The EpiPen Drama Shows What’s Wrong With How Drugs Are Priced

It’s like some overheated epic—except for the very real people suffering.

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llustration: Simon Abranowicz

The EpiPen pricing controversy is enough to trigger mental anaphylactic shock. First, Mylan raised the list price of EpiPens to more than $600 a pair. When protests predictably erupted, Chief Executive Officer Heather Bresch went on TV to say that if she cut the price of EpiPens, some people wouldn’t be able to get them anymore. Which is weird, because usually a lower price makes things easier to get. Then, on Aug. 29, Mylan announced it will sell a generic version of EpiPens at half the price—but keep selling the identical brand-name version at full price. Because, um, some people will be happy to spend twice as much as everyone else for their EpiPens?

None of this, including the original price hike, makes sense if you think of brand-name pharmaceuticals as normal products whose prices are set by the forces of supply and demand. It does start to make sense if you picture drug pricing as a multisided, Machiavellian, long-running, high-stakes Game of Thrones involving drugmakers, insurance companies, pharmacies, pharmacy benefit managers, Congress, presidential candidates, and somewhere, down there in the smoke and dust, the children with life-threatening allergies who need to bring EpiPens to school this fall.

This system has never worked well, but it’s working even less well now because of the profusion of high-deductible health insurance plans. Many ordinary Americans who haven’t reached their deductible limits are being exposed to high list prices that were intended to be no more than a starting point for negotiations between powerful institutional sellers and buyers. In other words, a price that was basically fake has become all too real. This is what Bresch argued in an interview on CNBC on Aug. 25: “It was never intended that a consumer, that the patients, would be paying list price, never. The system wasn’t built for that.”

If the system wasn’t built right, why not build a new system? That would involve untangling a web of rebates, reimbursements, pass-throughs, copayments, and fees. “It’s not simple to fix or change this gigantic machine we’ve built,” says Adam Fein, president of Philadelphia-based Pembroke Consulting, which advises drugmakers on sales and distribution.

You can learn a lot about a system when it’s under stress and the cracks become visible. The EpiPen storm is that kind of a teachable moment. Each seemingly inexplicable step along the way makes sense once you understand the players’ financial incentives.

Start with the price hike, to $608.61 for a pair of EpiPens, the latest in a series that began after Mylan acquired U.S. marketing rights from Merck in 2007, when the autoinjectors cost around $100 a pair. Mylan chose to risk a backlash because it saw generic competition on the horizon and wanted to make hay while the sun was shining. Bresch has tried to defend the price as compensation for investment in the product, but in fact the device has been changed only slightly since Mylan took it on. (Mylan doesn’t even manufacture the pens; Pfizer does.) The main investment has been a successful marketing and lobbying campaign to make EpiPens more widely available—which is laudable but has the nice side effect of increasing sales. In 2013, President Obama signed the School Access to Emergency Epinephrine Act, which encouraged states to make epinephrine available in schools.

Bresch has been telling anyone who will listen that Mylan doesn’t keep the whole list price. That’s true. Mylan has to grapple with pharmacy benefit managers—the biggest being CVS Caremark, Express Scripts, and OptumRx—that negotiate discounts on behalf of insurance companies and employers. Last year, so much money was sapped by rebates paid to pharmacy benefit managers that Mylan’s revenue fell about 1 percent despite a 32 percent list price increase, according to a calculation by Elizabeth Krutoholow, an analyst at Bloomberg Intelligence.

Pharmacy benefit managers are powerful gatekeepers. On behalf of their clients, they can choose not to include a drug in their formulary, which means it won’t be covered by insurance. In the case of EpiPens, it appears that they have negotiated an average discount of as much as $300. Wholesaler fees cost Mylan another $25 or so. Mylan says it nets $274 for a pair at the new full price.

Bresch perturbed the gatekeepers when she said she couldn’t outright cut the price of EpiPens, as critics demanded, because doing so might prevent some people from getting them. To industry insiders, that was a broad hint that the pharmacy benefit managers would stand in the way—providing skimpier coverage for EpiPens if they received smaller rebates on them. Benefit managers don’t base coverage on what’s in it for them, says Mark Merritt, president of the Pharmaceutical Care Management Association, the industry trade group.

At the same time, Bresch offered “savings cards” worth up to $300 for EpiPens. Bloomberg Intelligence’s Krutoholow estimates that savings cards and other subsidies will cut EpiPen revenue by around 6 percent this year. But that’s before figuring in gains from the price hike.

Bresch’s latest move, to offer a generic version of EpiPens at half the price, also makes sense when viewed as another Game of Thrones gambit. Some insurers will still cover the more expensive brand-name EpiPens because they get such big rebates on them that they end up being cheaper—for the insurers—than the generics. It’s even possible that some insurers will refuse to cover the generic.

Mylan Plans Half-Priced Generic Version of EpiPen

No wonder people are having trouble taking Bresch’s protestations of innocence seriously. “They benefited from federal legislation. Then they turned around and raised prices. There’s just something untoward about that,” says David Toung, an equity analyst at Argus Research in New York.

Epic drama, to be sure, even if there aren’t any dragons. Unfortunately, high prices for drugs hurt society’s most vulnerable citizens. Even $300 for a pair of generic EpiPens is steep for families that pay full price because their insurance doesn’t start kicking in until they’ve spent thousands of dollars. This is an issue that goes way beyond Mylan, of course. An employer survey by the Kaiser Family Foundation found that workers’ expected contributions in health plans rose 83 percent from 2005 to 2015.

Low-income families are least suited to high-deductible plans because they don’t have spare cash lying around to cover unexpected expenses. Yet they often sign up for high-deductible plans when given the chance because the premiums are the lowest. The bronze plans of Obamacare reimburse only 60 percent of all beneficiaries’ covered out-of-pocket expenses. In principle, high deductibles and copayments can rein in unnecessary spending on discretionary items. But for life-and-death items like EpiPens, they just shift costs from insurance companies and employers to families while raising the risk that families will go without—and suffer possibly fatal consequences.

What’s the answer? Hillary Clinton’s platform calls for a $250-per-month per person cap on out-of-pocket expenses for covered prescription drug costs “to provide financial relief for patients with chronic or serious health conditions.” The flaw in her plan is that insurers would have to raise premiums to compensate for losses on the cost cap. That could accelerate the “death spiral” in which healthy people drop insurance because of high premiums, leaving behind only those most costly to care for. “It looks good on the surface, but I hope the average American can see what it looks like on the back end,” says Tyrone Squires, founder of TransparentRx, a boutique pharmacy benefit manager in Henderson, Nev.

Donald Trump’s platform doesn’t even attempt to deal with the problem directly. It encourages high-deductible plans, coupling them with health savings accounts that families could use to set aside money for health expenses tax-free. Such accounts are of most value to families in high tax brackets.

The EpiPen episode is a small part of the very big problem of high and rising drug prices. But even this small problem is kind of intractable. “Everyone in the system has built their economics and contracts on the list price that exists. It’s incredibly difficult to unwind that structure,” says Pembroke Consulting’s Fein. “I can’t tell you there’s a simple solution. That’s why I’m not a politician.”

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