Healthcare tipping point? The impact of the EpiPen pricing controversy

Healthcare tipping point? The impact of the EpiPen pricing controversy

Most people, especially parents of school-age children, are familiar with the EpiPen, the auto-injection device used to guard against deadly allergic reactions. It’s hefty, kind of like a road flare, and when carrying one, parents of children with allergies (or the friends of parents whose children have allergies) feel secure. You’re armed with a defence against tragedy.

So, it wasn’t surprising to see the level of public outrage over the news of Mylan Pharmaceuticals’ most recent price increase for the EpiPen, which hit just over $600. Since purchasing the product from Merck KGAA in 2007, Mylan has steadily increased the price it charges for the EpiPen. The data below from The New York Times tracks these changes from 2006 to the latest increase.Graph illustrating the wholesale price for a two-pen set change from 2004 to 2016.Blame the supply chain?

Probably for the first time since the Heparin adulteration crisis of 2008, the pharmaceutical supply chain is being analysed by national media. This stems from the comments Mylan’s CEO, Heather Bresch, made in response to the outrage: “I laid out that there are four or five hands that the product touches and companies that it goes through before it ever gets to that patient at the counter… Our health care is in a crisis. It’s no different than the mortgage financial crisis back in 2007. This bubble is going to burst.”

She specifically calls out supply chain complexity (or value chain, to be more accurate) as one of the main culprits in the healthcare crisis facing the US. SCM World detailed this complexity in our report on the end-to-end healthcare value chain. There is truth in what Bresch says, but it isn’t a simple matter of too many middlemen upping the cost across the chain.

The physical flow of the product is really quite simple; the EpiPen flows through full-line distributors with extensive enough networks to meet very short lead times anywhere in the US. There’s nothing exceedingly complex about this setup, nor is it that unique compared to other industry supply chains.

There is massive complexity, however, in the financial transactions involving these products and the intermediaries that don’t in fact touch the physical product at all. Payers (or health plans) are one example of these intermediaries, as are pharmacy benefits managers – organisations that ultimately act as administrative liaisons between pharmacies, payers and manufacturers. The graph below highlights the complexity in the financial flow.

Infographic illustrating the end-to-end US healthcare value chain map.

This is the messy reality of the economics at the heart of US healthcare: the patient pays out-of-pocket-expenses in the form of co-pays, co-insurance, deductibles and insurance premiums; purely administrative intermediaries exchange information that connects product selection with patient drug benefits and pricing; and all parties exchange reimbursement and payment information in the form of rebates, chargebacks and other financial vehicles. The net result ensures a high list price for products and services that no one individual or entity pays, but acts as a charge to the system overall. Hence, why the ratio of health spend to GDP in the US is so high.

What Mylan did here (which many other healthcare and life sciences players do as well) is artificially inflate the price of a product, which allows the financial and administrative intermediaries to compete against each other for the largest rebate against the inflated price. This is one of the reasons that Bresch compares the mortgage crisis of 2007 to our current crisis in healthcare.

However, the outrage arose since more and more people use high-deductible health plans and now directly feel the financial pain of inflated drug prices. The consumer pays the cost of the product in the form of the deductible and the payer managing his or her health plan pockets the rebate from the manufacturer.

There’s not much to be proud of with a system so ineptly designed.

Supply chain to the rescue?

The truth is that the price of the product is completely divorced from the supply chain the product flows through. Today, supply chain leaders at pharma companies have little influence, if any, on the financial gimmickry played out in the system overall. And their commercial colleagues are not about to hand over accountability for it to them, either.

However, the consumer revolt against this system may raise the importance of supply chain as deliverers of real value – what the consumer wants, and how they want it. Let’s hope so.

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Author Barry Blake

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