Tuesday, August 13, 2019

Insulin And The Pharmaceutical Industry

There have been recent cases where young people have died from Type I diabetes because of a combination of rapidly rising insulin prices and health insurance policies which have bad coverage.  The latest one is typical of the other cases I have read about*.

Now why exactly a drug that has been available for a very long time would rise in price as much as insulin has done in the recent decades is a tricky question, and the answers to that question intertwine with the US health insurance system which still does not guarantee that all people have insurance to cover life-saving medications adequately.

A proper response to that question would take a book, but this 2016 article lays out many of the reasons for the current steep insulin prices in the US.  I would add the clearly oligopolistic nature of the pharmaceutical industry.  It gives the individual firms a lot of price setting ability and results in the kinds of outcomes where small improvements in quality can be used to defend giant price increases, and where this happens:

The modern age of insulin innovation kicked off with Eli Lilly’s introduction of Humulin, in 1982. Using genetic engineering, biologists figured out a way to modify bacteria into tiny, specialized factories that could create insulin that matches the kind the human body produces. Allergic reactions became rare as more people used the newer version.


Humulin could be created in vats instead of harvested from cows or pigs, and it relieved doctors’ worries that the looming diabetes epidemic would cause a shortage.
“These were an incredibly efficient way of making insulin. We’d never run out; it would keep the prices under control,” Nathan said. “How that has changed.”
The Danish company Novo Nordisk began making its own bioengineered human insulin in 1991. Rather than lower the price, however, competition had an unusual effect: The list prices began to rise.

Bolds are mine.

The industry argues that list prices may have gone up but that the final prices consumers are paying have not.  But this doesn't seem to be the case anymore, at least for those young people who age out of their parents' health insurance policies and who cannot afford an equally generous policy themselves.

The industry also argues that pharmaceutical prices cannot be set without considering the high costs of research and development, most of which doesn't result in any new profit-making drugs but must still be paid for.

And that's true, as far as it goes.  Still, how high those prices should be depends on many other factors.  Clearly, both the  low price elasticity of demand and the level of market concentration are among them.  

What the former means, in plain language, is that people needing insulin to survive are willing to pay almost anything for it rather than go without, should there only be one source selling it.  What the latter means is that if firms co-ordinate their prices (which can happen in an oligopoly), the market in practice is approaching the case of only one source selling insulin.

We need to enforce anti-trust laws better in this industry as in so many others industries.

*  In some cases individuals try to make their expensive insulin go further by lengthening the interval between the doses.  In other cases, individuals shift to a different older type of insulin which is cheaper, but harder to administer correctly.