I found William Galston’s column on drug prices in the Wall Street Journal interesting. He focuses on insulin:
For the 7.5 million diabetics who use insulin regularly, prices have risen rapidly. A standard measure is total costs—prices paid by consumers plus payments by insurers. A recent study in the Journal of the American Medical Association found that from 2012-17 the total costs of the three most popular insulin products sold in the U.S.—Humalog, NovoLog and Lantus—had risen by 117%, 118%, and 150%, respectively. To restrain the growth of overall premiums, insurers have increased copayments and deductibles, which helps explain why the out-of-pocket cost of insulin has risen so quickly. These increases cause many patients to use less insulin than the prescribed dose, risking disability and early death.
These trends would be easy to explain if insulin were a new drug protected by patents, but it isn’t. Medical insulin was first produced nearly a century ago. Since then, incremental improvements in safety, effectiveness and convenience have impeded the creation of a generic insulin industry. Generic-drug companies also haven’t considered it worthwhile to invest in the manufacturing techniques needed to produce versions of insulin whose patents have expired. An additional barrier comes from legal and regulatory protections for biologic drugs, including thickets of patents.
Without a generic form of insulin on the market, manufacturers can hike prices for each new version of the drug, even when it represents only modest improvements over versions available decades ago. (An article in the Lancet—a leading British medical journal—points to the lack of evidence on whether the newest products are safer or more effective than the insulins widely used in the 1990s, for which the patents have expired.) And because only three companies— Eli Lilly , Novo Nordisk , and Sanofi —command the lion’s share of the U.S. insulin market—a price increase initiated by one of the companies is often mirrored by the others, denying consumers the benefits of competition.
When I hear this what I hear is that the number of producers is limited, the industry has substantial barriers to entry including regulatory barriers as well as substantial initial investment, and the oligopoly that can produce insulin will not do so unless the price is significantly higher than what would otherwise be the market-clearing price for insulin. That sounds like a classic market failure to me which means that it requires government intervention. It is, like most market failures, a case in which government action is required to offset the consequences of other government actions.
Since I think that we should continue to regulate pharmaceuticals and I don’t think we should subsidize the pharmaceutical oligopoly, that limits the potential solutions. That’s why I ask my question: should the federal government manufacture insulin?
This is essentially a perfect paragraph:
“When I hear this what I hear is that the number of producers is limited, the industry has substantial barriers to entry including regulatory barriers as well as substantial initial investment, and the oligopoly that can produce insulin will not do so unless the price is significantly higher than what would otherwise be the market-clearing price for insulin. That sounds like a classic market failure to me which means that it requires government intervention. It is, like most market failures, a case in which government action is required to offset the consequences of other government action.”
However, before getting the government involved in production I’d like to understand the underlying dynamics. Critics generally love to characterize businesses as greedy opportunists. But its a logic problem to say prices are high and easily made higher, but no business wants to get in on the action.
Unless a diabetes cure is on the horizon high capital construction costs seem a weak explanation. Maybe prices aren’t that high relative to fully amortized production costs. Maybe there are technical know how barriers, but that seems unlikely. Maybe there are regulatory costs that could be addressed. I’d like to see the evidence.
Admittedly, I was just at the DMV last week. Heh. Doesn’t inspire one to advocate government production. But I do question whether they could do it better, and whether it would come with social engineering incentives like soda, potato chip, ice cream, pasta, pizza etc taxes. Come to think of it, most consumers, at least the Type IIs, could actually do something about cost all by themselves. But I suppose then Bernie would be promoting treadmills for all. (TFA)
I know plenty of thin diabetics, and, the government is probably paying the bill for over half of that insulin now. They set procedure prices for doctors through Medicare and Medicaid, so why not for the insulin purchased through part D. Set the price, and if they don’t want to do business, buy from Canada.
https://www.pharmacycheckerblog.com/buying-insulin-canada-without-prescription
for S&G value, the VA’s National Acquistion Center posts their prices for insulin. Some of the drugs are also sold to the DoD, Coast Guard, IHS. Might be fun to compare to prices paid elsewhere
I wasn’t able to find a simple statement of how much the federal government spends on insulin but it’s not as much as you might think. Medicare spends about $15 billion, Medicaid another $2 billion. Add in government employees and, to use round numbers, estimate $20 billion per year.
The total amount spent in the U. S. on insulin is probably around $120 billion. So the federal government doesn’t pay as much as I would have thought.
Still it’s not nothing.
My dog has diabetes, and we buy a bottle (Novolin) from Walmart for about $25.00. My wife checked other pharmacies, and Walmart is substantially cheaper than other places.
(I just recently learned that no prescription is needed for insulin.)
Perhaps people do not shop.
Are you sure you want to inject insulin meant for your dog into your wife?
“Medicaid another $2 billion”
That’s interesting because that’s the program Native American tribes use to fund theirs. Almost none of them live long enough to get medicare. The special relationship Natives have with the federal government would be under more scrutiny if they were not so few.
There’s also the Indian Health Service but that agency’s total budget is $6 billion so I assume that insulin is not a major expense item there. By “not a major” I mean millions not billions.
@Grey Shambler
It is insulin for humans, but it works for dogs as well.
Google is your friend
$25 per bottle?
Maybe people don’t ask the pharmacist. The scrip they have is probably for the humalog pen.
Just on general principle I would prefer that the government not manufacture stuff. What it could do is make it easier for competition to counter the coordinated price setting by big Pharma. Our network is part of group of hospitals that is looking into producing their own generics. (In theory they could also prosecute pharma for such obvious illegal tactics, but they donate a lot to politicians so that isn’t happening.)
Steve
The federal government doesn’t actually make very much any more. What they do is let contacts to contractors who make stuff for them. That is what I would expect would happen in this case. I don’t think that’s any more objectionable than having the present companies who dominate the market manufacture insulin.
As a practicing physician, while the $25 Walmart insulin is very helpful it also happens to be the worst insulin. The preferred forms of insulin (preferred because of their either long or short duration of action, allowing more close approximation of physiologic production) are all more expensive, ranging from 100 dollars per pen/vial upwards. In general Walmart Novolin/Humulin is useful for uninsured patient but is not a replacement for affordable modern formulations of insulin.
Welcome, John. Meet steve, a regular commenter here who is also a practicing physician.
This is an old post. Please return to this blog from time to time to check out more current posts that might be of interest to you. I frequently return to health care policy—it’s one of my areas of interest. I have a distinct point-of-view on the subject, having seen pharmaceutical companies, medical equipment manufacturers, hospitals, medical laboratories, and medical practices up close and firsthand. I am a registered Democrat but eclectic, pragmatic in my views.