Consumer Confidential With David Lazarus
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Recipe for ripoffs: Pricing drugs by their 'value' to sick people

Heather Bresch, chief executive of pharmaceutical heavyweight Mylan, testified before lawmakers Wednesday that her company acted ethically and fairly when it jacked up the price of life-saving EpiPens by more than 500%.

While saying she was troubled “that the EpiPen product has become a source of controversy,” Bresch told skeptical members of the House Committee on Oversight and Government Reform that “price and access exist in a balance, and we believe we have struck that balance.”

That’s a bold stance considering that each $300 EpiPen contains about a dollar’s worth of epinephrine and Mylan didn’t even invent the plastic injector that delivers the drug. It purchased rights to manufacture and sell EpiPens in 2007 as part of a $6.6-billion acquisition of Merck’s generic-drug operations.

At the time of the merger, people were able to buy EpiPens for about $50 each. Mylan now sells EpiPens in packs of two for more than $600.

It’s easy to assume that greed is solely to blame for runaway drug prices — and companies like Mylan do nothing to challenge that perception.

The reality, however, is more complicated.

When Bresch talked about drug prices and access existing “in a balance,” she was referring to what the pharmaceutical industry calls value-based pricing.

This is what you get when you price a drug not just commensurate with its research and development, production and marketing, but also reflecting the drug’s importance to patients. And that’s a very slippery concept.

What a pharmaceutical company is basically saying with value-based pricing is that a patient’s life would be a whole lot worse without their drug, so that should be worth something, right? Maybe a big something.

“There are a lot of moral and ethical issues that come up when you talk about value-based pricing of drugs,” said Robert L. Stein, a professor of pharmacy law and ethics at Claremont’s Keck Graduate Institute.

“Most other consumer products are discretionary or there are alternative sources,” he said. “When you talk about pharmaceuticals, especially newer pharmaceuticals, there aren’t a lot of options.”

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The poster child in this regard is Gilead’s hepatitis C drug Sovaldi, which carried a list price of about $1,000 a pill when it was introduced in 2014. A second-generation version of the drug, Harvoni, cost more than $1,100 a pill. The latest version, Epclusa, sells for closer to $900 a pill.

These are astonishing numbers. But Gilead’s drugs effectively cure patients of hepatitis C, so who’s to say they’re not worth every penny? More than 3 million Americans are estimated to have hepatitis C.

“We believe the price of Harvoni reflects the value of the medicine,” Gilead said in a 2014 statement defending its pricing. “Unlike long-term or indefinite treatments for other chronic diseases, Harvoni offers a cure at a price that will significantly reduce hepatitis C treatment costs now and deliver significant health care savings to the health care system over the long term.”

That’s one way of looking at it. Another is that Gilead justifies its crazy-high prices by arguing that because it would be more expensive to treat hepatitis on an ongoing basis, they can charge whatever they please as long as it’s less than that amount.

This is a problem.

“Value is one thing, but another consideration is whether society can afford that value,” said Gerard Anderson, a professor of health policy and management at Johns Hopkins University. “If you charge more than people can afford, people die.”

He compared lifesaving prescription meds to water.

“If a water company charged the value of water, they could charge whatever they like, an infinite amount,” Anderson said. “We couldn’t exist without water. That’s why we don’t allow the water company to charge the value of water.”

It’s a tricky business. There’s almost no limit to the value of a drug to someone who’s sick. So with value-based pricing, the door is wide open to abusing patients.

At the same time, we’re all better off if drug companies are financially motivated to do the costly research and development necessary to innovate and come up with new cures and treatments.

Stein at the Keck Graduate Institute said the only way to deal with the problem might be to approach every drug on a case-by-case basis, rather than imposing price caps across the entire industry.

“When is a drug price unconscionable?” he said. “It’s like Supreme Court Justice Potter Stewart said about pornography: You know it when you see it.”

Jason Doctor, director of health informatics at USC’s Schaeffer Center for Health Policy and Economics, said Mylan’s Bresch crossed that line when she raised the price of EpiPens more than a dozen times since 2008.

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“She operated from an oversimplified model that did not account for the value people place on protecting children from harm,” he said. “This is a treasured societal norm.  When the price she set for EpiPens violated that norm, people got angry, even though the price was legal.”

Bresch made nearly $19 million last year. She told lawmakers that this was “in the middle” of what drug-industry CEOs make.

On the other hand, most other top-tier pharmaceutical CEOs haven’t been subjected to sitting before lawmakers as their company is pilloried for being "sickening," "disgusting" and showing "blatant disrespect" for the needs of families.

Bresch seems decidedly overvalued.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to david.lazarus@latimes.com.

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