Behind Recent Drug Price Gouging, a Bad CEO and an Even Worse Legal System

It’s been a rough week for bad executives. Volkwagen’s CEO, Martin Winterkorn, resigned after investigators discovered that the carmaker had installed software that allowed its vehicles to pass emissions tests, while during normal operation they spewed out pollutants far beyond legal limits. Another executive received a 28-year prison sentence for deliberately shipping tainted peanut butter that killed nine people—the longest sentence ever handed down in a food-safety case. And Martin Shkreli became the “most hated man in America” after his company, Turing Pharmaceuticals, raised the price for a lifesaving anti-parasitic drug, Daraprim, from $18 to $750 a pill. The condition Daraprim treats affects mostly people living with AIDS. He quickly reversed the decision in the face of enormous popular backlash.
Mr. Shkreli is almost comically unlikeable. An ex-hedge fund manager with a history of unethical business practices, he is currently under investigation for “such a vast number of suspected crimes it is difficult to know where to start.” He has been accused of failing to pay two of his employees and of harassing another’s family through social media. He was fired from the board of one pharmaceutical company after being accused “of using the company as his personal piggy bank.” When questioned about his motives for the price jump, he called a reporter a “moron” and, bizarrely, claimed the price increase was altruistic since the company could reinvest profits in research and development for neglected diseases (his previous business decisions make this claim especially dubious).
It is easy to vilify the individual, particularly someone as ripe for vilification as Mr. Shkreli. The more important lesson, however, is the nonsensical legal environment that allows access to lifesaving drugs to be determined by the whims of an unscrupulous CEO.
Medicines aren’t like most other goods. Life and health are fundamental human rights and prerequisites to all other forms of human activity. Consumers tend to value their lives and health above all else and will generally pay whatever it takes to get access to a lifesaving or dramatically life improving drug. With a product that is so essential, consumers are particularly vulnerable to exploitation. Leaving drug pricing at the mercy of market forces, as U.S. law largely does, is inadequate.
There are only a few significant barriers to a company wishing to set an exorbitant price. One is competitive forces. However, where the drug is under patent or the disease affects too few people to attract multiple manufacturers (as is the case with Daraprim) competition is insufficient to the task.
Maintaining good public relations is another important barrier—it played a central role in the dramatic price reductions for antiretroviral treatment for HIV in developing countries. However, it too is insufficient. There are numerous examples of drugs that increased hugely in price without significant public notice. (These include drugs to treat several life-threatening conditions, such as multidrug-resistant tuberculosis, various heart conditions, and bacterial infections.)
The final barrier is what individuals and insurance companies are able or willing to pay for a drug. For individuals, with virtually no bargaining power, this price for a lifesaving drug will tend to be as much money as they have (most people value life over any amount of wealth). Insurance companies have a bit more bargaining power since they buy in bulk. However, for single-manufacturer drugs, insurance companies, like individuals, are in a weak bargaining position.
Legal protections against exorbitant drug prices are virtually non-existent. In fact, the law is skewed in the other direction. Unlike nearly every other country in the world, the United States government is explicitly prohibited from negotiating down drug prices for the tens of millions of patients enrolled in Medicare. An antiquated regulatory process often prevents U.S. consumers from importing cheaper drugs from Canada or other countries, regardless of the strength of their regulatory systems.
Defenders of the current legal system point to the high price as the cost of incentivizing biomedical research and development—and there is a kernel of truth to this argument. An economic incentive is needed to encourage investment and to reward innovation. However, this need not come out of patients’ pockets. There have been a number of proposals for “de-linking” the price a patient pays from the cost of research and development, such as publically financed “prize funds” and global coordination through a biomedical research and development treaty. A number of presidential candidates have weighed in, calling for more rational drug pricing—although their proposals vary widely.
Hundreds of years of capitalism has taught us that there will always be executives who place self-interest and profit margins above the public good. The only thing standing between us and them is a legal system that reflects our belief that life and health are more important values than corporate profit. In the midst of the shaming of Mr. Shkreli, let’s be sure to save some opprobrium for the legal system that allowed him to thrive.