Price-Gouging CEO and the Effects on For-Profit Pharma

A simple summary of the Martin Shkreli scandal, price-gouging, big pharma, profits off essential healthcare, and what we can do about it.

Profit creates competition on a good day; on a bad day a 32 year old ex hedge fund guy under investigation hikes an AIDS drug from $13.50 to $750 to profit off the sick and taxpayers. The worst part? He is just doing what the other guys are doing.

This event raises the question: How do we avoid price-gouging on taxpayer subsidized items, and how much profit and regulation belongs in drugs and treatments for chronic illness?

Summary of the Price Gouging CEO and the Implications for Big Pharma and US HealthCare Policy

There are a lot of issues involved, so what we will do is provide a quick bullet-point list of what you need to know to understand everything from the man to the issues behind his actions and the implications.

Who is Martin Shkreli and Why is He the Most Hated Man on the Internet in late November 2015?

• The New York Times reported that 32 year old Martin Shkreli,  founder and chief executive of Turing Pharmaceuticals, raised the price of the drug Daraprim to $750 a tablet from $13.50. Get the story.
• Price Gouging is when a seller prices goods or commodities much higher than is considered reasonable or fair, due to a a demand or supply shock. In this case it was demand, not supply which caused the unreasonable increase.
• Martin Shkreli is currently under investigation for all sorts of .01% shenanigans, which involve things like profiting off of the suffering of his fellow Americans and turning a profit from their illnesses into his own financial success. His attitude can be seen in a series of Tweets, which may be paraphrased as “you hate me cuz you ain’t me bro, check out this bling I bought off the back of human suffering”. Read the Tweets.
• The now dubbed “most hated man on the internet” is actually already under investigation for shady activities. These activities appear to be connected to his habit of profiting from shorting Biotech companies. Shorting involves selling shares you don’t actually have. It’s legal, and you have to “cover” your sake by replacing the shares in a fixed time period. If you think the shares you buy will go down in cost, there is money to be made by the difference between the high and low prices. In plain English that means he tries to sabotage drugs whose stock he has bought in order to bring the price down. If he can do that, he can profit (by covering his position) while everything is crashing. There is lots more to it, and you can read about why he is being investigated here.
• It’s worth noting Shkreli has done this thing before with a drug that treats kids with kidney disease, this sparked an article titled “predatory capitalism on the backs of the sick and silent“. Learn more about price-gouging on kids with kidney disease here.
• When confronted by the 99.99% including everyone on Social Media, journalists, and Politicians, Martin Shkreli defended his position by saying the drug was underpriced and that most people wouldn’t pay the full amount. The thing is, the reason people won’t pay the full amount is that tax payer dollars pay for it either through write-offs or through subsidization. So, in another words he justifies himself by saying that he isn’t stealing from AIDs patients as much as he is from tax payers. (Although in reality many AIDs patients will end up paying the high costs, or not having access to the treatment as a result of the base cost).
• Of course Martin Shkreli isn’t the only one exploiting the current healthcare system to profit from taxpayers and those needing healthcare. Instead, he follows a long line of companies that, rather than letting profit incentivize innovation, have been buying up known drugs, repurposing them, and jacking up rates. This does not lead to innovation, but raises the price of healthcare entirely for individual gain. Under ObamaCare, that means increasing the price of everyone’s already high premiums and deductibles and costing taxpayer dollars through subsidization, Medicare, and Medicaid. Essentially cheating the 99.99% in favor of the .01%, and increasing federal debt while hurting the middle class. Learn more in another Times article.

How Does this Relate to Policy?

• On the same day all this news broke (at this point it has been less than 48 hours) the house GOP released a budget that repealed ObamaCare and cut taxes on large businesses (like those who profit off of drugs that treat chronic illness). Not only could this budget shut down the Government like it did in 2013 when it costed the economy an estimated $20 plus billion, it also leaves the door open for more price gouging and profiting from essential drug treatments.
• In light of all of this both Bernie Sanders and Hillary Clinton confirmed their positions on healthcare. While they have very different views, both address moves to prevent price gouging and profiteering from essential healthcare treatments.

How Does This Relate to the Market?

In light of all of the above, pharma stocks took a bit of a hit. This most likely made Martin Shkreli a little extra in capital gains that he will not pay the same tax rate on that the 99.99% pay. The GOP budget would cut his tax rate even further all while removing the little regulation the ACA does put on essential phrama.

How Does This Relate to ObamaCare?

• ObamaCare may tax drug companies, but it does little to stop insurers, drug makers, or providers from profiting from an unsustainable taxpayer-fueled healthcare system.
• We are currently in a debt crisis due to a rising deficit, and this is actually primarily due to healthcare spending. This was true before the ACA, and remains true after the ACA. The Republicans want to solve the problem by repealing the ACA (ignoring the CBO’s warning that this would make things worse).

What Do We Do About Price-Gouging and Profits off Taxpayer Dollars and Essential Health Treatment?

This brings into question, at what point does profit hurt things like essential health treatments rather than help. Sure profit creates competition on a good day, but with so many bad days for the average American, at what point do we address the fact that we are collectively heading toward un-payable debt over treating diseases like cancer. Who can argue that a 62 year old drug’s price being jacked up 5,000% has anything to do with innovation?

An Answer

One answer, and the answer we find the simplest, is similar to that found in England, Canada, and many other countries:

Medicare-for-all single payer system. All essential treatment and drugs covered. Strict regulation on essential drugs and treatments. Supplemental coverage is handled by the private market and so are non-essential drugs and treatments. Regulations focus on creating incentives for innovation and preventing excessive profits and speculation with tax payer dollars. Maybe we could also simplify the tax code and address the treatment of capital gains taxes. I would like to see this country make everything a little more fair when it comes to healthcare essentials, and let the free-market thrive at what it does best, healthy regulated competition in a demand driven market.