Roosevelt Institute | Cornell University

The US's Role in Prescription Drug Pricing

By Alexander GomezPublished September 21, 2015

Turing Pharmaceuticals recently increased the price of the drug Daraprim from $13.50 to $750 dollars a pill. The increase in the price of the drug, which is used to treat toxoplasmosis, has spurred outrage among the public. Citizens and elected officials alike are questioning the firm's actions, but without more robust public policy to prevent price spikes, patients are at the mercy of the market.

In the course of a week, a former hedge fund manager has become the Internet's Public Enemy #1. Martin Shkreli, the founder and Chief Executive of Turing Pharmaceuticals, has made headlines for his company's controversial "price gouging," of their recently acquired drug, Daraprim. The drug is used to treat toxoplasmosis, an infection that can be especially dangerous to vulnerable persons, such as AIDS patients. Seemingly overnight, a single tablet rose from $13.50 to $750. Critics have begun to pour in and condemn the company's actions, including democratic presidential nominee Hilary Clinton.

But is this company's action an isolated incident? Increasing prices to improve margins is a trend that's spreading amongst large pharmaceutical companies. In fact, as the controversy surrounding Shkreli and Turing Pharmaceuticals unfolds, a case against Cycloserine and Rodelis Therapeutics is coming to a close. Cycloserine, used to treat multi-drug resistant tuberculosis, was acquired from a nonprofit organization affiliated with Purdue University. After the acquisition, Rodelis preceded to increase the price of 30 capsules of Cycloserine from $500 to $10,800. Once the strategy was uncovered, political pressure ensued and the drug was returned to the previous organization. Both companies explained the increase in pricing with a need for reinvestment in the company. Rodelis claimed that it needed the revenue to stabilize the supply of the drug and Turing claimed that it would use the additional revenue for research and development and educational programming. But the public is not satisfied with this explanation.

In addition to Clinton, other politicians, such as democratic presidential nominee Bernie Sanders have demanded a more thorough explanation for the price spike while stating that the change is both unreasonable and unacceptable. With this political pressure in mind, the United States' role in regulating the pharmaceutical industry becomes increasingly relevant. While the government and other large medical providers use their bargaining power to help reduce drug cost (through Medicare/Medicaid, hospital pharmacies, etc.), there is no policy system in place to ensure that prescription drugs remain affordable for everyone that needs them. In other countries with National Health Insurance systems, such as Germany, the government has enough power to set "reference prices," which limit the amount of money that "sickness funds" can use towards certain drugs, and in doing so prevents prices from increasing beyond reason. But Americans' reliance on the private market for pharmaceuticals leaves them at the mercy of demand elasticity.

Does this mean that the government should increase its intervention? Many of these companies are being run with only profits and increasing returns for their stakeholders in mind, perpetually increasing competition. It's through this competitiveness of the market that innovation arises. To stay at the top, companies need to pour money into research and development, as both companies stated. If regulation is increased, will this stunt pharmaceutical progress? There is no clear answer and personal ideology currently divides public opinion. However, if price changes implemented by the likes of Turing and Rodelis can create this much controversy, there will certainly be support for a grassroots' effort to put Big Pharma in its place and protect social welfare. In fact, in the wake of this controversy, multiples groups, including doctors and other healthcare providers, are beginning to demand change. This brings on an all too frequent question: will public opinion be enough to overturn private interest?  Unfortunately, only time can tell.