EpiPen Pricing Defended by Shkreli

Martin Shkreli, pharmaceutical patent scavenger, did an interview with CBS and defended Mylan Corp’s inflated pricing of their EpiPen product.

“This particular drug is a necessity for some people,” Nair said.

“Yeah sure, that’s great – but I think important medicine should be expensive because they’re valuable,” said Martin Shkreli.

The former pharmaceutical chief gained notoriety last year by ratcheting up the cost of a malaria and HIV medication by 5,000 percent.

He defended the EpiPen’s increase from about $100 for a two-pack in 2009, to more than $600 this year.

“Everyone can understand in a free market that dollars rule,” Nair said. “However, these are life-saving drugs. People don’t have a choice whether they can buy them or not.”

“Yeah well, that’s up to insurance to pay for them. Like I said, it’s three hundred dollars a pen. Three hundred dollars. My iPhone’s $700,” Shkreli responded.

“But you don’t need an iPhone to exist,” Nair said.

“Yeah, that doesn’t matter though because it’s three hundred dollars and 90 percent of Americans are insured,” Shkreli said.

Let’s leave aside that Shkreli sees decimation (in the original sense of the word) as a reasonable cost of doing business and move on to his views on the role of health insurance. Shkreli’s notion of pricing is that price has nothing to do with costs and everything to do with “importance”, however that is defined. Important drugs and devices will command high prices regardless of whether they are easy or difficult to produce; the critical nature of need is what matters. It is commonly stated that the actual drug component of the EpiPen actually costs some absurdly small amount of money, on the order of a couple of bucks. Doctors could, I presume, prescribe epinephrine and syringes to patients without high prices, but many patients would be at risk because actual delivery of the drug would be slow and, for this drug, seconds count. It is the mechanical delivery system that distinguishes the EpiPen, making getting the drug into the patient something that an untrained person can accomplish quickly and reliably. That is the value that insurance companies should pay for with ever-increasing prices, adjusting for “modern” medicine and “importance”.

In truth, what the insurance companies are paying for is the monopoly power of the patent that prevents competitors from developing, testing, and marketing alternatives. We need some way to protect innovators and reward them for their work, but that isn’t the topic I want to explore.

Instead, I want to explore a bit about health insurance. Health insurance companies have historically been in the business of spreading medical risk over a larger pool of people. Not everyone gets seriously ill, but everyone *could* get seriously ill, so even healthy people have a motivation to obtain health insurance (in the absence of a rational approach to dealing with healthcare costs). Actuaries work up statistics about what proportion of the population gets ill and at what cost, and are able to set pricing that pays for the provided healthcare, administration, marketing, shareholder profits, lawsuits, and lobbying. Historically, the healthcare costs have primarily been due to medical risk factors. Under Shkreli’s new vision of insurance companies as ATMs for corporate profits, though, healthcare costs have expanded beyond mere medical risk factors to encompass both current and future corporate greed. Given that only “importance” matters for Shkreli-pricing, there is no objective upper limit to what the corporate greed component of cost might swell to; Shkreli has not indicated that there is any rule for where to set an upper bound on pricing a particular product. Medical risks are in principle knowable and amenable to numerical analysis. Corporate greed risk does not appear to be in the same class.

Simply treating health insurance companies as something to be drained of money as expeditiously as possible to maximize corporate profits means that, in the end, the corporate greed component of the costs must be borne by the pool of subscribers. The health insurance companies have to increase their pricing to account for the burgeoning corporate greed costs inherent in Shkreli, Mylan, and various other manufacturers’ new approach to pricing. So when Shkreli shrugs off high drug prices as something health insurance must pay for, remember to unpack that. If you buy health insurance, the $300 price tag per EpiPen means *you* are paying extra for the health insurance you hold, enough extra that you and your fellow subscribers can claim credit for the Mylan CEO being able to get a $19 million salary each year now, and Mylan’s shareholders smiling at all that money raining down on their company. Because health insurers are not where the buck starts; that would be you.

This is something to think about when you see stories of premium increases. It is not a simple exercise to determine how much of that is increased medical risk and how much is the pharmaceutical corporate greed part, but we can be sure that the latter is non-zero and growing.