Thursday, August 25, 2016

EpiPen Price Hikes Are a Product of Government Failure, Not Market Failure

The EpiPen price hike story is tailor-made for political outrage. It involves a large for-profit corporation, a life-saving device, triple-digit price hikes, and as usual, poor people and their children are the ones that suffer the most.

For many people, it's a textbook example of market failure that demands government intervention.

In fact, it's a perfect example of government failure, and the best solution will be found in freer markets, not increased regulation.

Before we get to the economics of it, it's worth rehashing the basics of this scandal.

The EpiPen is used to treat life-threatening allergic reactions on the spot. It works by delivering a preset dose of the drug epinephrine. The tool is simple enough that even people who are panicking during an allergic reaction can self-administer the medication they need. It's a great idea, and it's been around since the 1970s. Epinephrine has also been around for some time, and is available in cheap generic forms today.

The problem is that one company, Mylan, owns the rights to the EpiPen device, and it has had a near-monopoly on the market. Thus, depending on where you read it, the price of the EpiPen has increased by 400 or 500 percent since around 2007. Given the critical nature of the device for people with serious allergies, these price hikes have not been too popular.

But this is where economics comes into play. Companies don't raise prices in a vacuum, and precious few could manage a four-fold increase and live to tell about it. If companies are raising prices dramatically and still making money, one of the following must be true:

  1. Their product is perceived to be so much better than the competition that their customers are willing to pay more. (Think Apple vs. PC.)
  2. Their product, and the underlying resources are in very short supply, and all companies in the industry are being forced to raise prices as a result. (For instance, this can happen for building materials after a natural disaster takes place.)
  3. Or more commonly, the company has little to no competition. And the government is keeping the competition out.
This last scenario is what accounts for the EpiPen's meteoric price rise.

In particular, the Food and Drug Administration has to approve any competing product before it can be sold in the US. And getting products approved by the FDA is a notoriously time-consuming and expensive process. As Reason notes, many companies are trying to compete in the epinephrine injection market, and the FDA has blocked most of them.

Meanwhile, the one product that has been approved by the FDA, Adrenaclick, has also been subtly sabotaged as a meaningful substitute. How? The FDA made it illegal for pharmacists to substitute a different version of the epinephrine injector for the EpiPen unless explicitly called for by the prescribing physician.

In other words, there's a reason that Mylan has been able to raise the price of a life-saving technology by 400 percent over the past decade. And that reason is government, not capitalism.

The Story and the Snapshot
The EpiPen is a new story, but in some ways, it's just a new version of the same story. It goes something like this:
The government steps in to regulate the market in order to protect consumers. 
These regulations have unintended consequences, and serve to restrict the amount of competition and supply in the market. 
Prices rise as a result.
Consumers complain about the price increases, and government introduces subsidies or other programs to offset the cost. Invariably, some consumers will fall through the cracks and find themselves without any access to the product they want or need. 
Even if we assume the best, purest intentions of government at every step of the way, the above story is still the likely result. The government starts with a good intention and ends up harming the very people it aimed to help. Of course, if we assume any corruption exists, the result deteriorates further.

It is near the last stage in the process above that these stories go viral, with politicians and everyday people starting to take note. 

And at this stage, all that gets reported is a snapshot--prices are extravagant, consumers are suffering, and usually, some corporation is making a lot of profit off all of it. And in that snapshot, capitalism really does look like it's at fault. Calling for more government intervention is the default response--after all, capitalism failed right?

But when we look beyond the snapshot, we see that capitalism is just the scapegoat for failed government policies. And if government intervention got us here in the first place, it's not likely a new intervention is going to provide the cure.

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