The headline in a New York Times article on Heather Bresch, the CEO of drugmaker Mylan Inc., reads: "Painted as EpiPen Villain, Mylan's Chief Says She's No Such Thing."
EpiPen is an auto-injector for a drug called epinephrine for potentially fatal allergic emergencies. It is reported that since 2007, when Mylan bought the rights to the product, Mylan had increased the price of this drug from $100 for a two-pack of injectors to $614 per two-pack.
So, does this price hike make CEO Bresch a villain?
Different Flavors Of Capitalism
As usual, the answer is a clear "No" and "Yes," and resolving the question raises much deeper issues than one executive's personal culpability. The answer depends on what definition of capitalism one deems appropriate. As the European economist André Sapir has noted, there are actually four distinct brands of capitalism in the Western economy, of which the version practiced in the United States and some other Anglo-Saxon countries—sometimes also referred to as "savage capitalism"—is but one.
The clearest version of raw Anglo Saxon capitalism, and one quoted widely to this day, was offered by the late Nobel Laureate economist Milton Friedman in his classic book "Capitalism and Freedom." There he proposed that the one and only social obligation to society that the CEO of an investor-owned, for-profit company is "to maximize its profits while engaging in 'open and free competition without deception and fraud.'" (Quoted in Thomas Carson's "Friedman's Theory of Corporate Social Responsibility.") On that view, any corporate action that is legal is ipso facto ethical.
Ms. Bresch can argue that with her aggressive pricing policy on EpiPen she was merely owning up to this doctrine of Anglo-Saxon capitalism. Her board of directors may or may not have known about that policy with regard to this particular product, one of many the company sells. Here Ms. Bresch also can point out that she is in good company in the drug industry. Many drug companies beyond the poster-boys for what is now decried as "price gouging"—Valeant Pharmaceuticals International and Turing Pharmaceuticals—have adopted raw Anglo-Saxon capitalism as the intellectual foundation for their pricing policies by steadily raising prices on long existing drugs, year after year, or even quarter after quarter.
An Expanded View Of Corporate Responsibility, Even From Friedman
But even Friedman eventually came to realize that his earlier definition of capitalism was too narrow and harsh. He subsequently broadened it by stating that "business executives are obligated to follow the wishes of shareholders (which will generally be to make as much money as possible) while obeying the laws and the 'ethical customs' of the society." With the sketch below, I explain that expanded conception of corporate responsibility to my first-year students in economics, many of whom eventually will be CEOs of for-profit business firms.
It is generally accepted in this country that the overarching objective of CEOs of investor-owned, for profit companies is to extract from the rest of society as much money as they can and to channel the highest fraction of that cash flow, after expenses, to the firm's owners, now usually including management itself. In the pursuit of that overarching goal, the CEOs is constrained by
- product-market constraints, that is, how much volume of a product the market will absorb at different prices;
- input constraints, that is, how much minimally must be paid to employees and for other inputs into production (energy, raw materials, etc.);
- technical constraints and costs of producing the product in question; and
- legal constraints—restrictions on pollution, prohibitions of sexual harassment, honesty in advertising requirements, and so on.
The final constraint, not explicitly stated anywhere, is what Friedman called the ethical customs of society. This constraint is anchored in the sense among the public of what is deemed as "decent" corporate conduct. The idea is that perfectly legal corporate conduct may still be judged indecent by the rest of society.
Fleshing Out "Ethical Customs"
It is part of good corporate management to have a good sense what these ethical customs of society are with regard to the products the corporation sells. Failure to appreciate this ethical constraint may impair not only the corporation's image, but that of the firm's entire industry, if not of capitalism itself.
If Mylan can be faulted, it is on misjudging what ethical customs American society wishes to impose on for-profit business firms serving the health care industry. The current uproar over the company's pricing policies, along with earlier outrages over Turing's and Valeant's pricing policies, suggests at least that the public does not approve of the raw version of Anglo Saxon capitalism (Friedman's first version of it, without reference to ethical customs) in health care. In this instance, the public seems to look askance at the practice of shoveling money willy nilly out of the savings accounts and incomes of anxious parents caring for a child with potentially lethal allergies in order to enrich shareholders and company executives.
Low-Income Discounts: A Solution, Or PR And Profit Maximization?
Firms that engage in these pricing policies always hasten to announce that they offer special discounts to low-income families. It has a mellow ring to it. It even sounds charitable. But for at least two reasons, I remain suspicious of it as a reliable societal approach to respond to the plight of low-income families.
Discounts Programs Are Often Inadequate
First, are the firms held publicly accountable for the fraction of low-income families (however defined) they actually serve with these programs? If a firm provides this relief only to some very low-income people, its CEO can still boast in general terms about the firm's discount program as a form of charity. Few journalists would probe more deeply into that response. The fact that by CEO Bresch's own admission Mylan is only now broadening and deepening the program of price discounts on its EpiPen suggests that previously the program had been inadequate.
Discounts Can Simply Be A Way Of Maximizing Profits
Second, what may look like charity actually may be only good old-fashion price discrimination, familiar to any first-year student of economics. Reducing the price of a product from, say, $600 to $300, via a discount coupon or card may be just a normal way to expand sales volume. For example, if a firm reduces the price of a product for some low-income customers from $600 to $300 when producing that product costs the firm only, say, $10 in truly incremental costs (costs for added sales it would not have in the absence of that volume increase), the firm would still earn a profit of $290 on sales it might otherwise not have had. That is not charity. It is pure profit maximization. (A similar analysis could be done regarding Mylan's decision to introduce a lower-priced generic version of the EpiPen.)
A Window Into Mylan's Thinking
It is worth listening to a lengthy (18 minute) interview by Brian Sullivan of CNBC with Ms. Bresch, to learn of her side of the story. For a TV personality, Mr. Sullivan was refreshingly probing in that interview.
Ms. Bresch claims that of a list price of $608, Mylan receives only $274 dollars per 2-pack of EpiPen, or 45 percent of the list price. She asserts that the rest, $334 or 55 percent, goes to pharmacy benefit managers, insurers, wholesalers, and pharmacy retailers, each of whom nourishes itself on the process of bringing drugs to market. Ms. Bresch claims that this distribution system is inefficient and that "Congress and other leaders of this country need to quit putting their toe in this topic and really fix this system." What exactly does she have in mind? Would she have government regulate the entire supply chain of drugs? If so, why should not government regulate her prices as well?
Many of Mylan's the efforts Ms. Bresch mentions in the interview to make people more aware of EpiPen strike me as merely old fashioned marketing, designed to broaden the market for this product, as Mr. Sullivan is quick to point out in the interview.
One may have to listen to the interview more than once. I personally found the logic of some of Ms. Bresch's answers taxing my cerebrum, as evidently it taxed Mr. Sullivan's as well. Ms. Bresch appears to think that when Mylan raises its price of a drug, it is not Mylan but health insurance companies, pharmaceutical benefit companies, drug wholesalers, and drug retailers who are to blame by raising the price patients have to pay for that drug, either at the pharmacy counter or more generally through insurance premiums.
Furthermore, Ms. Bresch seems unaware that her profits on EpiPen depend substantially on government policies to protect her economic turf, through patents and possibly FDA granted market exclusivities. When government grants a firm that powerful protection of turf, the public through its legislative representatives has the right to question the firm's pricing policies.
One revealing Freudian slip in the interview is suggestive of the way laws are passed under our system of governance. On several occasions, Ms. Bresch notes that "…we [presumably Mylan] are now passing legislation" or "… I am legislating in the access to EpiPens…" It corroborates the widespread notion, much discussed during the primary phase of the current presidential election, that many of our federal and state laws seem to be written by special interest groups and passed for their benefit through the good offices of kindly disposed legislators, presumably in return for cash-laced lobbying.
from Health Affairs BlogHealth Affairs Blog http://ift.tt/2bVJWwg
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