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.

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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.

Corporate Bribery Just Became Illegal Again

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.

PBMs and drug makers are in a cartel arrangement, where PBMs are engaged in market allocation in return for bribes. Drug makers have a ‘list’ price, which is the public cash price you’d pay coming off the street. But that’s not the price that most people pay, because most people buy through their health insurance. PBMs control the shelf space of insurance companies. That shelf space is known as a formulary, and is a list of what drugs an insurance company offers to its members, and what those members will have to pay in terms of a co-payment.

A PBM essentially sells to a drug maker whether an insurance company is willing to sell that particular drug to customers. In return for a higher rebate, a PBM will make your particular form of insulin the preferred product, and so all, say, UnitedHealth Group plan members will be offered that particular brand of insulin, and perhaps not allowed to buy a rival brand, or a cheaper generic one. It’s a bit like Amazon’s Buy Box, where Amazon will give better space for goods based on whether the merchants selling those goods are paying it higher fees.

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While there are patents on newer insulin products, certain patented insulin medicines can be substituted for one another. Novo Nordisk’s Novolog competes with Eli Lilly’s Humalog. So you would think that prices in general would go down, since it’s possible to bargain for better prices. But competition, because of these kickbacks, ends up driving prices up. Drug makers compete not to sell insulin at a lower price for better quality, as happens in most countries, they compete over who gives the biggest rebate to the PBM that manages that particular segment of customers. And of course, if you charge more, then the rebate is higher, so the incentive is always to push prices up. The competition has gotten so fierce that more than half of their insulin revenue goes to the middleman.

And there are laws against what the PBMs do, as the FTC’s statement noted. Antitrust agencies haven’t enforced these laws for a long time, but Khan essentially said in June that the commission is going to start bringing cases again. (And they did bring an exclusive dealing case against pesticide producers in October that looks a lot like what an insulin case might be.)

All of which brings me back to Eli Lilly’s actions, which should best be understood as a pharmaceutical firm deciding to break from the cartel and compete on the merits. Lilly did four things. First, it cut the price of its authorized generic, Humalog, to $25/vial. Second, it capped monthly payments for anyone buying Lilly insulin products at $35/month, which is exactly what Medicare recipients pay under the Inflation Reduction Act. Anyone paying cash at the drug store for list price can get vials at $25/apiece, and if they need multiple vials per month, can download a discount card to cap their total spending at $35/month. Third, Lilly lowered the list price of Humalog (and Humulin, which is an older version) by 70%. And finally, Lilly is launching a competitor to a different insulin drug, Sanofi’s Lantus, at a 78% list price discount.

The other two main producers of insulin, Sanofi and Novo Nordisk, haven’t announced similar price cuts, but now they will be under pressure to do so. The losers here are the PBMs. No longer will they get a giant rebate off an inflated list price, at least not for Eli Lilly products. It’s possible that PBMs will react to this move by moving Lilly’s products off their formulary, but Lilly is a powerful firm with lots of other products, so that’s not likely. Moreover, conservatives, for certain political reasons, tend to dislike PBMs, so House Republicans have just announced an investigation into these middlemen.

There are still very serious problems in the insulin market. Sanofi and Novo haven’t acted, and they have nearly 70% of the market. And Eli Lilly’s insulin prices are only dropping to what they were in the 1990s, when they should go down much more than that. There are also newer and better forms of insulin that will not be discounted, and as drugs keep improving, drug makers will try to make these older cheaper products irrelevant. And then of course, insulin is just one drug, and there are thousands of drugs where PBMs engage in the same rebate schemes to drive prices up.

So ultimately the FTC will have to bring enforcement actions based on its revived legal authority. But what is astonishing is that just the threat to do so has cut prices so quickly in such a high profile market.

UPDATE: I originally put the number of diabetics in the US at 8 million. The number of diabetics is 37 million. Only 8 million diabetics take insulin, the rest have a less severe form of the disease that can be managed with other treatments.

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What I’m Reading

TurboTax parent company Intuit is pouring more money than ever into lobbying amid push for free government-run tax filing, Open Secrets. This story is hiding good news. Intuit is mad that the Inflation Reduction Act put $15 million into exploring “the creation of a free federal tax filing service.”

Republican House members are mad at FTC Chair Lina Khan because of FTC Commissioner Christine Wilson’s resignation oped.

International Trade Administration and Amazon Launch New Initiative to Boost Export Opportunities for American Small Businesses, International Trade Administration. This move by the U.S. government to partner with Amazon exports for small business is unbelievably cringe. It’s spearheaded by Department of Commerce official Arun Venkataraman, who was at the Obama administration and then went to credit card monopolist Visa.

Private equity harms autism service market, Spectrum. Hey can PE get more evil? Yes, yes, it can.

A bunch of populist Senators from both sides of the aisle have come together to support tighter safety regulations on railroads after the Ohio train derailment. The group includes Senators Sherrod Brown, J.D. Vance, Josh Hawley, John Fetterman, Marco Rubio, and Bob Casey. That’s three Rs and three Ds, and what they want is some common sense stuff - more staffing on trains, better safety equipment, higher penalties for wrongdoing, and mandated information sharing with first responders. Chuck Schumer is saying he wants the legislation to get a vote. Is this a harbinger of a more populist Senate?

Biden Taking A Big Regulatory Swipe At The Small Percentage of Private Equity Investment in Senior Care, Yahoo Finance

The Alaska sovereign wealth fund manager recommends cutting private equity investments, basically says that PE valuations are fraudulent.

Wall Street has purchased hundreds of thousands single-family homes since the Great Recession. Here’s what that means for rental prices, CNBC

Private Equity And The Monopolization Of Medical Care, Forbes

Justices Express Skepticism at Holding Google Liable for Content, Wall Street Journal

Senators Ron Wyden and Elizabeth Warren sent a letter to Bob Sternfels, the head of McKinsey, on the firm’s work for Providence hospital systems to ‘wring more money’ out of low-income patients.

Crypto giant Binance moved $400 million from U.S. partner to firm managed by CEO Zhao, Reuters

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cheers,

Matt Stoller

P.S. I’m looking for people who are working in the electric vehicle or battery market building domestic supply chains. There’s a legal question over whether subsidies in the Inflation Reduction Act can go to production located abroad, and I’m wondering what the perspective is from people on the ground making investment or production decisions. If you are engaged in this business or you know someone who is, let me know.