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Customer Service: Greed comes before fall

Customer Service: Greed comes before fall

By now, you all might have heard about the furor caused by the EpiPen episode.  In this post I want to talk about how a combination of a lack of transparency in pricing by corporations, a collusion among the middlemen who act as intermediaries between the corporations and the consumers, and finally, a general apathy on part of the consumers to delve deep and get an understanding into their purchases, can lead to the situation mentioned above.

Mylan, the company that manufactures Epipen, is the second-largest generic and specialty pharmaceuticals company in the world with $9.4 billion in revenue last year (2015). EpiPen is an auto injector that delivers a shot of $1 worth of hormone called epinephrine into people undergoing severe allergic reactions. Since EpiPen was bought by Mylan from a German drug maker called Merck KgaA in 2007, the price of a dual-pack of EpiPen went up from $100 to over $600 by May, 2016 – a remarkable 550% + increase.

As to why Mylan jacked up the price? Well, because it could. Even though patients can still get epinephrine through other delivery systems like syringes, they require some training to pull the correct amount of a drug from a vial and inject the drug. EpiPens’ delivery system does that and the other competitors products in the marketplace do not. How can I even think of cheaper substitutes, an anxious parent might reason, when my child’s life might be at stake? And it is this irrational preference for brand-name drugs by consumers that provide the ammo for companies like Mylan to extort these insane prices out of them.

How Heather Bresch, CEO of Mylan, orchestrated the turnaround of EpiPen- an aging device which logged only $200 million in revenue and was recommend by the management team to be divested - and build it into a $1 billion-a-year cash cow is a text book case in savvy branding & marketing combined with a brazen willingness to exploit the emotional, political and economic factors that shape the health- care spending in our country.

The CEO made no secret of her strategy to increase demand for EpiPens by getting them stocked for emergency use in more schools and other public places. “We are continuing to open up new markets, new access with public entity legislation that would allow restaurants and hotels and really anywhere you are congregating, there should be access to an EpiPen.” Bresch said at a conference.

And as part of that strategy, over the past several years, Mylan hired consultants who had worked with Medtronic to get defibrillators stocked in public places. Ms. Bresch, the daughter of Senator Joe Manchin (D-W. Va.), turned to Washington for help, too. Along with patient groups, Mylan pushed for legislation encouraging states to stock epinephrine devices in schools.

So when the scandal exploded this summer, in a weak attempt to alleviate the obvious public outrage, Ms. Bresch took to the airways, and in an interview with CNBC, defended her company’s price increases. She then blamed high patient costs on insures who set high deductibles and drug-benefit managers who make the money by negotiating bigger discounts off increasing list prices.

Truth be told, there is some merit to her statement, although you can’t really feel sorry for Mylan, because, instead of being upfront and disclosing the actual cost of EpiPen to its customers, they decided to become bed-fellows with the opaque background player called Pharmacy Benefit Managers (PMB) who was introduced to the party by your insurance companies. Once the PMB’s entrenched themselves into the drug delivery system they introduced costs into the system for everyone in short order. How you ask?

Insurance companies in order to get a grip on the runaway train called drug prices sought out PMBs  - PBMs are hired by your insurer, employee insurance plan, or welfare plan to negotiate costs between the insurance company and pharmacies, hospitals, and other health services. Because pharmacy benefit managers are hired by the insurers, it is their job to try and keep that provider’s costs to a minimum. For them, the best way to do this was by avoiding pricy, brand name drugs and instead selling you cheaper generic drugs.

PBMs make their money by buying generic drugs in bulk and marking up the prices much higher than what you should be paying. Because of healthcare laws that favor a lack of transparency, PBMs are able to hide the true cost of drugs from you, the consumer. Oh, while they were doing this, they also cut out a sweet deal on the side with the branded drug manufactures to accept rebates (kickbacks) so that they could push the branded drugs to the insurers instead of the much cheaper generics. So while the price of prescriptions is causing the inside of your wallet to gather mothballs, PBMs are lining their own wallets with your money.

Anyway, circling back to Ms. Bresch, while she was busy blaming others – and rightfully so – for the scandal, she conveniently failed to acknowledge in her interview, the depths of greed either her or her executive team would stoop to in this massive price gouge, as reported by a Wall Street Journal article.

The article exposes how Mylan “… put a special incentive plan in place more than two years ago (since 2014) that rewards executives if they hit aggressive profit targets.” The article goes on to say “Companies commonly give their executives incentives by linking their pay to earnings or stock-price goals, and companies are free to raise prices as they see fit. But some industry watchers say Mylan’s incentives may have played a role in the steep price increases for the EpiPen.” “They are being compensated very heavily on hitting [earnings per share] targets,” said Ronny Gal, an analyst at Sanford C. Bernstein & Co., “We suspect Mylan realized that their EPS targets will be tougher to reach and decided to raise prices on EpiPen to make that target more achievable,” he said.”

Ms. Breash and members of her ilk consistently justify the premium price of their drugs anytime there is an outrage about the sky-high prices of life-saving drugs. They talk about the long lead times in developing and testing the drugs, bureaucratic hurdles at the FDA, and spending over a billion dollars to bring a new drug to market. While there is validity to those claims, they conveniently gloss over the fact about the controls in place – complements of the US Govt. - to ensure they reap huge windfall each time a drug is introduced into the marketplace.  Commenting on this scandal, Mark Cuban, the billionaire-entrepreneur put it best, on Twitter. “We give patents,” he wrote. “We have the right to expect something in exchange for those patents.”

Listen, I have no problem with capitalism, with making a profit. But what Mylan and too many other companies demonstrate is an unfortunate mutation of capitalism where “I want mine now” greed overrules both common sense, and practical business considerations for the future. And any executive that subscribes to the “I want mine now” ideology, in my mind, is not interested in the long time survival and the real success of their firm and are a little more than a common thief with a really nice office.

If you brush off the above example as “just one bad apple”, you would be mistaken. Mylan was raising prices of EpiPen for six years. The world finally caught up to their shenanigans and expressed outrage about it for six days. Why is that? It is because people have accepted routine pharma price increases as normal. They were finally upset because they reached their breaking point. Bad behavior by corporations like the one mentioned above happen on a daily basis in our country, and across a lot of industry verticals, too. Mylan’s in the spotlight because they were caught with their hand in the cookie jar. For all the other businesses that didn’t get exposed, it’s business as usual.

To Mylan, I say, why hide behind expensive advertising, intense lobbying, shady middlemen and opaque pricing. Through all these actions your costs exploded, you created a schism between you and your customers, attracted unwanted attention from the Congress and other regulatory agencies, and in the process ended up with egg on your face due to the huge public embarrassment.

Instead, refrain from the above activities, realize the cost savings, and promptly pass on those savings to your customers, and immerse yourselves in providing superior customers service. Your customers will return the favor by becoming your product’s unpaid evangelists. It’s that simple. Is my proposed solution wishful thinking on my part? Absolutely, because, too many pigs, umm, I mean executives, are busy feeding at the trough. So yeah, I don’t see any reason why they would get off this gravy train. Until the customers of EpiPen demand a change to the status quo, nothing will change.  

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Last Updated: 2017-10-26 20:05:00


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