Sunday, August 28, 2016

A debate on the FDA’s role in increasing drug prices

The drug company Mylan has recently come under intense criticism for jacking up the price of EpiPens – a portable, life-saving dose of steroids carried by people with severe allergies in case they go into anaphylactic shock – from about $100 apiece to about $600 for two.  Many on the left attacked their CEO for “price-gouging,” while still more (including Vox) lamented drug companies’ ability to set their own prices at all as a unique flaw of America’s capitalist healthcare system.

I think this is a horrid misdiagnosis of why healthcare prices are so high, and what we should do to fix that.  So does Reason Magazine, who posted a response to the criticism that turned the scrutiny right back at those wishing to expand the government’s role.  I posted that article to Facebook, and a productive debate ensued with three of my friends.  You can read the transcript below.

Friend 1 - Not so simple. Difficult product to manufacture and blindly approving drugs poses public health risk; see Sanofi's Auvi-Q recall last year

Auvi-Q is mentioned in the WSJ article as an example proving our point. There were only 26 cases of incorrect dosage over 3 years of use. They write: "Though the recall was voluntary and the FDA process is not transparent, such extraordinary actions are never done without agency involvement. This suggests a regulatory motive other than patient safety."

The point I'm making is that the entire system is one of strong incumbency advantage. Companies should not have the burden of conclusively proving their product is safe before being allowed to sell it - permission to do something should be the default in a free society. Rather, the FDA should have the burden of conclusively proving not only that it isn't safe, but that consumers are being lied to/misinformed about/have no way of determining how dangerous it is before being allowed to impose restrictions.

The whole article and your argument is predicated on the incorrect notion that the FDA is only here to protect incumbent players. While patents and exclusivity play a vital role in even incentivizing innovation for these companies, first and foremost the FDA is a public health agency. Companies must provide clinical data to prove that not only that their product is safe, but that it provides clinically meaningful benefits. I would argue selling drugs that have failed these tests and in all likelihood do not work is more of a crime. Even Auvi-Q was BX rated by the FDA, meaning that not even EpiPens closest competitor could prove bioequivalence

No, you misunderstand the notion on which my argument is predicated. I agree the FDA is a public health entity. Enforcing monopoly conditions (or worse) is merely an unfortunate side effect of it's mission to promote public health. My argument is that nine times out of ten, that mission itself is illegitimate: not the government's place, and an immoral restriction on the personal liberty of both the producer and the consumer.

Evaluating the safety and effectiveness of drugs is important work, but it's not a proper function of government. The private sector can and does create evaluatory agencies for all sorts of products, and consumers can and do use those services to inform themselves before making purchasing decisions. See Underwriter's Laboratory, for example. There are websites that compile research and provide reviews for practically any product. Even complex subjects beyond the grasp of most people, like guns or stocks or auto-repair, can be navigated by consumers with enough incentive to get the right information. And of course, epi-pen's advertising team would make sure to highlight any defects or shortcomings in their competition's product that people should be aware of. No bureaucratic involvement is required.

If people with allergies are faced with a choice between paying $600 for an epi-pen an $150 for an off brand competitor with a slightly higher chance of malfunction, reasonable people could disagree about which they should buy - but the point is, they should at least have that choice. Unless we're talking about vaccines or second-hand smoke or something where one person's decision can actually worsen the health of others around them, "public health" is merely an amalgamation of individual healths, and nobody is better motivated to protect their health than that individual. From soda limits to fast food bans to the war on drugs, that term has become one giant euphemism for "I know how to live your life better than you do." Even if that's true, neither you nor the FDA have an ethical right to use the force of gunpoint to prevent them from making whatever voluntary transactions they want to make.

Friend 1 – If what you're saying was true then why was EpiPen able to take yearly price increases in the first place? Auvi-Q was not the only BX rated product available yet EpiPen still had price inflation. If what you were proposing were a true solution for bringing prices down then it would have already happened

I don’t think it’s remotely controversial that competition brings prices down.  The vast majority of products on store shelves are reasonably priced, and that’s not because companies are just more ethical in all those other industries.  Markets work.  When prices are vastly higher than total costs, it’s a good indication that the forces of supply and demand are not being allowed to do their thing.

Megan McCardle of Bloomberg has a good piece here on all the many ways regulators are incentivized to stymie competition and protect the incumbent.  She writes:

“What’s easier to regulate -- a few staid old incumbents that you know well or a zillion upstarts who don’t know the rules, don’t have a highly competent and extensive staff of compliance officers to deal with the regulators, keep changing what they do, forcing you to figure out what that means and come up with whole new sets of rules to cover the evolving marketplace and ... I don’t really need to ask this question, do I? Over time, the interests of regulators and the interests of incumbents tend to converge upon keeping things nice and tidy by making sure that experienced players dominate the field.” 

In this particular case, I confess I don’t know what BX/bioequivalence means scientifically.  But, I do know that the Wall Street Jounal article referenced in the link I posted gave extensive detail of multiple would-be competitors who the FDA blocked from entering the market.  These were not unlicensed quacks brewing up a potion of who-knows-what in their basements, and claiming it cured anaphylactic shock.  These were respected pharmaceutical giants like Teva and Adamis, offering the same cheap, abundant drug Mylan offers (much like Aleve and Motrin and off-brand Ibuprofen/Aceteminofen manufacturers jumped in to compete with Advil and Tylenol). Still other companies were doubtlessly deterred from even trying to enter the market by the increased startup cost required to go through the FDA’s process.

There is no intuitive reason Mylan’s version should be inherently and permanently safer or more effective than those of everyone else – and yet, decades after its creation, it remains the only one on the market, despite the efforts of many to cut into that lucrative monopoly.  That is very clearly an artificial restriction of supply, leading to predictably high prices, not the price-gouging market failure the left has portrayed it to be.

Friend 1 - You have a fundamental misunderstanding of the industry and the payer-payee relationship and assume that the drug companies have 100% control over the price of their drugs. I am not against competition WHEN that competition has met the same criterion that approved drugs have passed. There is a reason why third party payers continue to pay for EpiPen despite the availability of these BX rated products. It is not as simple as lower wholesale prices equal higher demand for these products and that is exactly my point. The channel also consists of wholesalers/distributors, PBMs, insurance companies, pharmacies, all before reaching the hands of the hospitals and patients. Which is exactly why EpiPens price continued to increase over the last few years despite the availability of the likes of Auvi-Q and Adrenaclick. You're argument doesn't disprove this fact. Knowing these things is literally my job - you won't beat me here

I’m sure I won’t.  I’m not disputing that you better understand the intricacies of drug markets than I do, which is why I have reserved my commentary to the more generalized economic principles I do understand.

I can grasp that there’s a complicated purchasing chain that doesn’t ordinarily go straight from consumers to drug manufacturers, and that this distorts pricing signals in other ways besides the lack of competition.  In fact, the article I posted said as much: they quoted Bresch complaining that "more than half the amount paid by the health care system for EpiPens goes to pharmacy benefit managers, insurers, wholesalers and pharmacy retailers, not to the company itself."  In other words, the market would be fucked-up even without the FDA.  Accordingly, it may be that enabling more competition ON ITS OWN would not suffice to reduce prices much – maybe I’ll take your word on that.

But even if that’s true, permitting market entry is still an essential component of any healthcare reform effort that hopes to reduce costs.  Competition may not be a sufficient condition for lower prices, but it is a necessary condition for keeping those prices in line with costs over the long term.  In posting this article, I wasn’t attempting a comprehensive healthcare overhaul in one breath.  I was merely identifying one of the many government-created problems contributing to the high prices, which so many on the left are wrongly attributing to capitalism (as if this whole channel of “wholesalers/distributors, PBMs, insurance companies, and pharmacies” arose spontaneously without 80 years of government intervention).  There are probably 10 reforms we could make to reduce the cost of Epi-Pens, but making the FDA to back off a bit is a good first step.

Friend 2 - Doris, the drug-vetting process is extremely important to public health, forgetting anything about private sector companies doing that. Now, if private sector companies *did* do that, who makes sure that those companies aren't just paying lip service to the highest bidders? Infinitely competitive landscapes are rare and at some point, there ceases to be proper incentive to 1) do the right thing and 2) have competitive entry into markets. Trust me.

This is so much more "libertarian" than what is recommended by your own article. You're suggesting the elimination of one of the purest responsibilities of government- ensuring the health and safety of its citizens. If you want evidence that the FDA is arbitrary in its red tape, look no further than the WSJ's article about the cigar market less than two weeks ago. That's a great argument that a lot of people could have gotten on board with.

You’re right that the argument I made goes further than the one made by Reason (in this article) or the WSJ.  But those arguments are neither contradictory nor a package deal.  People don’t need to get on board with removing the FDA’s drug approval function entirely, as I would do, to still recognize that it has a strong anticompetitive bias, with a troubling tendency towards regulatory capture, and that this contributes to the inflated cost of healthcare.  And since most of the people who support an expanded role for government regulation in these matters are from the left – the same group now complaining about Epi-Pen’s price hike – they need to take a look in the mirror and decide which set of perceived problems they’re more willing to live with.  To instead blame it on the excesses of unregulated capitalism, when we haven’t had anything resembling such a system in healthcare for 80 years at least, is to attack a straw man: pointing out flaws in a healthcare system that practically no one actually supports.  That’s the message I was aiming for when I posted this link.

But, since I can’t resist, I’ll take you on about the importance of FDA’s drug-vetting role in general.  You argue that without it, we’d go right back to the conditions described in Upton Sinclair’s “The Jungle”….I really doubt that, for reasons I’d be happy to explain at greater length later (in short, because the Jungle does not depict the excesses of the free market so much as it depicts rampant cronyism, and also because the world is very different today than it was in 1906 quite apart from the relative levels of federal regulation).  But to avoid nitpicking and move the conversation along, I’ll concede the possibility that eliminating the FDA outright would have some costs.  In this context, some drug side effects which are identified in our current system may go undetected until after they’re marketed in my system.  We can quibble about the magnitude of these effects, but this would have some adverse consequences for patients, and these outcomes would be highly visible.

All I ask is that you recognize there are also costs in the current system, which go largely unseen because of status quo bias and the difficulty in quantifying them.  Regulatory bodies work with industry incumbents every day, and face ultra-conservative incentives not to rock the boat.  If they approve a new drug and it works great, nobody gives the FDA credit; but if a problem emerges, there’s nothing the media loves more than a good panic.  Every drug recall brings fear-mongering news headlines and class action lawsuits and a whole bunch of bad press.  Inversely, a drug which could have saved lives but fails to get approval costs the FDA little.  They act accordingly, and that creates victims whose names will never make the papers.

When the FDA prevents people from switching to e-cigarettes that aren’t nearly so dangerous as traditional cigarettes, people die.

When a Cleveland doctor invents a medical app that allows physicians to calibrate the ideal radiation dosage for breast cancer patients, but is then forced to abandon it because the FDA demanded such expensive proof of its safety that he cannot afford it, people die.

When the FDA makes software developers wait three years and pay hundreds of thousands of dollars to test SIMPLE mobile devices, that merely combine MRI images, PET scans and CAT scans onto the same screen to enable easier analysis, diagnoses were missed that might otherwise have been caught, and people died.

When the FDA imposes six-figure testing requirements on small family businesses who hand-roll their cigars (because they cost less than $10 and thus aren’t classified as “premium”), businesses fold and people are deprived of utility for no reason whatsoever.

Useful HIV drugs were available in Europe for years before the FDA approved them for use here – which again, cost lives.

Millions of dollars and man-hours are wasted on trivia to cover some bureaucrat’s ass, while the victims of such meddlesome caution go forever unnamed.  There’s also a chilling effect on medical innovations even happening in the first place, since major companies know the road to a sellable product is so long and onerous.  All of this prevents innovation and stymies competition, making healthcare both less effective and more expensive than it could otherwise be.  That has real utilitarian consequences whether or not you value individual liberty as much as I do.

Private evaluators, on the other hand, don’t face these same perverse incentives.  You ask: “if private sector companies *did* do that, who makes sure that those companies aren't just paying lip service to the highest bidders?”

Answer: the same competitive pressures that keep private organizations accountable to their customers in any other relatively free market.  Underwriter’s Laboratory is so universally respected precisely because their entire business model/stream of income depends on maintaining their public reputation.  If the public comes to distrust them, their stamp of approval becomes meaningless, and manufacturers won’t pay them to get it.  Similarly, online review sites like CNET or Kelley Blue Book can’t be bribed by Samsung or Chevy to review their products highly, because sooner or later it wouldn’t align with the customers’ actual experience with those products, and they would lose traffic (and thus ad revenue) to better review sites.

It would be more accurate to say the FDA is the one paying lip service to the highest bidder.  There’s a well-documented pipeline from the FDA higher-ups to cushy positions at the companies whose interests they protect.  Andrew von Eschenbach, for example, FDA commissioner from 2006-2009, is now director of a biotechnology company called BioTime.

You ask who is going to take on the behemoth of companies like Pfizer in the immediate cessation of a patent?” In short, LOTS AND LOTS OF PEOPLE!  Look at ibuprofen; Advil had the monopoly for a long time thanks to its patent, but now you can buy dozens of off-brands that have severely decreased the price.  Market entry is not easy, but that’s exactly why we need to remove as many barriers to it as we can.

You write: “I’ve had an EpiPen for about 6 years now and I’ve never even heard of Auvi-Q.  Why is that? Because…doctors need to actually prescribe it.”

Which is another reason prices are so high: the person choosing which drugs to order has no incentive for cost consciousness.  If you had to pay for your EpiPen yourself, you might well have shopped around for it, and an ad for Auvi-Q might well have caught your eye.


You continue: BY THE WAY, a "slightly higher chance of malfunction" to someone undergoing anaphylaxis is literally life or death. Very few people are going to take that chance.

You know what else is life or death?  Having an epi-pen handy vs. not having one handy, because you couldn’t afford the luxury of buying an extra one to keep in your purse or something.  It’s maddeningly paternalistic and privileged to decide for the whole country which miniscule risks are and are not worth an extra $450 to mitigate, but even supposing you’re right – that very few people are going to take the chance – that means there shouldn’t be an issue with allowing Auvi-Q on the market.  If nobody wants it, they’ll go out of business on their own.  And if people do want it, who are you (or the FDA) to tell them they’re making the wrong decision for their own unique health and financial situation?

When people have life-threatening ailments, nobody is better motivated to seek information about their treatment options and conduct a thorough cost-benefit analysis than that person.  Neither does anybody have the right to make those decisions for them, including the detached medical experts at the FDA.  People in such situations should be allowed to put whatever the hell they want into their bodies – period.

Friend 3 - Companies absolutely should have the burden of proof in this scenario. In the same way that someone making an affirmative claim in an argument must back up their claim with facts and reason, a company selling a product should have to back up any claims about the relative safety and usefulness of their product.

No, the burden of proof always lies with the person seeking to justify violence and restrict freedom.  Freedom to do as you please – including to create/buy/sell a drug - is the default condition of humankind.  If the FDA’s funding and recommendations were voluntary, I’d have no problem with placing the burden of proof on the company (in fact, it would then be the very sort of private vetting organization I’ve already endorsed).  But they aren’t voluntary – they rule by fiat, with the implicit threat of arrest and imprisonment for any who dare sell medicines they have not approved.

The sum of good policymaking is determining in which situations it is ethically justifiable to prevent people from doing things at gunpoint.  To me, those situations are few and far between, and uncertainty about whether a drug is safe enough is not one of them.  It is totally fine for people to be risk-averse in their own life.  But if my father’s eye-cancer comes back, and the only chance at saving him is an experimental treatment in Europe with a 40% success rate which the FDA hasn’t gotten around to approving yet, they can fuck off preventing him from trying it because it hasn’t passed their arbitrary evidentiary threshold.  I don’t mean to be melodramatic about it, but some version of that story happens every day in this country.  People are needlessly dying while regulators bite their nails over the possibility of unknown side-effects, and you don’t need to be libertarian to see the absurdity in that situation.

Friend 3 – I don't disagree with you, it's just that my priorities for wanting the same or a similar system as you are in a much different order. I think the FDA sucks at its job and that its job is ill-defined in the first place, but I also think it sets a profoundly negative precedent to allow companies to put out untested or insufficiently tested products without, at the very least, regulating the claims they can make (including the requirement for a claim of relative safety). Beyond that, I think people should be able to choose whether or not they want the 40% effective cure or the 20% death rate cure or, dare I say it, homeopathic medicine. If a company doesn't want to or can't afford to test their products, they should be allowed to sell them, but with clear acknowledgement that they don't know if their product is safe/effective.


I think our priorities are more in line than you realize, because I already said as much in a comment below: "the FDA does have a role, from my view, in truth-in-advertising laws to make sure companies aren't outright lying to people." That's also fully consistent with libertarian ideology on property rights. If someone sells me a can labeled "pork and beans", and I go home and open it and find out it doesn't actually contain pork and beans but rather some filler substance that weighs about the same, that's straight-up theft. That violates my right to whatever property I gave them in exchange for the can just as plainly as if they were to steal it from my wallet. Same thing with a pharmaceutical company making false claims about its products. Prohibiting such conduct is not restraining the market so much as laying the property-rights groundwork which any market requires to function, and I'm all about that.

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