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America’s Real Drug Problem

ANN ARBOR – No doctor can forget his or her first patient with toxoplasmosis, a harrowing parasitic infection found in people with compromised immune systems, such as patients with advanced HIV/AIDS. After infecting one’s organs and brain, it causes an altered mental state, fever, shaking chills, and seizures. Left untreated, it can lead to death in as little as one week.

A life-saving treatment – marketed in the United States under the name Daraprim (pyrimethamine) – has been available for more than 60 years. But recent developments have threatened to make it unaffordable. In August, a company called Turing Pharmaceuticals bought the marketing rights for the drug and promptly hiked the price of a pill from $13.50 to $750. In addition to raising worries about the drug’s availability, the move exposes one of the great flaws of the US health-care system: profits can be – and often are – placed ahead of people.

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Turing’s CEO, Martin Shkreli, was quickly vilified in the media, including in a Facebook post by former US Secretary of State Hillary Clinton. His response was uncompromising. In a Twitter exchange, he called a journalist “a moron,” and described the price hike as “a great business decision that also benefits all of our stakeholders.”

From a purely economic point of view, Shkreli is right. Pyrimethamine is an off-patent drug, but Turing is its only manufacturer. And because the demand curve for life-saving medications is almost perfectly inelastic, raising the price by more than 5,000% is a rational way to maximize profits. As abhorrent as Shkreli’s decision may be, neither he nor Turing is the real problem. They did not write the US laws and regulations that permit price gouging on medications like Daraprim.

Most people would expect life-saving medications to be treated differently from consumer goods such as smartphones or automobiles. But no such distinction exists in the US. Indeed, the US is the only developed country that allows drug makers to set their own prices.

Most European countries directly or indirectly regulate the prices of pharmaceuticals, similar to how electricity or water prices are regulated in US markets. In the United Kingdom, for example, a regulatory body – NICE (National Institute for Clinical Effectiveness) – decides whether drugs are sufficiently cost-effective to justify reimbursement by the National Health Service.

Furthermore, because the US does not have a publicly funded health system, there is no single payer that can leverage its bargaining power to lower drug prices. Instead, each state’s Medicaid system, which covers health care for the poor, procures its own drugs. And Medicare – one of the largest procurers, which provides coverage to those over the age of 65 – is prohibited from negotiating prices. This, together with other factors, has led to prices in the US being, in many cases, much higher than in most other developed countries.

Some argue that the higher prices reflect the fact that the US bears a cost premium for innovation. But in many cases – Turing’s decision is just one egregious example – higher prices do not reflect investments in innovation. Price hikes are simply profit grabs by rent-seeking manufacturers.

Solving the problem will not be easy. Introducing a new regulatory body or moving to a single-payer system is likely to be bureaucratically costly or politically impossible. And, in any case, there are pitfalls to empowering a single agency to determine a drug’s value for an entire country. Different groups may benefit differently, depending on factors such as age or socioeconomic status. Even so, some simple steps can be taken to prevent price gouging, while maintaining incentives for innovation.

Daraprim is widely and cheaply available as a generic in other markets, including the UK, India, and Brazil. In the US, however, it was not until the uproar over Turing’s price hike that a competitor announced it would produce an alternative for about $1 a pill. With fewer than 13,000 prescriptions annually for pyrimethamine, drug manufacturers did not have the financial incentive to navigate the US Food and Drug Administration’s application process for regulatory approval. In addition, the FDA’s backlog of more than 4,000 applications for generic medications means that approval can take more than two years.

Volume guarantees are one way to spur competition and put downward pressure on prices in such niche markets. This approach was used successfully for HIV/AIDS medications, when donors pooled procurement for low- and middle-income countries to create price ceilings. In the US, a few large public payers, such as Medicare and Medicaid, could be mandated to provide an overall volume guarantee, providing an incentive for new entrants and a reason for existing manufactures to keep prices in check.

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Another way to make niche markets more attractive is through priority review vouchers, which promise manufacturers an expedited review process for one of their drugs. The FDA already awards these to manufacturers of new drugs for rare pediatric disorders. It could do the same for generic medications for which the market is small.

Turing’s attempt to profit at the expense of those suffering from HIV has clearly shown that regulators and drug manufacturers need to explore new ways of doing business. Access to life-saving medicines should not depend on the extent of one person’s benevolence. Rather, we should work to embed in our institutions practices and policies that safeguard the interests of patients.