In search of real answers to the EpiPen controversy

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Sep 1, 2016

Epinephrine shot

Since the controversy surrounding the EpiPen price hike first hit the news a week ago, the public outrage and criticism of Mylan Pharmaceuticals, the manufacturer, and the rest of the healthcare industry has only intensified. EpiPen is a single-use, automated injection pen that delivers life-saving medication, epinephrine, to people suffering from anaphylaxis (a rapid onset of a sometimes fatal allergic reaction caused by insect bites, foods, and medications). Epinephrine is widely available, and the low-cost drug of choice for treating anaphylaxis, but many users choose to have it delivered via EpiPen, which easily delivers the drug with a single stabbing action by the user. Over the past decade, Mylan has steadily raised Epipen’s price—17 times to be exact—from just over $100 for a pack of two to more than $600.

According to data from IMS Health, a healthcare data analytics firm, more than 3.6 million prescriptions were written for EpiPen in 2015, contributing more than $1 billion, or 11% of revenues, for Mylan. The media, politicians and healthcare analysts have all blamed lack of drug pricing regulation, difficult FDA approval processes for new products, a rise in high-deductible insurance (HDI) plans, and even the patent laws for this problem.

Despite the growing concerns, drug prices continue to rise. The new drug discovery process has become more expensive, leading to less competition and more aggressive profit-taking by drug companies. The chronic disease population and types of diseases have increased, pushing the demand upward. Pharmacy benefit managers (PBM) who manage individuals’ prescription drug benefits, such as CVS and Express Scripts, are also trying to be more profitable, adding pressure to pricing. In the current landscape, where cancer drugs that cost more than $100,000 only work for less than 20% of patients, charging even $600 for two EpiPens that save lives could be seen as a huge discount and a “public service.”

Approaching the drug price inflation from a new angle

So far, little has been done to reverse the trend of rising drug prices, although a number of proposals calling for new legislation, greater regulation, and revisions to the FDA and reimbursement processes have been given. Unfortunately, these solutions are extremely difficult to implement and not very effective. A new drug pricing regulation, for example, could result in other unwanted side effects, including companies cutting key research and development budgets. Loosening the FDA approval processes would only increase the liability of sub-standard products reaching consumers. HDI plans are here to stay, and revising the current patent laws would hurt innovations more than help them.

Instead of tackling the problem head on by changing some of the existing rules, innovators need to find alternatives to EpiPen based on different business models—ways in which accessibility and affordability of life-saving drugs can be achieved in the current environment. Mylan’s business model is offering an easy-to-use and effective product at a premium price. A new model, however, might compromise ease of use and require more training, but be much less expensive. Although this shift would initially be seen as an inconvenience, over time it could positively disrupt not only EpiPen’s pricing, but also management of severe allergies.

The price escalation phenomenon in healthcare is a clear sign that the industry is ripe for disruptive innovations. As explained by Clayton Christensen, co-founder of the Christensen Institute and architect of disruptive innovation theory, when an established product becomes too expensive for a large number of consumers, a disruptive innovation emerges to address the unmet demand. Initially the new product might not be as good as the established one, but it is good enough and affordably priced for many consumers. Over time, the new product improves, eventually replacing the more expensive incumbent.

In the pharmaceutical industry, this disruptive process is typically triggered by expiration of patents, allowing for generic alternatives to emerge and reduce pricing by 90-95%. In the case of EpiPen, however, the patents on the drug have expired, but the patents on the injector remain valid. This has delayed competitors from bringing generic alternatives to market, allowing Mylan to continue raising prices. Interestingly, in an unusual move, Mylan has used the current controversy as an opportunity to introduce its own generic alternative, the exact same device used for EpiPen without the branding, priced at a 50% discount, but still twice as much as EpiPen’s pricing in 2007. Some view this as Mylan’s strategy to prevent pricing erosion when generics are launched. With Mylan’s generic version priced at $300, others generics will be tempted to follow the established price.

Fortunately, several effective and low-cost alternatives to EpiPen already exist, but consumer adoption has been low on these options primarily due to inconvenience. A generic auto-injector, Adrenaclick, is already available in the market for less than 30% of the price of EpiPen. However, physicians are so thoroughly trained to prescribe EpiPen that they need to be reminded to prescribe Adrenaclick. To that end, a business model that focuses on educating consumers to ask their doctors for an Adrenaclick prescription could be effective at increasing affordability and accessibility.

A more process-involved alternative is training patients to use a syringe to inject epinephrine. While this costs around $10 per shot—less than 3% of the price of an EpiPen—the injection needs to be done by someone who’s been trained, and epinephrine needs to be stored in the dark. But, being trained on how to give a shot is not an impossible hurdle for most patients and their caregivers. Millions of diabetes patients, for example, self-inject insulin multiple times a day. A prefilled syringe can make the process even simpler.

Other disruptive long-term alternatives are also possible, such as combining care providers and insurance operations to form an integrated fixed fee service where all care needs, including much of the costs of EpiPen, would be covered by a fixed fee, per year, per patient. Tweaking the rules on insurance deductibles to make sure patients are fully covered for access to life-saving treatment is another way to reduce financial burden on patients with chronic illnesses. However, for these models to work, the service providers and insurance companies need to be willing to manage risk rather than just charge their members based on a grid put together by population health statistics—the current norm in insurance pricing.

While expressing outrage and voicing concerns help raise awareness of troubling trends in healthcare, they are not sufficient to bring about effective changes. Watching commercial insurance companies flee the ACA Exchanges, we should be reminded that legislation and regulation can only do so much to protect consumers from unfriendly forces of the market. However, innovations, particularly the disruptive kind, are the ones that can restore healthcare to focus on patients’ needs, since they prioritize affordability and accessibility. The easiest way to manage corporate greed is not through more legislation, but through more disruptive innovations.

Spencer Nam

Spencer researches disruptive innovation in the healthcare industry. He has over 15 years of professional experience working with U.S. and international healthcare enterprises, most recently as an equity research analyst covering medical technology companies.