The Pharm Report: Oligopoly and Drug Pricing

Prices of certain drugs continue to spiral out of control as alternatives are sought.

ol·i·gop·o·ly (äləˈɡäpəlē), noun: a state of limited competition, in which a market is shared by a small number of producers or sellers.

I have been looking at data from the Centers for Medicare & Medicaid Services (CMS) Drug Dashboard. There currently are three drugs that treat blood clots and reduce clotting due to atrial fibrillation, or “afib.” These drugs and their manufacturers include the following:

• Xarelto (Created by Bayer, marketed by Janssen Pharmaceutica)
• Eliquis (Bristol-Myers Squib and Pfizer)
• Pradaxa (Boehringer Ingelheim)

These three companies compete for the same market, but they all agree on one thing. They agree on the price.   

That is because in a situation in which a few providers control the supply of a unique product or products, the rules of a competition break down. While members of an oligopoly compete for market share, they all maximize profit by agreeing to a price to charge people buying the product. Instead of one member grabbing market share by reducing the price, members of an oligopoly realize the way to maximize the profit for all members is to create a uniform highest price, based on what the total market would bear. This is true even though these companies created these drugs in different environments, with different cost structures.  

Let’s look at the average Medicare Part D spending per member for these drugs, per CMS data:

More significant is what these drugs sell for in other countries for a monthly supply.  Let’s just look at Canada:

Where I live, in Florida, our new governor is attempting to allow the state to buy drugs from Canada. Gov. Ron DeSantis is seeking a waiver under the under the federal Medicare Prescription Drug, Improvement, and Modernization Act of 2003. While this might seem straightforward, that states can try this, during the battle over the Patient Protection and Affordable Care Act, drug manufacturers successfully blocked this effort.  Here is the kicker: you can buy these drugs from Canadian pharmacies for less than what Medicare and Medicaid pay the manufacturers. I heard the sound of your jaw hitting the floor. You are bound to ask if I am saying that our federal government and most states are paying drug companies more than what drugs cost wholesale in other countries. The answer is yes.

In the words of Robert Kennedy, “there is a Chinese curse, which says, ‘may he live in interesting times.’ Like it or not, we live in interesting times.” 

Why People Are Mad About Insulin

Meanwhile, the U.S. House of Representatives Oversight and Investigations Subcommittee held a hearing on April 10 titled, “Priced Out of a Lifesaving Drug: Getting Answers on the Rising Cost of Insulin.” This was the second congressional hearing on the rising cost of insulin.

In large part, we see that the pharma industry has what seems to be an upside-down pricing structure. When the industry creates a new life-saving drug (or version of that drug), they raise the price as the demand rises. 

Normal pricing suggests that at some point, as demand rises for a commodity, the price per unit goes down to reflect the fact that the cost to develop the commodity has already been incurred and baked into per-unit pricing (and the cost to produce each unit falls as the manufacturer produces more units). The falling cost per unit becomes the barrier that keeps out competitors.

Based on data from the CMS Pharmacy Dashboard, the number of Medicare Part D beneficiaries using high-priced drugs that treat type 1 and type 2 diabetes grew 13.64 percent from 2014 to 2017 (from 2.7 million to 3.1 million beneficiaries). At the same time, the total spending for these same drugs went up 35.36 percent ($5.3 billion to $8.2 billion). While the dashboard does not have 2018 data, it appears that these trends continued last year.

We heard testimony on Capitol Hill that patients on fixed incomes who need insulin to live are skipping meals and other medications to pay for their increased costs of insulin. During the hearings, Illinois Rep. Jan Schakowsky said that prices of insulin are “curiously close” between manufacturers, and “way too high.” 

When you have an industry comprised of few manufacturers, with barriers to entry, instead of competing against each other by lowering prices, oligopoly pricing takes over. Then, producers collude, either directly or indirectly, by matching each other’s high prices.

Imagine there are only two gas stations in a small town. When the owner of one station sees the other raise its price, they could decide, “if I leave my price low, all the people will fill up at my station, and I will make more money.” 

But in oligopoly pricing, when the owner of one station sees their competitor raise prices, they say, “I can raise my price too because there are only two gas stations in town. I will make more money by raising my price to match my competitor than by having a price war with them.”

Here is the hard edge of the pharma industry that the public struggles with. The pharma industry, in the end, sees drugs as commodities, and they charge as much as they can, without considering the impact on patients. They argue that they have to do this to make a profit, and to continue making life-saving drugs. 

At some point, it is the job of our legislators to stand up for patients. Let’s see if they do.