NOTES -- Why is Insulin so expensive?

Here’s a super rough overview of some of the drama we’ve seen in insulin prices over the last few years.

The Players

• The pharma companies Eli Lily, Novo Nordisk, and Sanofi. They run R&D and manufacture drugs.
• PBMs: pharmacy benefit manager, which are often subsidiaries of other healthcare companies. OptumRx, CVS Caremark, and Express Scripts. They act as intermediaries between the pharma companies and the insurers, employers, government, etc. Their goal is to show their clients “hey we negotiated super hard for you with pharma and got you a great deal on these drugs.”
• The insurers, who have direct relationship with the drug customers and set premiums, copay, deductible. They hire PBMs to negotiate prices.

The Story

1. Modern insulin production has tremendous initial capex: hyper-sterile bioreactors, supply chain validation, regulatory scrutiny, etc. So despite market leading patents expiring in 2000s and 2010s, new market entrants haven’t emerged.
2. PBMs make money on spreads: the difference between the pharma list price and the negotiated net price.
3. So PBMs look at a list of insulin options and they choose the option that has the highest spread, which pushes list prices upwards while modestly reducing net prices. This is done via auction: “which pharma insulin option has the highest spread”.
4. The pharma companies are played off against each other like any other market: compete on spread or lose volume to competitor.
5. The result is that insurance pays the reasonable negotiated price, while the uninsured, or the ones with high deductibles, get stuck with the over-inflated list price.
6. And the PBMs take an ever-increasing value-share of a patent-expired name brand life saving drug.

The result is that Humalog, the Eli Lilly brand-name insulin medication, went from $21 out-of-pocket in 1999 to $274 in 2017.

So what happened?

1. Public pressure gets ridiculous. everybody in the US hates the pricing of the healthcare system and insulin becomes the poster child of drug price inflation. Every CEO testifies in Congress, accused of price fixing.
2. The pharma companies get blamed for this: “why is Eli Lilly charging $275 for a patent-less life-saving drug that costs them tens of dollars to produce?!?”
3. Eli Lily makes the first big move. In 2019 they release “Insulin Lispro”, a lower-priced generic of their own drug, priced at half of the sticker price. The uninsured crowd seized on this new generic, but access was hard to come by because…
4. PBMs refuse to pick it up initially because there was zero spread.
5. But eventually the public outrage forces the insurers to sidestep the PBMs and go for the cheaper sticker alternative.
6. Along with a combination of state-level government legislation and the Inflation Reduction Act, serious downward pricing pressure was exercised.
7. By 2024, proper market competition had reduced out-of-pocket costs to $35 for a vial of generic.