no alternative drug that is covered by your health plan, ask your provider to obtain a Prior Authorization from your insurance company. A Prior Authorization is a process used to get coverage for medications, treatments and services that typically are not covered by your plan. It requires that your provider establish that the drug or treatment being prescribed is medically necessary and why it is. Sometimes progress notes and laboratory or imaging results from your medical record will have to be submitted to your insurer by your provider. If other modalities have been tried and have been unsuccessful, then documentation of this may need to be provided as well. This process can take some time… possibly a few weeks. It sometimes requires a fair amount of effort on the part of your provider; but often times, it can save you a great deal of money.
4. Avoid a wasted trip to the pharmacy, or feeling pressured to pay for a too-expensive prescription because you are at the counter, by calling your pharmacist ahead of time to inquire about the cost of your prescription. If it is cost-prohibitive, ask your druggist to contact your provider for an alternative, which will be less pricey.
5. If you have concerns about the price of your medication, contact your prescription plan and ask for a list of comparable drugs, that your plan covers, which are in the same category as the one that you have been prescribed.
6. If you do not have prescription coverage and have been prescribed a branded drug or newly manufactured medication, there is a good chance that the manufacturer has a Patient Assistance Plan. These plans are designed to provide otherwise cost- prohibitive medications to patients who do not have prescription coverage and would otherwise be unable to afford the medication that they have been prescribed. It typically requires that the patient and healthcare provider complete an application. It is very short, and for the patient, simply asks for demographic information and some description of income and assets. Many plans will ask for confirmation of income, whether in the form of a W2 form or an attestation from your employer. These are often need-based programs, which will send your medication to your home free of any charge; and will require that the application be resubmitted on an annual or semi-annual basis.
7. Whether or not you have a prescription plan, if, for some reason, you must be prescribed a drug that is costly, do an internet search for a coupon for that medication. This is as simple as putting the name plus the word “coupon” into your internet search engine. So, if it’s Crestor that you will need, you can search for “Crestor Coupons”. You will typically get a number of hits with coupons that will discount the drug by varying amounts. These work quite well, and any restrictions on the use of that particular coupon will be spelled out on its face.
8. Ask your provider about any coupons or discount cards that are provided by the
manufacturer. Often times, your provider will have these in their office, as they often
take the place of drug samples.
9. Ask your provider about samples. Do they have any that you can try before purchasing
your prescription? This is always a good idea in the event that you might experience an untoward side effect or reaction that would stop you from taking the medication. It is better to find that out with a free sample than with a medication that you just purchased with a $60 co-pay.
10. Whether or not you have a prescription plan, investigate different pharmacies. Now that you know that prices for the exact same drug may vary from pharmacy to pharmacy, find the place that will offer you and your insurer the lowest price possible.
11. Another way to cut costs is to participate in your employer’s FSA (Flexible Spending Account) or HSA (Health Savings Account) plan. These plans are one way of decreasing your taxable income, and can often provide a small nest egg for later on. Any prescription or over-the-counter medications that you purchase can be used to redeem money from these plans, and with HSA’s, the benefits can roll over from year to year.
It is often alarming when we become aware of corporate practices and government regulations that do not always work in our best interest. Laws take time to change, but I would encourage you to contact your elected officials about those things that you feel are important. Tell them what you would like to see happen.
In the mean time, become as educated a consumer as you can. Find out how things work, and ask what you can do to protect your hard-earned resources.