By Carl Gaul
If you have a life-threatening illness or condition you or your family will pay whatever they have to for your medicine and drug companies know this. Recently, pharmaceutical company Mylan increased the cost of EpiPen by 400 percent.[1] This is the latest in a series of pharmaceutical price hikes that have left people dependent on lifesaving drugs scrambling to maintain their wellbeing (or life). This trend includes Turing Pharmaceuticals increasing the price of the drug Daraprim 5,456 percent from $13.50 per pill to $750 per pill[2] and Valeant Pharmaceuticals increasing the price of lead poisoning treatment medication by 7,200 percent over the past six years.[3] In other areas of the economy this behavior is called price gouging and is illegal under the Sherman Act § 2.[4] So how does this happen? How is this legal?
US intellectual property law allows drug manufacturers the privilege of monopoly power over the product for twenty years after a new drug has been patented.[5] As soon as the patent application for a new pharmaceutical is filed, the filing entity is allowed the right to exclude others from making, selling, using, or distributing the drug for twenty years.[6] The economic implications of this policy are staggering. Allowing a monopoly on any product prevents competitors from entering the market for the drug. Without competitors, the sky is the limit for prices.
IP granted monopoly power does not present a significant problem for consumers and the economy in regards to most patented products. This is because most products are not a necessity for survival; when most products become too expensive, consumers simply stop buying them or turn to a substitute. In economic (and antitrust law) terms, this is known as “elasticity of demand.”[7] A product with highly elastic demand will see a drop in quantity demanded when the price is raised while a product with inelastic demand will see no, or a small, drop in quantity demanded when the price is increased.[8]
In every other area of the economy antitrust law prohibits price gouging.[9] Specifically, the Sherman Act § 2 prohibits the exercise of monopoly power to increase prices in an anticompetitive manner.[10] Patent law is exempt from this prohibition for a clear, well-intended reason; maintaining incentives for inventors to create new products.[11] Inventors should be rewarded for developing new products which improve people’s lives and, in general, this policy has had overwhelmingly positive results. However, this policy creates perverse incentives in the pharmaceuticals industry.
These perverse incentives are the result of highly inelastic demand for pharmaceuticals.[12] Simply put, this means that consumers will pay whatever they need to pay to keep themselves or their loved ones alive. Inelastic demand is not a serious problem in the context of most other products because when prices spike, consumers are free to simply not purchase the product. But, because in many cases pharmaceutical products are essential for life, demand is highly inelastic and consumers will pay whatever they must. Drug companies like Turing Pharmaceuticals are free to price gouge their customers by effectively saying, “Pay $750 per pill or take your chances without your AIDS or malaria treatment.”
However, on November 9th, California voters turned down the California Drug Price Relief Act, Proposition 61, which would have placed a price ceiling on prescription drugs.[13] The price ceiling would have been determined by requiring drug prices to remain equal to or below the amount paid by the U.S. Department of Veterans Affairs for all consumers, not just veterans. While well intended, experts stated that the effects of a government enforced price ceilings have had significant and far reaching ramifications in the past and likely would have had unintended negative consequences for consumers.[15]
As demand for a legislative solution grows, Congress has held extensive hearings about these events,[16] but has yet to bring a substantive policy proposal which would resolve the issue. Further, existing legislation has proven insufficient to prevent pharmaceutical price gouging.[17] Only Sen. Bernie Sanders (I-VT) and Rep. Elijah Cummings have come forward calling on the Department of Justice for an investigation into the increasing costs of insulin medication as a price fixing scheme between drug companies;[18] an antitrust violation under the Sherman Act § 1.[19] This may very well be the first small step towards amending antitrust law to check the profit incentives of pharmaceutical companies, but is not enough to bring a halt to pharmaceutical price gouging.
A modernized interpretation of the Sherman Act and IP law to address the issues faced by consumers is likely the best possible solution. The patent law exemption from antitrust liability may be revoked without destroying the positive, welfare building incentives to invent new products. A policy which both maintains the right of pharmaceutical companies to hold their patents and provides private individuals standing to seek judicial relief from pharmaceutical price-gouging may resolve the problem. Such a policy would function by looking to the elasticity of demand for a given product and the proportionate price increase. If a product market is associated with inelastic demand, significant price increases over a short period would have to be justified in economic terms. Without a justification for price increases other than maximizing profits at the expense of vulnerable Americans, a price increase should be condemned as illegal price gouging. Such a policy would prohibit price gouges seen recently without preventing inventors from profiting and avoid placing a new regulatory burden on the economy.
[1] Emily Willingham, Why Did Mylan Hike EpiPen Prices 400%? Because They Could, Forbes (Aug. 21, 2016) (last visited Nov. 1, 2016) https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/emilywillingham/2016/08/21/why-did-mylan-hike-epipen-prices-400-because-they-could/.
[2] Heather Long, Here’s What Happened to AIDS Drug That Spiked 5,000%, CNN Money (Aug. 25, 2016) (last visited Nov. 2, 2016) https://money.cnn.com/2016/08/25/news/economy/daraprim-aids-drug-high-price/.
[3] Kristian Foden-Vencil, Price of Drug Used to Treat Lead Poisoning Increased 27-Fold, Jefferson Public Radio (Oct. 18, 2016) (last visited Nov. 4, 2016) https://ijpr.org/post/price-drug-used-treat-lead-poisoning-increased-27-fold#stream/0.
[4] 15 U.S.C. 2.
[5] 35 U.S.C. 154(2).
[6] Id.
[7] Christopher L. Sagers, Antitrust Law: Examples and Explanations, 39-40 (Second Edition) (Wolters & Kluwer) (2014).
[8] Id.
[9] Simpson v. Union Oil Co. of California, 377 U.S. 13, 24 (1964) (holding that “the patent laws which give a seventeen-year monopoly on ‘making, using, or selling the invention’ are in pari materia with the antitrust law and modify them pro tanto”); Unitherm Food Sys. v. Swift-Eckrid, 375 F.3d 1341, 1356 (Fed. Cir. 2004), reversed on other grounds 546 U.S. 394 (2006) (“as a general rule, behavior conforming to the patent laws oriented towards procuring or enforcing a patent enjoys immunity from antitrust laws.”).
[10] 15 U.S.C. 2.
[11] Christopher L. Sagers, Antitrust Law: Examples and Explanations, 235 (Second Edition) (Wolters & Kluwer) (2014).
[12] A. Gordon Smith, Price Gouging and the Dangerous New Breed of Pharma Companies, Harvard Business Review (July 6, 2016) (last visited Nov. 5, 2016) https://hbr.org/2016/07/price-gouging-and-the-dangerous-new-breed-of-pharma-companies.
[13] Deena Beasley, California Voters Turn Down Drug Pricing Initiative, The LA Times (Nov. 9, 2016) (last visited Nov. 11, 2016), https://www.reuters.com/article/us-usa-electiopharmaceuticals-idUSKBN134120.
[14] 2016 Cal. Legis. Serv. Prop. 61 (Proposition 61), Drug Price Relief Act.
[15] No Prop 61, (last visited, Nov. 13, 2016).
[16] See e.g. 114th Cong. 2nd Session, Vol. 162 No. 11 (expressing general disapproval for the actions of Turing Pharmaceuticals then CEO Martin Shkreli, but taking no action to prevent similar behavior in the future).
[17] See e.g. Drug Price Competition and Patent Term Restoration Act of 1984, 21 U.S.C. 301 (incentivizing companies to create price-competitive generic drugs, but only once the patent period is near its end).
[18] Carolyn Y. Johnson, Bernie Sanders Wants the Feds to Investigate These Drug Companies for Possible Price Collusion, The Washington Post (Nov. 3, 2016) (last visited Nov. 7, 2016), https://www.washingtonpost.com/news/wonk/wp/2016/11/03/bernie-sanders-wants-the-feds-to-investigate-these-drug-companies-for-possible-price-collusion/.
[19] 15 U.S.C. 1.
