Before the 1920s, a diagnosis of type-1 diabetes meant a death sentence. No drugs existed to treat the autoimmune disease that caused the body’s immune system to attack and destroy the insulin-producing cells in its pancreas. Without insulin, cells in the body are unable to use sugar in the bloodstream, leading to organ failure.
However, on July 27, 1921, a Canadian physician named Frederick Banting successfully isolated insulin in his laboratory at the University of Toronto, aided by professor of psychology J.R.R. McLeod and medical student Charles Best. In January of the following year, the first type-1 diabetic received insulin treatment, ending the era of a certain death. Following the monumental discovery, the three men were granted an American patent for the hormone, which they then sold to the University of Toronto for $1 USD.
In order for all type-1 diabetics to benefit from this new-found discovery, Eli Lilly & Co. (“Eli Lilly”) — a global pharmaceutical company — received the rights to begin mass producing animal-derived, pork-based insulin called Iletin. Within the decade, insulin became Eli Lilly’s top selling product, making up a majority of the company’s revenue.
Over the next century, other drug companies began producing their own forms of the drug. In 1923, Sanofi, a French pharmaceutical company, began producing commercial insulin in Europe, and, in 1982, the Danish pharmaceutical company Novo Nordisk began producing human-like insulin using genetically-engineered yeast cells. These new cells were yet another huge technological jump, creating a more effective insulin treatment at a lower cost to producers.
However, despite insulin being a century old and with only slight variations over the past thirty years, the price in the United States has continued to rise. For instance, Eli Lilly’s primary rapid-acting insulin, Humalog, sold for $21 per vial in 1999 compared to $332 in 2019, an average price increase of 14.8% per year. Average inflation from 1999 through 2019 was 2.16% per year.
This article will explore the current economics of the insulin industry, mainly the current oligopoly that dominates production and how burdensome government regulation and barriers to entry have exacerbated the pricing problem in the United States. Furthermore, this article will explore different solutions, both policy-oriented and market-oriented, that could combat the drastic rise in insulin prices for the 12.3 million American type-1 and type-2 diabetics who require the drug to live.
Concentration of Insulin Production
In 2021, Fortune Business Insights valued the North American insulin industry at $8.84 billion and predicted that the industry could grow at a compound annual rate of around 2% through the end of the decade. Within this multi-billion dollar market, three companies — dubbed the “Big Three” — control 90% of the market: Eli Lilly & Co., Novo Nordisk, and Sanofi. This insulin oligopoly has allowed these firms to make enormous profits by continuously raising the price of all forms of insulin. In 2015, the US accounted for half of global insulin revenue, despite comprising only 15% of the market.
The drastic rise in the price of insulin does not coincide with what should occur in a competitive market. And given the concentration of production, regulatory barriers, and natural consolidation within the industry, it is difficult to make the case that the insulin market is even capitalist in the traditional sense of the word.
First, patents in the United States plague the insulin industry and choke potential competition that would facilitate a decline in consumer costs. Contrary to popular belief, most patents on human and artificial insulin have expired, with almost a dozen insulins having no patent protection. The issue of patents instead revolves around insulin delivery devices, which do have heavy patent protection. Novo Nordisk holds a patent on NovoLog flexpen, an insulin pen used with single-use pen needles. Eli Lilly and Sanofi have similar patents on insulin delivery systems, mainly pens which a majority of diabetics use to administer the drug. So, while potential entrants into the insulin market do not encounter legal trouble producing insulin, they are forced to devise a novel delivery system that does not violate the patents of the Big Three insulin producers.
The insulin market has also faced significant regulatory barriers to entry due to laws regulating the introduction of biosimilars. Until March 2020, the most impactful barrier was the insulin classification. Under the Public Health Service Act of 1944, insulin should have a classification as a biologic — a drug derived from living things like humans, animals, or microorganisms — and should fall under the Food & Drug Administration’s (FDA) process for approval. However, the timing of insulin’s initial approval before the PHSA led to the drug’s classification as a small molecule drug, regulated by the Federal Food Drug and Cosmetics Act and the New Drug Application. This ambiguity has led to regulatory inconsistencies, posing major roadblocks to any insulin biosimilars and helping maintain the current oligopoly of approved insulin products.
Further regulatory setbacks have prevented the introduction of a generic insulin alternative, as well. In general, generics typically have prices 50-80% lower than name brands. As opposed to biosimilar drugs which are like the reference biologic, these generic drugs are identical to the biologic in terms of active ingredients and efficacy. Unfortunately, to replicate a biologic requires significant time and capital investment, equal to developing a novel drug. As any entrant would have to price compete with the Big Three, many drug companies opt to deploy their capital in a less-concentrated market than insulin.
Another practice undertaken by insulin manufacturers that allowed them to protect their patents through the mid-2010s was known as “evergreening.” To understand this practice, imagine a fictitious company, Drug Inc., that created a novel drug, SuperSerum, and patented it for the maximum length in the United States, twenty years. Flash forward nineteen years and SuperSerum has been Drug Inc.’s highest-selling product for almost a decade. They do not want new market entrants with biosimilars and generics of SuperSerum, as this would drive down the price and soften revenue growth. So Drug Inc. devises a plan to marginally increase the efficacy of SuperSerum to create a “new” drug called SuperDuperSerum. Drug Inc. then applies and receives another decade or so of patent protection for SuperDuperSerum. And despite the patent for SuperSerum having expired, no company will make a generic of SuperSerum because prescribers now view SuperDuperSerum as the primary drug due to its “optimal” efficacy. This, in essence, illustrates the practice of evergreening: abusing intellectual property laws to artificially perpetuate market power. Defenders of the practice, especially the drug companies, have proclaimed attempts to hinder patent laws would obstruct innovation. However, the standard economic model champions competition, not market cartels, as the key driver of true innovation, which improves product quality while also driving down prices for consumers.
Reaping the Profits from Non-Competition
As stated previously, the Big Three of Eli Lilly, Sanofi, and Novo Nordisk have performed wonderfully for shareholders, growing their combined revenue 4.9% on a compound annual growth basis and expanding their operating profit margin from 2016 through 2022.
Annual revenue and operating margin (operating profit/revenue) for each individual company, as well as the same data for a hypothetical firm that combines the revenue and profits of all three companies (bottom right)
While these companies have pharmaceutical portfolios beyond insulin that contribute to their bottom line, insulin still makes up a key percentage of these firm’s revenues. In 2021, Humalog, a rapid-acting insulin, was Eli Lilly’s second-highest selling drug, and insulin products accounted for 42% of Novo Nordisk’s total revenue in the first half of that year. Additionally, Lantus, a long-acting insulin, was Sanofi’s second-highest seller from 2017 to 2021. As profitability and revenue generation have grown at impressive rates for these firms, so too have prices of their insulin products.
Unfortunately, these companies have only been able to uphold their oligopoly and pricing power due to stringent government regulations. While some reasons have been listed above, the costs associated with drug applications pose yet another obstacle to any new insulin products and shield the existing market participants. As Dr. Jeffery Singer and Michael Cannon, the Director of Health Policy Studies at the Cato Institute, note, “in 2019 dollars, the average estimated cost of each new drug approval has risen from $523 million in 1987 […] to $3.2 billion in 2013. The cost grew at an average annual real rate of […] 8.5% from 1990 through the early 2010s.” These high regulatory costs add an additional barrier for entrants on top of direct R&D costs. Therefore, while the initial reaction is to place sole blame on the drug companies for the continuous rise in their prices, we must recognize that these firms can only engage in such behaviors because of onerous regulations and costs that plague the pharmaceutical industry.
Another interesting trend observed in the rise of insulin prices — particularly from 2008 through the mid-2010s — was a simultaneous increase in drug prices by all three manufacturers, suggesting the insulin oligopoly may also resemble a monopolistic cartel in its pricing practices.
The dramatic rise of insulin prices over the past few decades, despite the underlying chemicals remaining relatively the same, raises red flags regarding industry inefficiencies. Over one million Americans with diabetes report rationing insulin due to high prices, a practice that leads to hyperglycemia (high blood sugar) and a higher risk of kidney failure, diabetic coma, diabetic retinopathy (blindness), and other serious complications.
Solutions to the Problem that could Grow the Problem
The most recent – and likely best known — solution to the rising costs of insulin was introduced in the Build Back Better Act (BBBA), one of the Biden Administration’s landmark proposals. While it has not been passed by the Senate, the House-version of the bill would cap the monthly out of pocket expense for insulin at $35 for those on individual or group private insurance plans and loosen Medicare’s non-interference clause to allow the US government to negotiate drug prices for select high-priced medications, including insulin. Currently, only Medicare recipients are able to take advantage of the $35 monthly price cap, a result of the Inflation Reduction Act which President Biden signed into law in August 2022. The more ambitious BBBA insulin proposal still faces backlash in Congress. While the BBBA’s plan has received lots of praise by Democratic members of Congress, the implementation, breadth, and economic soundness of the plan is far more complex than Twitter would suggest.
However, even if passed, many question the effectiveness of the BBBA in reducing the price of insulin and creating a competitive market. For one, the BBBA’s plan for insulin prices only applies to those with health insurance, meaning roughly 15% of diabetics would not see lower costs. Additionally, the plan caps insulin costs for those on group or individual private insurance. While most Americans receive health insurance through their employer, many hourly employees are not eligible for these health benefits and would not gain from the BBBA.
Beyond these issues, the BBBA’s economics do not actually alleviate the source of the problem. Past government intervention in drug manufacturing has driven up the cost of synthesizing new drugs. For instance, the Congressional Budget Office stated that the increased government regulation for new drug prices in the Inflation Reduction Act will increase launch prices for new drugs. The CBO projects that negotiation provisions would “increase the launch prices for drugs that are not yet on the market relative to what such prices would be otherwise.” This report illustrates how further regulatory obstacles may compound the current issue of high barriers to entry, upholding the market concentration. While the CBO does state in the same letter that manufacturers would seek higher launch prices to counteract regulations on price increases after the product hits the market, this phenomenon demonstrates how increasing regulation creates new problems and loopholes requiring further regulation in a perpetual, bureaucratic cycle.
Increased regulatory control over the insulin industry would also raise costs for private policyholders and for the federal government. Because the proposal limits out-of-pocket costs for insulin-receiving individuals, insurance companies must pay the remainder of the drug cost. These insurance companies will then have incentives to raise premiums for policyholders to pass on higher costs, elevating the already high cost of healthcare. As for the federal government, Medicare will have to cover insulin prices similar to private companies in addition to increased federal expenses due to Obamacare subsidies for certain individual private insurance plans.
Reinstate Capitalism to the Insulin Market
Microeconomic principles explain how competitive markets yield the best prices for consumers, with oligopolies and monopolies generally being worse for consumers. Unfortunately, drug importation regulations, patent laws, and costly drug application processes have created a marketplace where three sellers consistently make unilateral pricing decisions. To remedy the high cost of insulin, policymakers must create an environment that welcomes new market participants, promotes organic innovation, and ultimately reduces costs for consumers.
Allowing American patients to import and obtain cheaper insulin from other countries demonstrates one such proposal that would force domestic producers to reduce prices. In the United States, a vial of insulin costs $98.70 on average compared to $7.52 in the United Kingdom.
As of February 2023, the FDA forbids US residents from importing any drug not approved by the FDA. Because neither Canada nor Mexico require a prescription to obtain insulin, Americans could travel into those countries to buy cheaper insulin. However, laws regarding returning to the US with non-FDA-approved insulin makes this practice risky, and residents living far from Canada or Mexico cannot utilize this loophole. If the US government would acknowledge the near-identical chemical structure and safety of insulin around the world and allow its citizens to import cheaper versions of the drug, consumer prices would fall substantially from increased competition.
Other methods can also increase competition in the US insulin market, including reducing regulatory costs for drug approval and launch. As stated earlier, the US government has created an environment where could-be market entrants are discouraged by over-regulation, dampening the profitability of any drug brought to market. Fewer regulatory hurdles would allow companies to develop and produce lower-cost insulins without the time and monetary costs. With more market participants, the Big Three would no longer have strong price-making ability nor the ability to operate like a cartel when adjusting prices.
Finally, while a prosperous economy requires the protection of intellectual property, abuse of these laws gives rise to monopolistic and anti-competitive behavior. The insulin market exemplifies this phenomena, whereby a handful of companies have held onto the patents for a drug whose original patent sold for $1. The initial reaction tends to revolve around reforming patent laws to prevent evergreening; however, these actions could have unforeseen consequences that disadvantage the public at large. A lack of intellectual property protections will disincentive companies from funding R&D if they cannot capitalize on their novel product. On the other side, upholding the current patent laws will allow drug companies to continue to profit enormously on century-old drugs. Thus, policymakers should approach patent reform with caution: going too far could upend the US’s pharmaceutical industry and disincentive true innovation while not going far enough will perpetuate the current abuses of the system.
Drug companies in the United States and around the world have done a monumental service in providing complex substances that can do everything from preventing deadly diseases to allowing diabetics to live long, prosperous lives. However, the insulin market in the United States illustrates how companies can and will take advantage of intense regulation and manipulate certain laws to maintain market control long after their initial discovery of the drugs. As it pertains to insulin, the United States has clear inefficiencies that allow the cost of the drug to far surpass any other developed nation. Now, lawmakers, regulators, and us, the people, must decide if this phenomena emerges solely from corporate greed or if there are artificial barriers to entry set by bureaucracy that prevent competitive markets and prop up these oligopolies.