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EpiPen’s 400 percent price hike tells us a lot about what’s wrong with American health care

The EpiPen was invented in the 1970s by a biomedical engineer, Sheldon Kaplan, who was searching for a way to treat allergic reactions quickly.

What he came up with was the EpiPen we know today: a pen-like device that delivers a premeasured dose of the hormone epinephrine in emergency situations. The device is ubiquitous in our country, carried by those with asthma or life-threatening allergies.

And since 2007, a drug company called Mylan has quietly hiked EpiPen’s price by 400 percent.

Sen. Chuck Grassley (R-IA) sent the company a letter Monday asking for an explanation of why some have found themselves paying more than $500 for the generic medication.

“I am concerned that the substantial price increase could limit access to a much-needed medication,” he wrote.

Grassley can ask Mylan to explain its prices, and he can express concern. But there’s not much he can do beyond that. The American government is exceptional in that it has no power to regulate drug prices.

The story of Mylan’s giant EpiPen price increase is, more fundamentally, a story about America's unique drug pricing policies. We are the only developed nation that lets drugmakers set their own prices, maximizing profits the same way sellers of chairs, mugs, shoes, or any other manufactured goods would.

In Europe, Canada, and Australia, governments view the market for cures as essentially uncompetitive and set the price as part of a bureaucratic process, similar to how electricity or water are priced in regulated US utility markets.

Other countries do this for drugs and medical care — but not other products, like phones or cars — because of something fundamentally unique about medication: If consumers can't afford the product, they could have worse odds of living. In some cases, they face quite certain odds of dying. So most governments have decided that keeping these products affordable is a good reason to introduce more government regulation.

When drug companies set their American prices, they don't focus on the price of making the pills. Instead, they look at what their competitors already charge for similar products and try to land their price somewhere in the same range, regardless of production costs or how good the drug actually is. Since most drugs are already expensive, new drugs keep matching those prices.

And if you're a drug company that produces the best medication for a situation (as Mylan does for allergy attacks), this makes a ton of sense: You have consumers whose life, quite literally, depends on buying your product. This is what the now-infamous pharmaceutical executive Martin Shkreli talked about, quite bluntly, in a Bloomberg interview last year.

He was defending a decision to increase the price of Daraprim, a drug that treats a rare disease called toxoplasmosis, by 10,000 percent.

"We know these days that modern pharmaceuticals and cancer drugs can cost $100,000 or more," he said. "Daraprim is still underpriced compared to its peers."

The real question at the heart of the EpiPen outrage isn't why one drug company decided to hike a drug price. The real question is why other companies aren't taking advantage of the pick-your-price nature of American pharmaceutical policy.

On American drug prices, "the sky is really the limit"

Pills

Drug pricing follows a predictable pattern in most developed countries. In places like Spain, the United Kingdom, and the Netherlands, the government sits down with drugmakers and haggles over how much they will pay. Each country uses a different process, but the goal is the same — to balance drug companies' pursuit of profit with the public's interest in making useful treatments widely available and affordable.

The United Kingdom, for example, runs its bargaining through the National Institute for Clinical Evaluation (NICE). NICE exists solely to decide at what point a new treatment is cost-effective: when it will save the health care system money in the long run by preventing further disease. NICE runs dozens of these analyses each year, on drugs and surgeries and scanning devices. And it uses its findings to tell medical manufacturers: This is the price our country will pay for your service.

In the United States, there's no such negotiation process to speak of. Federal law bars Medicare, the country's largest insurance plan, from even trying to negotiate bulk discounts with drugmakers. Once a pharmaceutical company sets its price, the government-run plan that insures 49 million seniors is required to accept it.

"For Medicare, the sky is really the limit," said Jamie Love, who has studied drug pricing and directs the DC nonprofit Knowledge Ecology International.

Other federal programs get certain discounts from drugmakers. Federal law requires that Medicaid, the program that covers low-income Americans, get a 23 percent discount on of all brand-name drugs' sticker prices. Each state's Medicaid program also has the authority to negotiate even lower prices. The Department of Veterans Affairs also negotiates drug prices, as do private health insurance plans.

There are thousands of private insurers, though, and they often have little clout to demand lower prices. Other countries are essentially buying in bulk, like shopping at Costco. The United States does the equivalent of going to the local grocery store — and paying more.

"We don't have a NICE in the United States," said Steven Pearson, founder and president of the Institute for Clinical and Economic Review, a nonprofit that evaluates evidence on medical tests. "We have a system that says, ‘If it's better, we have to provide this pill, and you, the drugmaker, get to name the price.' It's not a market. It's a drugmaker saying what they want."

When Mylan changes the price of its EpiPen, large insurance plans might try to haggle with the company, or look for less expensive alternative treatments. But Medicare is the country's biggest insurance plan, and it legally cannot try to negotiate down the price. It has to pay it. When the sky is the limit in American drug pricing, the hardest thing for a company to figure out is how high to go.

Forget the $500 EpiPen. The era of the $1,000 pill is already upon us.

sovaldi

A handful of high-profile, expensive drugs have caused similar outrages to the current Mylan backlash. But drug companies have largely weathered those controversies unscathed, trading a few months of bad press for blockbuster returns.

Consider the case of Sovaldi, a new hepatitis C drug that came on the market in 2012 at the price of $1,000 per pill. Its maker, Gilead, faced fierce backlash over the price; for an entire course of treatment that lasted three months, the drug would cost $84,000.

Drugmakers — and particularly the makers of Sovaldi — could do this for two reasons that also apply to the EpiPen case. First, there's no regulatory body to tell them not to. Second, and perhaps more importantly, consumers don't have any leverage to not buy their product. Sovaldi was, when it came on the market, the only drug that cured hepatitis C. And EpiPen is, right now, the best treatment available for an emergent allergy attack. Other pharmaceutical companies have tried to launch competing drugs but so far failed; one drug was recalled last year after due to problems with its injector.

When Sovaldi hit the market, coalitions sprang up to denounce the high price. Congress launched an investigation into the issue in July. Sovaldi, Sens. Ron Wyden (D-OR) and Chuck Grassley (R-IA) said in a rare bipartisan press release, raises "serious questions about the extent to which the market for this drug is operating efficiently and rationally."

All these actions were meant to send a signal: It's unacceptable for drugmakers to price their products so high. Pharmaceutical companies will be made to answer for these actions.

It didn't work: While Sovaldi became a poster child for pharmaceutical greed, it has brought Gilead and its shareholders a hefty profit. The drug "catapulted Gilead Sciences into the ranks of the top-selling pharmaceutical companies," the Wall Street Journal reported this summer. Gilead has sold more than 280,000 Sovaldi prescriptions this year, according to a CitiGroup analysis. The company earned $3.5 billion in Sovaldi sales in 2014's second quarter (sales fell to $2.8 billion the quarter after).

Mylan, in a way, took a page from the Sovaldi playbook: The company sees that it's possible to charge much higher prices for a drug and weather the ensuing storm — with plenty of profit made at the other end.