Mylan Pharmaceuticals’ 461 percent price hike for its EpiPens is the latest controversy facing drug manufacturers. It’s the latest high-profile story about escalating drug costs and is perhaps the most instructive for leaders across the entire healthcare spectrum.
Price hikes by drug companies are not news; what’s getting attention are companies whose pricing strategies appear exploitive. Mylan, the manufacturer of the EpiPen injectable that’s used in emergencies for severe allergic reactions, has successfully fought off its competition. EpiPen price hikes were scheduled every six months like clock-work, increasing 32 percent in the last year, and the company’s CEO, Health Bresch, was awarded $18 million in total compensation last year on top of an earlier one-time windfall of $38 million as a result of the board’s special award.
The presumed price gouging by Mylan, Turing, Valeant and others has deepened America’s dissonance about prescription drugs. We depend on them and believe them safe and effective, but we cringe at their cost and growing numbers sense manufacturers put their profits above all else. Hospitals and insurers have cried foul and it’s drawn the attention of Hillary Clinton in her run for president.
As a health system, Americans spent $419 billion on prescription drugs last year: 11 percent of total health spending, or $858 for every man, woman and child in our population. That’s double the average per capita for the 19 most industrialized nations on the planet. Total spending for drugs was up 12 percent from 2014; this year, forecasts are for another double-digit climb. One in three branded products had 20 percent or higher price hikes last year.
Their manufacturers are quick to say their R&D costs justify these hikes, but the claim is not credible in cases like EpiPen and others. Price hikes occur because they can — it's that simple.
Most Americans have no idea what it costs to produce a drug and what our myriad of insurers negotiate for their portion. We can’t distinguish between large and small molecule compounds and combination therapies nor do we comprehend formulary designs and pharmacy and therapeutics committee deliberations. We don’t know how pharmacy benefits management companies operate nor how business schemes like “pay to delay”, “benevolent use” and “discount cards” actually work in the pharmaceutical manufacturing industry. We suspect drug companies sell the same drugs cheaper in other countries and don’t know why importation isn’t allowed.
What gets our attention is what we pay out of pocket, which is increasingly challenging to consumers with high deductible health plans. We cross our fingers hoping someone else will pay if we’re unlucky and if we need a big ticket drug. But for most of us, drug pricing is clouded from view by insurance payments, negotiations for discounts and other confusing ways we consumers are shielded from drug prices.
Mylan CEO Bresch blamed the company’s price hikes on the health system, not the company’s determination it could charge more to enhance its bottom line. “This isn’t an EpiPen issue, this isn’t a Mylan issue — this is a health care issue,” she stated in a CNBC interview. Her position seems at odds with the reality of the company’s systematic price hikes and executive compensation plans.
There are three important lessons to be learned from the EpiPen story that apply to every organization and company in health care, including not-for-profit hospitals and health systems.
1. Secrets in health care are hard to keep
The Mylan story started last September in Bloomberg’s coverage but the “Stop the EpiPen Price Gouging" petition circulated by a concerned mom and wife, Mellini Kantayya, to 836 of her Facebook friends resulted in 121,000 signatures conveyed to Congress. Mylan became a company of interest to consumers, legislators, regulators and media. There are no secrets in health care. Patients share experiences. Investment analysts read each others' research. Employees describe their organizations' cultures. Congressional staffers listen to company earnings calls. Narcissistic leaders are outed by former employees. And pricing strategies are widely discussed, even if inaccurate. In middle income households, healthcare spending has increased 26 percent since the downturn in 2007, compared to decreases in housing, transportation, fuel and food costs (Brookings). As health costs become even more challenging to individuals and families, dinner table discourse about insurance premiums, drug costs, hospital charges and physician performance will be more frequent. And as employers, insurers, and hospitals face inexplicable price increases for drugs, they’re likely to expose secrets of the system that might be uncomfortable.
2. The buck stops with the board
Boards set the direction for their company. They hire leaders and approve their pay packages. And they sign off on pricing strategies. The balance of profit and social purpose must be on the agenda for every board, and the rationale for pricing strategies transparent to employees, business partners and the public. As the New York Times wrote on Sept. 3, “The outcry over the EpiPen pricing shows Mylan to be the latest example of a company whose board allowed executives to reap bounties from activities that wound up harming other shareholders.”
3. CEOs must be credible in crisis communication
In the drug and biotech industry, CEOs are highly compensated: the 14 biotech and pharmaceutical firm CEOs in the Standard & Poor’s 500 who served all of 2015 were paid median compensation packages valued at $18.5 million, which is 71 percent higher than the median $10.8 million for S&P 500 executives in all industries, according to Equilar. When crisis hits a company, CEOs are thrust into the spotlight. Their temperaments, trustworthiness, character and integrity are judged by their actions and words. With their pay packages as a backdrop, the reputation of the entire company is reflected positively or negatively by their performance during a crisis. Mylan’s Heather Bresch, Turing’s Martin Shkreli and Valeant’s former CEO Michael Pearson are names now associated with companies that failed the test of public confidence in a time of crisis. Every organization in healthcare will face a crisis; how a CEO behaves in those situations is key to the organization’s reputation and survival long-term.
Mylan has been asked to submit details about its pricing strategy to several Congressional committees and CEO Heather Bresch might be asked to testify. Legislative staffers are likely to find the company’s recent 20 percent plus price increases for 24 of its products curious and Bresch’ sale of 100,000 shares of the company’s stock Aug. 9 of interest. Meanwhile, since the EpiPen controversy began, the company’s stock has slipped, down about 20 percent since Aug. 19.
Mylan is a case study worth review by every organization in healthcare. Trust is invaluable in healthcare. It cannot be compromised, and when it is, boards must be attentive and leaders responsive and credible.
Paul H. Keckley, Ph.D., email@example.com, does independent health research and policy analysis and is managing editor of The Keckley Report. He is a member of Health Forum’s Speakers Express; for speaking opportunities, please contact Laura Woodburn. Marina Karp can be reached at firstname.lastname@example.org.