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Shkreli was arrested Wednesday on charges of security fraud. He is accused of taking stock from a biotech company he founded and was later pushed out of, Retrophin, in order to pay off debts from another one of his businesses, a hedge fund that lost more than $7 million in 2011.
But that's not the reason that some have dubbed Shkreli "the most hated man in America." Much of that has to do with how Shkreli took advantage of American drug pricing policy.
The story of Martin Shkreli and Daraprim's giant 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 that sellers of chairs, mugs, shoes, or any other seller of manufactured goods would.
In Europe, Canada, and Australia, governments view the market for cures as essentially
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 that 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 cure for a disease (as Turing does for
"We know these days that modern pharmaceuticals and cancer drugs can cost $100,000 or more," he said. "
The real question at the heart of the Shkreli outrage isn't why one pharmaceutical executive 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"
Drug pricing follows a predictable pattern in most developed countries. In places like Spain, the United Kingdom and the Netherlands, the government
The United Kingdom, for example, runs its bargaining through the National Institute for Clinical Evaluation (NICE). NICE exists
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 Reviews, 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 Daraprim changed the price of its drug to $750 per tablet, large insurance plans might try to haggle with the company, or look for alternative, less expensive treatment options. But Medicare is the country's biggest insurance plan, and it legally cannot try to negotiate down the $750 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 $750 pill. The era of the $1,000 pill is already upon us.
A handful of high-profile, expensive drugs have caused similar outrages to the current Daraprim 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 onto the market in 2012 at the price of $1,000 per pill.
When Sovaldi hit the market, coalitions sprang up to denounce the high price. Congress launched an investigation into the issue in July.
All of 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).
Shkreli repeats a common pharma refrain: higher prices increase innovation
Shortly after the price hike, Shkreli appeared on Bloomberg to offer one of the pharmaceutical industry's most common defenses of high drug prices: Companies have to charge more in order to develop even better drugs.
"This is a tough disease," he said, "and it requires a lot of attention and focus."
It is definitely true that if the United States began to regulate drug prices, then Turing and Gilead and other pharmaceutical companies would earn less money. One paper in the journal Health Affairs estimates that if the United States adopted European-like price controls, drug company revenue would fall by 20.3 percent.
Researchers have estimated that drug companies devote about 20 percent of their revenues to research and development. So it's probably true that Turing, by charging more for Daraprim, will have more money to spend on researching other
But it's also true that Turing doesn't necessarily have to raise its prices to do that. Pharmaceutical companies have some of the highest profit margins in the health-care sector. The World Health Organization estimates that, internationally, they hover around 30 percent. If Turing is similar to other pharmaceutical companies, it's entirely possible that it could earn a
In the American
@IDDocHymes im reading your awfully short list of meaningless work. i have to move on to real science--again, please cease communication
— Martin Shkreli (@MartinShkreli) December 12, 2015
But if you want to be angry about the drug price, Shkreli isn't the most sensible target — he's taking advantage of a system that allows drug makers to name their price. Congress has not taken steps that would allow the government to negotiate drug prices, and created a system where pharmaceutical executives like Shkreli can easily win.
