MRI v. EpiPen
What drives healthcare costs?
June 19, 2018
by William P. Meyers

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Some drugs do cost a lot, but is that the main driver of insurance rates?

Health costs, and health insurance costs, are determined by many variables. One often neglected in the discussion is the overall health of the population. Another is the nature of disease types. A chronic, expensive to treat disease that allows the patient to live to old age is much more expensive to treat than a disease that kills quickly, like a deadly heart attack.

But for reasons to do mainly with politics, the focus in America has been narrowed to two issues: prescription drug prices and the overall cost of healthcare insurance.

In this article I will be examining the cost of a prescription for an EpiPen (a brand name for an epinephrine injector) and being sent for an MRI scan. Of course EpiPens represent a tiny bit of the overall spending on medicines, and scans are just one of many diagnostics used by doctors. Operations, doctor visits, hospital stays, and the overhead costs of insurance and government also add to the overall total. Yet I believe the public can learn a lot from considering the MRI v. EpiPen issue.

The current list price for a single EpiPen, if you buy 2 at a time as mandated by the FDA, is $304.50. A generic version, also from Mylan, which mainly makes and produces generic drugs, is available for $150.00 each, again if you buy a pack of 2.

Most people with insurance do not pay that much out of pocket for their EpiPens, unless they have not met their deductible for the year. One reason for the high list price is that there is at least one, and are often three, middlemen between Mylan and the consumer. They may or may not pass on discounts to the consumer (usually not), and even when a consumer has only a small out-of-pocket expense, they are still paying for it through their insurance payments.

Call the cost to the healthcare system $300 per pen, or $150 for the generic. The pens usually are not actually used, because they are for anaphylactic shock, which is actually quite rare. Sometimes they are used for more ordinary allergic reactions when a patient panics. The medicine in the pens is good for 2 years, to the cost for the majority of those who keep them around is $300 or $150 over two years. That is $12.50 or $6.25 per month. That hardly seems to be responsible for the high cost of healthcare insurance.

But then no one drug is responsible for the high cost of healthcare., If all prescription medicines are priced too high, as a group drugs would be. Now consider MRI scans.

A study of MRI use (Too Many Scans Time.com, June 13, 2012) showed the number of MRIs increased by a factor of 4 from 1996 and 2010, to a rate of 65 per 1000 patients. In other words, 6.5% of patients who saw a doctor were given an MRI scan. CT scans were even more common, reaching 149 per 1000.

Well, what is wrong with that? Scans, like X-rays, can be an important diagnostic tool.

Let's say 300 million Americans may visit doctors each year. That means 19.5 million MRI scans. How much does a scan cost? It varies by what is scanned and how, the hospital, how much insurance fights about the cost, etc., but $1,000 seems like a good current estimate.

Cost to the healthcare system, whether paid by insurers or patients, would be $19.5 billion per year.

Back to EpiPen. Mylan does not release sales figures, but one EpiPen article I found estimates 3.6 million people carry EpiPens (they are for emergencies). I suspect that is a high figure, but if each person, or their insurer, pays about $300 per year, that is about $1.1 billion per year.

One aspect that both these products share: safety. While MRIs can be very useful diagnostic tools, they often either turn up nothing, or turn up a false positive that involves even more expenses for further diagnostics. EpiPens work really well, saving most people's lives when they go into anaphylactic shock. Only thing is, in the United States each year only a few thousand people experience genuine anaphylactic shock, but millions of people buy EpiPens on the advice of their doctors. [I am looking now at a web site saying anaphylaxis is common, with more than 3 million cases per year, but that conflates severe allergic reactions with anaphylaxis.]

Since caution drives both MRI use and EpiPen prescriptions, whether there is overuse depends on how safe you want patients to be. In theory since every person could develop anaphylaxis, including people with no prior allergy symptoms, everybody should carry an EpiPen. In theory since something could to wrong with your body at any moment, everybody should have an MRI every day, or at least at every doctor visit. At the other end of the safety continuum would be the idea that only emergency and medical workers would carry EpiPens, and MRIs would be restricted to situations where they almost always show a benefit.

In my opinion, EpiPens and MRIs are overused. That adds to healthcare costs. Even so, if EpiPens and MRIs cost less, that would reduce overall costs, and hopefully the cost of insurance. What drives costs for EpiPens and MRIs?

The political outrage against Mylan over EpiPen prices was driven largely by factoids that consumer groups and politicians used out of context to stand in for: Greed. And I believe that profitability was certainly a motive. But to solve a problem you need to actually understand it. Here is what I have learned, so far. The details matter.

EpiPen delivers epinephrine, which has long been generic, is very cheap, and is so potent only tiny amounts are needed to be effective. Some consumer groups claim an EpiPen only contains 2 cents worth, and I have never seen Mylan claim that the cost of epinephrine affected overall cost.

The 2 cents worth of epinephrine does someone having an anaphylactic reaction no good unless it gets into the body, in a way that can relieve the symptoms before a heart attack causes death. So what is important is the device. It must work even when a person is partly incapacitated and in a panic.

It's complicated. To sum up, it is so complicated that no other company could produce one that satisfied the FDA. They tried and failed. Mylan (and partners) invested in designing the pen, getting it approved by the FDA, then building a factory that was up to FDA standards. And if the person using the pen dies despite that, Mylan can expect a lawsuit (epinephrine does not work 100% of the time, even in a hospital emergency room).

Finally, Mylan is supposed to sell two at a time because the FDA has found that sometimes one is not enough, but doubling the dose of one is too strong for most uses.

Mylan sells to pharmacy chains, wholesalers, and medical organizations, so the division of the retail price may be cut up several ways. An insurer may negotiate a discount, but does not buy the EpiPen itself. The wholesaler, pharmacy benefits manager, and retailer all take cuts.

Then there are profits, which is usually equated with greed by activist groups. Since no other company could produce an FDA-approved epinephrine injector for emergencies, Mylan did take advantage to jack up the price. $300 to save a life does not seem excessive to me, but it upsets Bernie and Donald.

On the other hand, you might want to look at the big picture for Mylan, which sells thousands of generic and over-the-counter products. The profits in generics are thin compared to the profits in new drugs. That is why most of us pay so little now for something like Lipitor, which was so expensive just a decade ago. Mylan has a large, global infrastructure that was partly built with borrowed money. The profits from EpiPen sales, during the period of little competition, allowed Mylan to expand what it could offer the public, including lower cost versions of very highly priced drugs. While executive pay may seem generous, stockholders have not received a dividend in years. Mylan's GAAP (standard measurement) profits, for the first quarter of 2018, were 3.3% of revenues. Mylan's debt was $12.5 billion, which must be paid off out of profits.

With MRIs, the situation is complex in different ways. An MRI machine is a big investment for a hospital or clinic. Usually money is borrowed to pay for it. Even a not-for-profit hospital needs to pay the interest, the principal, operational and maintenance costs, and cover administrative overhead.

I believe, based on anecdotal evidence from doctors and hospital administrators,that with MRIs any overuse comes from gray areas. That is, once an MRI is available, it is used when it is clearly advisable, and no one gets sent there just to help the hospital recover its costs. But doctors know who pays them, and whether the MRI is under-utilized. From what I have heard, they almost always are under-utilized. Doctors are encouraged to use them in gray areas: just to be sure areas, I don't want a lawsuit later gray areas. Maybe areas. Again, you can argue for or against any particular spot in the gray tangle, depending on your specific ideas of safety v. waste and the likelihood of finding something medically useful.

How much does an MRI machine cost? It varies, of course. The price has dropped over the years, but they still cost from about $150,000 to $500,000. Not all of the $1000 charge for getting a scan goes to pay for the machine, so it can take years to pay for one.

I do think some pharmaceutical companies sometimes overcharge for their products. But I believe that can be handled on a case-by-case basis. Generics, biosimilars, new drugs that are for common indications and new drugs that are for rare indications are all different categories. I am not opposed to the FDA policing pricing, as long as it is reasonable policing.

People often refuse to take generic drugs, then complain when they have to pay more for the newest, best drug available, even though its proven benefits over a generic are often slight. Who decides who gets what level of treatment, and who should pay for it? With the Affordable Health Act (Obama Care) the U.S. moved in the direction of standardizing treatment for all patients, and paying for it collectively through insurance premiums and taxes. But we could certainly go back to the "every-man-for-himself model." Then almost no one will be able to afford new drugs, so companies will stop making them, and medical progress will come to a standstill. That would hurt the rich almost as much as the poor, the working class, and the middle class. But we would have all the drugs created in the past.

The main cost of healthcare is for pay for healthcare workers. Whether these are $1 million a year specialty doctors, or $40,000 a year home healthcare workers, it all adds up. Politicians ranting about high drug costs does not help much.

Politicians like to promise easy solutions to voters who don't have the time or expertise to understand complex issues. I should not imply all politicians are that way. Some do take the time to understand complex matters of public policy. If you can find one, vote for her.