Lesson From Pharmaceutical CEO Shkreli’s Outrageous Drug Price Increase

Turing Pharmaceuticals CEO, Martin Shkreli, made headlines when he raised the price of Daraprim, a prescription drug for a life-threatening parasitic infection that mainly strikes pregnant women, cancer patients and AIDS patients. Overnight, Daraprim went from $13.50 to $750 per pill, a 5000% price increase. Outrage from the public followed, making Shkreli “the most hated man in America.” Pressed with demand to lower the price, Shkreli announced that he would lower the costs. However, the flamboyant self-promoter later stated that he should have increased the price even more.

Last month, Shkreli was arrested and charged with securities fraud and wire fraud. So, the federal government is now looking into his alleged ponzi scheme. But, what about the 5000 % price gauging?

Profit-Making U.S. Health Care Industry

Shkreli’s unethical price gauging reflects the bleak truth of American health care system, so deeply rooted in capitalism. Let’s be honest. In the U.S., health is not a guaranteed right. Our country’s healthcare does not cover everybody. In most other developed countries, health care is a guaranteed right and everyone is covered. In the United States, health is a commodity for-profit private system with only limited control from the government.

T.R. Reid, in his comprehensive examination of the health care systems of France, Germany, Japan, the UK, and Canada comparing with the U.S. health care system, diagnosed the differences: “The United States is the only developed country that relies on profit-making health insurance companies to pay for essential and elective care. All other developed countries have decided that basic health insurance must be a nonprofit operation. In those countries, the insurance plans – sometimes run by government, sometimes private entities – exist only to pay people’s medical bills, not to provide dividends for investors.” The OECD statistics show that the U.S. is by far the world’s biggest spender on health care.

Shkreli’s action presents an example of manipulating the legal loopholes of the U.S. health care system. By charging an enormous price on a drug his company did not invent and unscrupulously profiting at the cost of those who need the drug, his gigantic price hike harms the public, providers, and the overall U.S. health care industry.

Unethical Drug Pricing

Surprisingly, Shkreli’s price gauging was legal. Shkreli defends himself, stating that he has a sworn duty to make profits for his shareholders and tells New York Times, “It really doesn’t make sense to get any criticism for this.” Granted, as a CEO for a for-profit corporation, he owes a fiduciary duty of care to his company and shareholders.

However, his fiduciary duty alone does not justify his outrageous actions. It’s because he shamelessly maximized profits while failing to uphold his ethical obligations. We are not talking about some price increase on a latest model of a smart phone. We are talking about treating sick patients and preventing life threatening diseases.

It’s disturbing to learn that his action is not an isolated incident. Other pharmaceutical companies have been engaging in the same type of hundred fold price hike. A news analysis by Hedge Clippers shows that at least 19 other drugs have experienced stunning price hikes of between 300% and 1,200% in the past two years. Rising cost of medicines raises insurance costs, medical bills, and the government expenditure that ultimately impact every one of us.

Why Isn’t a Price Increase from $13.50 to $750 Not Illegal?

People wonder how such gigantic price increase was possible without violating any laws or free of regulations. That’s because for profit U.S. health care industry has limited the government’s regulation over the industry. Unlike most of other developed countries, the U.S. government can neither set a standard fee schedule for medical care nor tightly regulates prices of drugs and medical devices. However, to ensure safe drugs on the market, FDA restricts its approval process and then only allows the approved manufacturers make the drugs.

Shkreli knew how to get around FDA rules. Usually, once the drug is approved, the drug price increases until the drug’s patent expires. After the expiration of the patent, the drug becomes generic drugs and any companies can make the drug leading the price to drop. But the government has placed restrictions on distributing some drugs that are dangerous if abused. Federal regulators approve only if the drugmaker agrees to tightly control their distribution – providing them only for hospital use, for instance.

As an old drug, Daraprim’s patent had expired decades ago. Shkreli’s strategy was to buy old neglected drugs and turn them into high-priced “specialty drugs.” There was hardly any R&D cost because Turing did not invent Daraprim. Turing bought rights to sell Daraprim and secured controlled distribution. Although anybody could conceivably make generic copies since the patent expired, Shkreli effectively foreclosed competition through controlled distribution. His controlled distribution prevented other manufacturers from obtaining sufficient supplies of samples for required testing to make copies. This allowed Turing to practically monopolize the market, discouraging other companies from manufacturing and going through FDA approval process.

His business maneuver of exploiting the loophole of the system legitimized his 5000% price increase without violating any antitrust law.

Government Should Regulate Drug Pricing

Americans seem to believe that the private sector can manage any type of business better than government can. For health care though, the government has an important role to watch for the common good thereby the public do not become the victims of capitalism. While allowing free competitions among insurers, health providers, and pharmaceutical companies, the government should be able to negotiate the cost and enforce cost control measures.  Shkreli’s case shows that a for-profit entity can raise prices of health care without limits. The recent debate over prescription drug pricing and pharmaceutical’s unethical price increase prompt the need for appropriate regulation. Had there been the government’s oversight over the price of prescription drug, Shkreli would not have been able to increase prices in the manner he did.

What we are not exactly aware, but is well known to the rest of the world, is that the U.S. health care is behind in many levels such as coverage, quality, and cost. The U.S. health care system is too complex and too fragmented. There is no price transparency and added administrative costs. We do not have a standard fee for a certain procedure or medicine where everyone pays the same price for the same treatment and same drug. Germany and Japan provide one of the world’s best health care. Their system resembles ours in that it is a multi-payer system where a number of providers compete for services and individuals are insured through private insurers. The difference is that, while private insurers freely compete against each other, the government tightly regulates cost.

The burden of health expenditure is on everyone in one way or the other, as patients, employers, hospitals, insurance companies, Medicaid (the government) and Medicare. Drug companies should continue to compete for business and should be held publicly accountable when prices increase a hundredfold with minimal R&D. To sustain a health care industry that is based on capitalism and motivated by greed, competition and control must coexist. Otherwise, our health care spending will continue to produce millionaires with no ethical principles while sick patients become sicker because they can’t afford the drug any more.