When reining in price-gouging drug companies, utilities offer a model

When news spread this summer of big price increases for EpiPens, the devices used to inject epinephrine to stop an allergic reaction, public disbelief and outcry followed. The price for the potentially life-saving medication had risen nearly 10-fold in less than a decade.

An even more egregious situation last year — a 5,000 percent price increase over just two months for Daraprim, an antimalarial drug sold by Turing Pharmaceuticals that also is used to treat the parasitic disease toxoplasmosis — prompted calls for changes to drug pricing rules in the U.S.

In response, Sens. Susan Collins of Maine and Claire McCaskill, a Missouri Democrat, led a yearlong, Senate Aging Committee investigation into prescription drug price spikes. In a report released last week the senators identify a hedge fund-like mentality for pricing drugs as a major contributor to the problem. The CEO of Turing Pharmaceuticals, Martin Shkreli, illustrated their point, bragging about his investment smarts and saying drug prices should be even higher.

The panel led by Collins and McCaskill reviewed four drug companies that raised prices between 310 percent and 5,785 percent. The report found five common factors that contributed to the price spikes.

First, a new type of company, often run by former hedge fund managers, has been buying up the marketing rights to drugs on which a small number of patients depend. These companies usually are the sole source for the drug even if it is no longer patented. With no competition, it was easy to raise prices.

Second, the drugs these companies sell are considered the “gold standard” for treatment of diseases that are not widespread. That points to factor No. 3 in contributing to price spikes: The market for these drugs is small, and patients are highly dependent on them.

The drugs are sold through a closed distribution system or specialty pharmacies so patients have few if any options to obtain the needed medication through other channels.

As a result, each of the companies studied easily could — and did — engage in price gouging.

In the case of Turing, it raised the price of Daraprim from $13.50 per pill to $750 per pill after it acquired it — more than a 5,400 percent spike.

Shannon Weston of Whispering Pines, North Carolina, told committee members earlier this year about her baby daughter’s experience. When her daughter Isla was just 2 months old she was diagnosed with a life-threatening parasitic infection. Immediate treatment with medication was needed to prevent brain damage. Isla’s doctor prescribed Daraprim — shortly after the price increase.

“I was hopeless and depressed at the thought of what would happen to my perfect little girl if I was not able to help her,” Weston told the committee. “I looked into any way I could think of to come up with the almost $360,000 necessary to treat my daughter for a year with a drug that she needed” to keep her symptom-free.

Legislation sponsored by Collins seeks to speed the review of generic drugs where there is a shortage or lack of competition.

That step can help, but Congress may need to take a stronger approach.

Utilities, which generally operate as monopolies, have to present a case to regulators before they are allowed to raise prices. This could provide a model for drug companies that have a monopoly on drug therapies that are needed by only a small number of people.