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Did Lina Khan Just Slash Insulin Prices?
Eli Lilly just announced price cuts of insulin list prices by 70%. Did government just help people? Yes, yes, it did.
Roughly 37 million Americans suffer from a disease called diabetes, which is a condition where your body cannot produce enough of the vital hormone insulin. Insulin regulates blood sugar in the body, and when you can’t produce it, or can’t produce enough of it, your body starts breaking down your own fat and muscle. Your blood becomes acidic, and you die.
Before 1922, diabetes was fatal. That year, scientists created artificial insulin. Today, with regular injections of artificial insulin, diabetics can live long and healthy lives. Over the last hundred years, scientists have invented newer and better forms of insulin that are less painful to take and work more reliably. They come not just in vials with syringes, but in easy-to-take prefilled injection pens.
So insulin, if not diabetes, looked like a mostly solved problem. But starting in the 1980s, in our monopolized economy, as with much else, we created an artificial scarcity of this vital medical product. Over the last twenty years, prices for insulin have increased in the U.S. more than 600%, and are increasingly out of reach for millions of diabetics.
Egregious insulin pricing is an American problem; prices in the U.S. are five to ten times what they are abroad. Because of the desperate need for insulin, there is literally no price that a diabetes patient won’t pay for insulin, if they have the money.
Today, however, Eli Lilly reversed this decades-long trend, and announced it is cutting the list price of its insulin by 70%. This is stunning and important news, and will reverberate far beyond insulin markets. So why did Eli Lilly make this move? Is it for real? What kind of impact will it have? And who loses?
The most important reason for the pricing change is public outrage over insulin prices, which have become symbolic of an excessively greedy pharmaceutical industry. Last November, for instance, Sean Morrow, an activist at More Perfect Union, impersonated Eli Lilly’s corporate Twitter account, and tweeted out “We are excited to announce insulin is free now.” Eli Lilly’s stock took a temporary dive, and the fake tweet was covered in the Washington Post, the Financial Times, Marketplace, Forbes, and so forth.
The public anger here is deep, and has begun to turn into policy change. Politicians run ads on insulin prices, there are lots of lawsuits against insulin producers, and House Democrats on the Oversight Committee did an in-depth investigation of the industry in 2021. In the Inflation Reduction Act, Congress singled out insulin as uniquely egregious, capping out of pocket costs for Medicare recipients at $35/month. This year, President Joe Biden attacked “Big Pharma” in his State of the Union over the drug. The California state government is launching an initiative to have the state itself make insulin. (UPDATE: There’s also an important bargaining lever in how Medicaid buys insulin that Congress strengthened in 2021, which explains why the price cuts will come in October.)
But the most interesting policy action to cut insulin prices happened last June, at the Federal Trade Commission, in a bipartisan policy statement around the distribution of the drug. “The Commission,” it said, “has received complaints about rebates and fees paid by drug manufacturers to pharmacy benefit managers (PBMs) and other intermediaries to favor high-cost drugs.” Such an arrangement could, according to the FTC, violate a number of laws, the Clayton Act, the Robinson-Patman Act, or the Sherman Antitrust Act, all of which prohibit forms of corporate bribery. In fact, I described it exactly this way when Khan put out the statement.
Interestingly, when this happened, the FTC wasn’t looking at the pharmaceutical producers as the main force hiking insulin prices, but at a small set of middlemen known as pharmacy benefit managers that control which medicines are on our shelves.
So what are these middlemen and what do they do? I’ve written about PBMs before, and how they influence the price of drugs.
PBMs maintain a list of drugs for insurance companies, they negotiate drug prices, and they manage reimbursements to pharmacies. The original idea behind PBMs is they would be able to get enough bargaining power by representing multiple insurance companies that they could negotiate to bring down drug prices. And accumulate bargaining power they did, merging until three PBMs control 80% of the insurance market. They are also vertically integrated with insurance companies and drug store chains. The top three PBMs are owned by CVS, United Health, and Cigna. Unfortunately, because of an exemption from anti-kickback laws, PBMs don’t use their bargaining power to reduce consumer prices. Instead, they force pharmaceutical firms to compete over who will give the PBM the biggest kickback, which in the industry is known as a rebate. Take insulin. In 2013, Sanofi gave a 2-4% kickback to PBMs to prefer their product to customers. In 2018, that number went up to 56%. In other words, more than half of the price of insulin is going to a middleman who does nothing more than push around paper.
Basically, to make money, PBMs solicit bribes in the form of a rebate from pharmaceutical firms in return for letting their products on their formularies. As of 2018, pharmaceutical producers like Eli Lilly were getting 47% of the revenue from their insulin products, and PBMs were getting 53% of it. That’s likely an even worse split today....