It is good news that the Senate is working on a bipartisan plan to make insulin more affordable for the millions of Americans with diabetes who desperately need it. The bill, circulated by primary co-sponsors Sens. Jeanne Shaheen (D-N.H.) and Susan Collins (R-Maine), would tackle insulin affordability in two main ways: first, by capping insured patients’ out-of-pocket costs for insulin to just $35 per month, and second, by nudging drug manufacturers to lower list prices of their insulin products to improve affordability among the uninsured.
As laudable as the drafters’ motives are, however, the bill is flawed as it needlessly raises costs above what is necessary, through higher insurance premiums for insured households and employers, and higher government payments for Medicare. It would do so by muting future price competition in the insulin market and by unnecessarily raising spending through the opportunities it creates for strategic conduct and with its formulas for setting some transaction prices.
To understand why, consider how the U.S. pharmaceutical market operates today. To sell more of their drugs, pharmaceutical manufacturers regularly compete to get on insurance company “formularies,” (lists of covered drugs) by agreeing to pay “rebates,” or discounts. These rebates typically go to pharmacy benefit managers (PBMs) who pass them back to insurers, after taking a cut. The rebates reduce the net costs of covering drugs to insurers and with that premiums. However, the rebate system has also given manufacturers incentive to inflate the list prices of their drugs. The high list prices do not affect patients who pay flat co-pays on their insulin, but they hurt patients with deductibles, co-insurance, or no insurance at all.
For the insured, the Senate bill proposes to use a $35 co-pay cap for “certified insulin products” as a fix for the affordability problem. The Senate bill sets up a voluntary certification program for manufacturers who agree to lower their list prices for their insulin products to the benefit of uninsured patients who could not benefit from co-pay caps. The “certified” price for a specific insulin product should not exceed weighted average of prices net of rebates paid by Medicare’s Part D plans in 2021, with weights reflecting plan enrollment. (New insulin products also have a pricing formula to establish certified prices). The certified list prices would now become new transaction prices for insurers because the bill would ban any additional rebates and other discounts offered to PBMs and insurers for covering specific insulin products. These new transaction prices would become permanent, locked in at 2021 levels (adjusted for general inflation). All “certified” products would automatically get preferred placement on insurer formularies.
What’s wrong with this approach? With automatic formulary placement and transaction prices pegged to 2021 levels, the bill eliminates price competition for insulin in the insured market. This would lock in manufacturer profits at a time when competition is increasing, manufacturer margins are dropping, and more competitors are on the horizon. The voluntary nature of certification creates incentives for strategic selection of products to certify—manufacturers would choose to certify if they believe they could make more money doing so. With multiple products within the insulin class, manufacturers would have incentives to use physician marketing, patient advertising and other tools to shift use from the currently highly discounted insulins to those that have higher margins but would be newly certified. The pricing formula for new insulins would create an automatic incentive for manufacturers to create costlier but not necessarily better versions of their existing insulins.
There are ways to address some but not all of these problems. The new product formula should weigh insulins by their volume of use. Certification could allow a manufacturer to certify only one price per insulin class, at a level that is least costly for insurers. The policy could allow for Medicaid rebates to continue (a cost we have not listed above). Pricing need not be fixed to 2021 levels in perpetuity but rebased every few years.
Together these concerns suggest that it may be time to pause and consider whether access to affordable insulins for uninsured patients could be addressed in some other way than by undermining price competition in the insured insulin market beyond what is necessary to achieve $35 co-pay caps. A mandatory program would limit the strategic selection of products (gaming). In absence of such a plan, a narrower certification program where the product with lowest transaction cost in each insulin class, not for each manufacturer, and with guaranteed sales volume, could be a path forward. With programs like these, the promise of $30 insulin could become a reality.
Richard G. Frank, PhD., is the Leonard D. Schaeffer Chair in Economic Studies at the Brookings Institution and Director of the USC-Schaeffer Initiative on Health Policy. He is a former Assistant Secretary for Planning Evaluation at the Department of Health and Human Services. Marta E. Wosińska, PhD., is Visiting Fellow in Economics Studies at the Brookings Institution. She is former Director of the Bureau of Economics at the Federal Trade Commission and former Chief Healthcare Officer at the Office of Inspector General in the Department of Health and Human Services. From that role, she was detailed in 2019 to the Senate Finance Committee to work on the insulin drug pricing investigation. Both Frank and Wosińska acknowledge grant funding from Arnold Ventures.