University of Nevada Las Vegas Business Law Paper

Critical Thinking 2.3: DRUG PRICES: MARKET PRICING OR PRICE GOUGING? • Drugmakers persist inraising prices far beyond the rate of inflation
The United States has no formal drug pricing policy, preferring to leave pricing open to market
competition. In theory, those competitors should be willing to compete on price, but the market reality
is very different.
January 2019 saw price increases on over 250 prescription drugs in direct opposition to demands from
President Donald Trump to hold prices level in anticipation of a national plan to lower drug prices in
what has become the world’s most expensive pharmaceutical drug market.
When challenged over these price increases, pharmaceutical CEOs point to the increasing costs of
developing new drug treatments that can be targeted at the genetic profile of individual patients.
However, the economic reality tells a slightly different story.
Data recorded by the U.S. Drug Accountability Office tracked an increase in prescription pharmaceutical
sales from $500 billion in 2005 to $700 billion in 2015, with a corresponding increase in profits of about
18 percent over the same decade. In contrast, worldwide research and development (R&D) spending
over the same period increased from $82 billion to only $89 billion.
To further undermine the “targeted treatment” argument, while most of the cost increases were
attributable to new treatments, the largest price increases were placed on established brand-name
drugs–around 9 percent per year.
One drug in particular–insulin–has come under increased scrutiny in recent years as pricing has
increased far beyond market averages. In 2014, for example, the price of Lantus, an insulin product
made by Sanofi, rose by 49 percent. According to research by the Health Care Cost Initiative, the market
price of insulin doubled between 2012 and 2016, without any change in the drug’s composition or
efficacy.
In 2018, the Attorney General of Minnesota filed a federal lawsuit against the makers of insulin–Eli Lilly,
Sanofi, and Novo Nordisk–in response to media coverage of the death of a young diabetes patient who
was forced to ration his insulin medication far below the recommended dosage due to rising costs.
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Growing consumer awareness of this issue is leading to increased demand for an explanation as to why
drug prices are allowed to continue to rise beyond the rate of inflation. Industry analysts point to three
key factors that directly impact the leverage that pharmaceutical companies appear to have over the
Pharmacy Benefit Managers (PBMs) that work for the insurance companies:
1.
Mergers & Acquisitions
In recent years pharmaceutical companies have achieved higher profits by buying competitors (and their
respective drug portfolios) rather than investing in R&D (see Valeant Pharmaceuticals in Chapter 5). The
broader the range of drug products they have in their portfolio, the more leverage they have over PBMs
and the higher those drug prices can be.
2.
No Competition
When there are only three makers of insulin, the potential for a price war is greatly reduced, especially if
those companies choose to file a joint lawsuit to halt the development of generic alternatives to their
patent-protected drugs.
3.
Lack of Transparency
In the absence of a federal drug policy, pharmaceutical companies are allowed to get very creative with
pricing models, including rebates, discounts, and limited social programs–“if you cannot afford drug X,
company Y may be able to help.” With no formal requirement to disclose drug costs, offering rebates
from higher prices allows pharmaceutical companies to achieve a higher revenue target by lowering
those rebates without technically raising the list prices in the future.
A resolution for high drug prices still appears to be based on discussion rather than action. Medicaid is
still unable to negotiate drug prices, and any congressional attempts to tackle the issue face immediate
and aggressive responses from the pharmaceutical industry lobbyists. It remains to be seen whether
consumer demands for transparency and accountability will be sufficient to force the government into
action.
QUESTIONS
1. Why doesn’t the United States have a formal drug policy?
2. Why would pharmaceutical companies choose to raise prices in direct contradiction to the
President’s request to hold them level?
3. Is there a conflict of interest in the relationship between pharmaceutical companies and the
PBMs? Why or why not?
4. Which of the three key factors supporting high drug prices is the least ethical? Explain your
reasoning and propose a practical solution.
5. Should other states follow the example of Minnesota and start to challenge the drug companies
in court? Why or why not?
6. Do you think consumers will be able to bring about change on this issue? Why or why not?
Sources: Michael Erman, “Drug Companies Greet 2019 with U.S. Price Hikes,” Reuters, January 2, 2019;
“Why Are Prescription Drug Prices Rising?” US News & World Report, February 5, 2019; Alison Kodjak,
“Prescription Drug Costs Driven by Manufacturer Price Hikes Not by Innovation,” NPR, January 7, 2019;
and “Why Trump’s Plan Will Not Cut Drug Prices,” The Economist, May 19, 2018.