The Real Cause of High Insulin Prices

Diagram showing distribution of payment of $400 insulin.

Follow the Dollar: In the diagram above, see where all the money goes from a typical insulin purchase by an insured patient in the US paying full price before his deductible is met.  Pay special attention to the right-hand column, which shows how much each party keeps from the sale.  Note that about 70% ($294) or the $408 the customer pays secretly gets refunded mostly to the insurer, with a  the Pharmacy Benefits Manager (PBM) keeping a small portion of that.

Kickbacks of Almost 75% Inflate US Insulin to About 400% of  'Real' Prices


In general, the outrageous US insulin prices (relative to historical prices and to current prices in the rest of the world) are blamed on a mysterious combination of drug-company greed, high drug-development costs, and a "complex" pricing system.  

However, if you take a peek behind the curtain (like the diagram above and links below), you'll see that there is one clear, simple cause: "Drug Rebates" (to US insurers and PBM's) of up to 75% of the price of every single vial (or box of cartridges/pens) that an insured consumer buys (even when paying full price "out of pocket”).

These so-called "rebates" (kickbacks really) inflate the US retail list prices for most types of insulin to about four times the real prices (the final prices to public and private insurers, and as it happens, the average worldwide prices).

Brands 'Pay to Play' for Health Plan Coverage

Drug companies pay these "rebates" to the insurers and PBMs in order to get favorable coverage (or any coverage at all) in US health plans.  Each year, PBMs and insurers offer the spots on their "formularies" (the lists of covered and preferred drugs) to the brands offering the lowest cost to the insurer (not to consumers — this is an important distinction as you'll see below).

In this "pay-to-play" scheme, the fiercest competition for health-plan coverage is for longterm medications with a few interchangeable brands (like insulin).  That's why the rebates and prices have gone up faster and higher for insulin than for most other drugs.

Given that insulin and other drug companies clearly need to be covered in health plans, it's easy to see how competing insulin companies have had no choice but to inflate prices every year in order to offer higher and higher rebates (both in terms of percentage and dollar value).

That's how, over the past 20 years, this has resulted in the situation we have today, with typical rebates for insulin of around 75% of the retail price, and retail prices now inflated to about 400% of the real price (the price paid after rebates to public and private insurers, for most insulin sold in the US).

For $200-$400 Insulin, Real Price is $50-$100

Therefore, the real price (after these rebates) is only about 25% of the "fake" retail prices.   That means the real prices for insulin that retails for $200-$400 is really $50-$100.  Or for a box of cartridges that costs $500-$600, the real price is just $125-150.  (In the diagram above, the real price is about $115 from the $408 that the customer spent.)

This real price can be calculated either by subtracting the rebates from the total paid, or by adding the amounts that the manufacturer, wholesaler and retail pharmacy make from a sale.  

Keep in mind, this is still the retail price (as it includes the wholesaler and retailer's mark-ups), but it's the real retail price, not the fake, inflated one.

Inflated "Out-of-Pocket" & Co-Pays

In addition to the extreme hardship these inflated prices cause for uninsured consumers, the rebates and inflated prices clearly defraud insured customers when they pay for their insulin fully or partially "out of pocket":

Here's how it works:

(1) Insurers and PBMs receive these rebates on ALL purchases of a particular brand, even when consumers pay full-price before meeting their deductibles.  This is the case in the diagram, where $294 of the customer's $408 "out-of-pocket" payment secretly goes to his health insurer and PBM. Therefore, most of the $3,000, $7,000, or whatever people have to spend for their deductibles, often goes  to their own insurers.

(2) After deductibles are paid, consumers who pay percentage co-pays (rather than fixed dollar amounts)  may really be paying co-pays that are  2-4 times what they believe they are paying.

In the diagram, if the customer has a 20% co-pay (an $80 co-pay on the $400 retail price), he actually pays a 70% co-pay on the real price ($115), after the secret rebates are deducted.  So, in this case, the insurer will cover only about 30%, rather than 80%.  

With higher co-pays, the customer can end up paying 80-100%, and in some cases, the insurer even makes money on each "covered" prescription filled!

Insurers Pay Less As Prices Get More Inflated

This illustrates a more general rule: with percentage co-pays, insurers pay less and less (or make more), as the retail prices get higher and higher (as long as rebate percentages are increased proportionally).  

Here's a particularly astonishing example:  With a 20% co-pay, a $100 insulin with no rebate costs the insurer $80 ($100 - $20 co-pay), but a $400 insulin with a 75% rebate costs the insurer just $20 ($400 - $300 rebate - $80 co-pay)!

Now The Whole Puzzle Fits Together

Combine all this with the fact that drug brands with the lowest final cost to the insurer are the ones that get the best coverage (or only coverage) in US health plans, and it‘s easy to see how and why the US ended up with such highly inflated drug prices, especially for insulin.

This scheme explains why insurers often cover just one brand of interchangeable insulins, and why they sometimes switch.

And, it explains why the price of a particular prescription may be higher through insurance than paying in cash.  (Rebates to the insurer and upfront pricing are both set by the health-plan codes on the customer’s insurance card.  Without the insurance card, other codes that provide an upfront discount may be used.)

The Solution

On the bright side, the solution to all this is clear and relatively simple: Replace "drug rebates" with upfront discounts for everybody. 

This way, insured and uninsured customers will pay the true cost of the insulin (now $50-$100 for most brands) and a 20% co-pay really will be a 20% co-pay.  

Of course, the devil is in the details, but with enough public pressure, this scheme can be turned on it's head and become a surprisingly simple solution for affordable insulin and other prescription drugs in the US.

Note: The diagram was produced by the drug companies themselves (through their trade group, PhRMA).  Because only the drug companies, PBMs and sometimes the insurers know the exact rebate percentages, and because the figures shown are supported by other sources, we believe these figures are typical.  We receive no support from the drug companies (or any other industry).

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The Take-Aways

● Health insurers & PBMs receive huge "rebates" (typically around 75% for insulin) on all the prescription drugs that the insurers' customers buy.

● Because these "rebates" don't go to the buyers (who have no idea), they really are secret kickbacks.

● To cover these kickbacks, US retail prices for most insulin is inflated to almost 400% of final price (after rebates).

● Therefore, by replacing the "rebates" with upfront discounts, US insulin prices could fall from the typical $200-$400 per vial to $50-$100.

● Since $50-$100 are the average worldwide prices (for the same insulin types), drug rebates are clearly the problem.

● Even when insured buyers pay full price "out of pocket" (before deductibles are met), the insurer and PBM still get the rebates and often end up with most of the money.

● After deductibles are met,  a customer's 20-30% co-pay on the inflated retail price is often a 70-90% share of final cost.

● In fact, with percentage co-pays, insurers ALWAYS pay less and less as retail prices inflated for proportional rebate percentage increases.

● For example, with a 20% co-pay, the insurer pays $60 less per vial on a $400 vial of insulin with a 75% rebate, than on a $100 vial of insulin with no rebate.

● Given that brands with the lowest final cost to the insurer (not to the consumer) get preferential (or exclusive) coverage in US health plans, it's easy to see how insulin rebates and prices have skyrocketed.

● This "pay-to-play" scheme forces insulin and other drug companies to raise prices every year, to "one-up" the competition with a larger rebate.

● This is why health plans often cover Humalog, but not Novolog (or vice versa), and why they periodically switch.

● This also explains why competing brands (like Humalog and Novolog), have risen in lock-step over the past 20 years.

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