Eli Lilly Cuts Insulin Prices by 70%; This Should Trouble You
On Wednesday, March 1, 2023, Eli Lilly announced that it would cut the price of Humalog and Humulin, two of its proprietary insulin products by 70%. While this is welcomed news for many physicians and their patients, the pharmaceutical’s drastic and sudden reduction in the price it charges for a medication integral to the treatment of one of America’s most prominent and expensive medical conditions raises some very valid concerns.
Why did Eli Lilly suddenly decide to cut the price of insulin? Is it still profitable for Eli Lilly to continue to sell insulin even at rates 70% lower than it did one month ago? And if so, then how come Eli Lilly was able to sell insulin at such elevated prices for so long?
Predictably, the move comes not as a result of internal market pressures or some altruistic motive that the corporate giant suddenly discovered (heaven forbid). Rather, the 70% cut, according to Reuters, is the result of a push by President Joe Biden to extend the $35.00 cap on insulin costs presently enjoyed by Medicare health program beneficiaries to “most Americans”; a move that Congress is willing to back through the legislative process. As quoted in the Reuters’ article, Eli Lilly Chief Executive Dave Ricks said, “While we could wait for Congress to act or the healthcare system in general to apply that standard, we’re just applying it ourselves.”
In other words, the general public was sufficiently appalled at the country’s falsely elevated insulin prices to motivate crony capitalists in Washington and their Big Pharma codependents to benevolently and mercifully bestow some relief upon consumers.
The day’s events also herald a major problem in America’s healthcare system: the reason why we find ourselves in this situation is simply because of the deleterious effects government interference has on our abilities to produce, sell, and purchase medications in this country.
Medicare’s Deleterious Effects on Drug Prices
Not only are essential, no-longer-patented medications like insulin overpriced in this country , many are not even available(!), as I detailed in my book, The Case for Free Market Healthcare. According to the American Society of Health System Pharmacists, there are presently about 300 medication shortages in the United States, with generic injectable products making up the plurality. Essential medications like sodium chloride, ciprofloxacin, lidocaine, and generic cancer drugs abound in the list, and the reasons for these shortages point straight at government.
The Medicare Modernization Act (MMA) of 2003 aimed to accomplish with medications what the Balanced Budget Act of 1997 did with provider reimbursements. Progressive legislators and policymakers tried to solve the problem of high drug costs by implementing a mandatory price formula. Under the MMA, medicines in the outpatient setting could only be sold for the average selling price plus six percent and then only increased by six percent semiannually.[i] Although the regulations were implemented to protect consumers, they also caused significant problems.
“The underlying problem with insulin prices in the United States is not a lack of government regulation, it is too much government regulation.”
Following the expiration of a patent, the price of a medication can fall as much as 90%.[ii] Because of this, the patenting drug manufacturer tends to discontinue the production of those medications that have lost their patents. Under normal circumstances, other suppliers would step in and fill the voids created by these absent manufacturers, but under the MMA, the incentive for potential competitors to do so is very low. Consequently, as the original manufacturer stops making a drug, very few if any competitors step in, leading to predictable drug shortages and market pressure shortfalls.[iii]
The Negative Impact of Group Purchasing Organizations
Adding to the insidious problem of government price manipulations is the influence of group purchasing organizations (GPOs). These entities were developed within the medical industry to broker the sale of equipment and medications to providers. Under ideal conditions, GPOs contract with manufacturers for discounts in exchange for access to their clients. For example, a GPO controlling the sale of a certain medication to fifteen hospitals is in a position to negotiate deep discounts for the purchase of those medications. In the United States, networking with GPOs has become a popular practice amongst hospitals. However, these GPO-controlled-networks have grown so large that only the bigger manufacturers have been able to supply the large volumes of products demanded by the GPOs. Additionally, in a market dominated by GPOs, it becomes exceedingly difficult for competitors to enter the market unless it can provide a similar volume of products. As a result, for example, only three or fewer manufacturers produce 90% of all generic injectable oncology medications in the United States. [iv]
One would think that artificially strengthening GPOs' positions would be counterintuitive under these circumstances, yet that is exactly what the government has done through federal safe harbor provisions.
The Social Security Act generally prohibits payments exceeding 3% of the sale price in return for purchases or orders made by any private entity participating in a federal health care program. Interestingly, GPOs selling to hospitals have been granted an exception to the Social Security Act's anti-kickback statute.[v] GPOs and their clients have therefore engaged in an elaborate scheme of money flow where everyone wins except the patient.
The way this scheme works is as follows. The customer (in this case the hospital), in coordination with a GPO, purchases a product from a vendor. The hospital pays the vendor the reduced price negotiated by the GPO. The vendor then pays a commission to the GPO. The GPO is then free to send a portion of the proceeds back to the hospital while using the remainder of its fees to fund other products or services.[vi] This practice has disseminated so widely that, in 2012 alone, the "administrative fees" collected by the top five GPOs amounted to $2.3 billion![vii]
Government Is Diluting the Ideal Price Cutting Influence
The events dealing with Eli Lilly, insulin prices, and their artificial manipulations by government is emblematic of the disease plaguing our healthcare system: government interference. Whether in the form of the gasoline shortages experienced in the 1970s (and now), physician shortages, or our nation’s medication stock, the common dysfunction is the belief by some in government that they have a better idea regarding market prices than the free market itself.
The underlying problem with insulin prices in the United States is not a lack of government regulation, it is too much government regulation. Largely due to the influences outlined above, Eli Lilly owns a 90% share of the insulin market in the United States. Clearly, this is not the result of any natural competition or the evolution of a robust and stable market. Eli Lilly’s 90% hold on the insulin market exists because Medicare price regulations help to artificially bolster its position. When a manufacture like Eli Lilly produces a new medication, it has about seven years to realize the costs of the product’s development; a cost often in excess of $1.2 billion. Once the patent expires, Medicare regulations kick in to make it nearly impossible for a potential competitor to enter the fray. Even if one did, the system is presently set up to enhance its chances at failure, as GPOs and their variants, pharmacy benefits managers (PBMs), negotiate market advantages favoring the established manufacturers at the expense of stifling competition.
There are only two possible routes for Eli Lilly with its “voluntary” cut in insulin prices. It either sells the medication at a price where it is still a viable commodity for it—in which case, it has strengthened its position at controlling the insulin market well into the future—or it loses money in continuing to sell insulin—in which case it will make up for it by increasing its prices for other products or by bundling the sale of the insulin with associated, more profitable products. Either way, the ever-present temptation of solving a price problem with government mandated price cuts only serves to further the dysfunction of the healthcare system government itself has created.
Dr. Julio Gonzalez is n orthopaedic surgeon practicing in Venice, Florida, and a former Florida State Representative. He is President of the United States Medical Association.
[i] United States House of Representatives Committee on Oversight And Government Reform, "FDA's Contribution to the Drug Shortage Crisis," 11, June 15, 2012.
[ii] United States House of Representatives Committee on Oversight And Government Reform, "FDA's Contribution to the Drug Shortage Crisis." 11, June 15, 2012.
[iii] United States House of Representatives Committee on Oversight And Government Reform, "FDA's Contribution to the Drug Shortage Crisis." p. 11-12. June 15, 2012.
[iv] United States House of Representatives Committee on Oversight And Government Reform, "FDA's Contribution to the Drug Shortage Crisis." p. 4. June 15, 2012.
[v] Statement for the Record by Marjorie Kanof Director, Health Care Clinical and Military Health Care Issues, General Accounting Office. "Group Purchasing Organizations Use of Contracting Processes and Strategies to Award Contract for Medical-Surgical Products," 6, July 16, 2003.
[vi] United States Government Accountability Office, "Group Purchasing Organizations, Funding Structure Has Potential Implications for Medicare Costs," Fig. 1, Oct. 2014.
[vii] United States Government Accountability Office, "Group Purchasing Organizations, Funding Structure Has Potential Implications for Medicare Costs," 17, Oct. 2014.
