Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

For veteran Martin Shkreli-watchers , the fact that this week's congressional hearing on drug pricing only featured a few short minutes of the former Turing Pharmaceutical CEO's presence didn't make it any less of a gift. There was fifth-pleading, smirking, a case of mistaken SUV identity, "unfortunate" tweeting and, inevitably, a livestream

Defying Gravity
Valeant shares were up after its CEO got grilled at a Congressional hearing.
Source: Bloomberg
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But beyond the theatrics, the hearing highlighted what an opaque and broken mess drug pricing is in the United States. No one, not even the government, really knows what companies charge for drugs across a fragmented market. That creates dark corners where Shrkeli thrived, where Valeant Pharmaceuticals (whose CEO Howard Schiller was also grilled on Thursday) devised its now publicly disavowed price-hike-focused business model, and where many others have massively boosted prices more quietly.

It will take more transparency, not outrage, to fix that. However, Congress seemed more interested in a bit of righteous on-camera yelling -- and revealing some remarkable ignorance about the health care system -- than in root causes. 

An exchange (an hour and 34 minutes into the hearing stream) between Vermont Congressman Peter Welch and Turing executive Nancy Retzlaff -- left to face Shkreli-provoked congressional wrath over that company's infamous 5000 percent price increase for toxoplasmosis drug daraprim -- is particularly revealing.

Welch asked repeatedly what daraprim would cost for hospitals, for insured patients, and for others. In response, Retzlaff offered a dizzying array of prices other than the $750 list price, prompting Welch to say, with some exasperation, that the country has a broken pharmaceutical market. 

Schiller -- under fire for Valeant raising the prices of decades-old heart medications Isuprel and Nitropress by more than 500 percent and 200 percent, respectively -- and Retzlaff both employed similar defenses. They said the steep list prices of their drugs don't accurately reflect what patients or hospitals pay after some combination of insurer and pharmacy benefit manager contracts, volume discounts, patient assistance programs, and mandatory government discounts.   

This line isn't unique to these companies. Reliably, when asked about prices, pharma executives note that list prices don't reflect reality. It's the oldest of news for anyone who follows the industry, but apparently novel to Congress.

The lack of transparency in the market all but guarantees the sorts of abuses that necessitated the hearing in the first place. The fact that real prices are so opaque makes it difficult to measure cost in the system and to assess value. It lets drugmakers charge wildly varying prices as they negotiate with disparate groups that have imperfect information. It's hard for anybody to negotiate price effectively when they start with a fake number. It helps companies raise prices on old drugs, and gives everyone a ready-made excuse for six-figure prices.

Companies such as Valeant and Turing have enjoyed this system the most. Even if they only manage to charge high prices to a small subsection of patients or payers, there's plenty of profit to be had. Valeant, according to Representative Elijah Cummings' comments at the hearing, apparently netted $351 million in profit from its decades-old heart medicines in 2015. Both Valeant and Turing targeted old drugs with small patient populations in the hope payers, physicians, and patient groups wouldn't notice, according to documents released as part of the hearing's investigation.

There are other factors to blame for high prices, including a slow generic approval system that delays new competition. But a good place for Congress to start would be admitting what it doesn't know and make it easy, or even merely possible, to answer the question: "What does a drug actually cost, and why?"

  1. A selection of previous columns: 

    http://www.bloomberg.com/gadfly/articles/2015-12-17/martin-shkreli-arrest-slams-kalobios-shares

    http://www.bloomberg.com/gadfly/articles/2015-12-01/express-scripts-imprimis-daraprim-compound-a-threat-to-turing

    http://www.bloomberg.com/gadfly/articles/2015-12-04/kalobios-chagas-drug-is-another-shkreli-loophole-deal

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To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net