HCD 511 Module 1 Final Summative Case Study: Applying Health Economics to a Health Care Issue Example

Why a Century-Old Drug Became Unaffordable: The Economics of Insulin Prices in the United States

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MS in the Science of Health Care Delivery, Arizona State University

HCD 511: Health Economics and Policy

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Month Day, Year

Why a Century-Old Drug Became Unaffordable: The Economics of Insulin Prices in the United States

The Issue

Insulin was discovered a century ago and is essential for people with type 1 diabetes and many with type 2. Yet in the 2010s, its U.S. list prices rose so fast that patients began rationing doses. An American Diabetes Association working group concluded that rising list prices, an opaque supply chain and insurance designs that pass list prices to patients had made insulin unaffordable for many (Cefalu et al., 2018). At one urban diabetes center, one in four patients surveyed admitted skimping on prescribed insulin doses because of what it cost them (Herkert et al., 2019). This case applies the course's economic concepts to explain why.

Supply, Demand and Elasticity

Demand for insulin is highly price inelastic for the people who need it: a person with type 1 diabetes cannot substitute away or go without, so quantity demanded falls little as price rises. In an inelastic market, a seller with pricing power can raise prices and increase total revenue, because the loss in quantity is small. The usual market discipline, buyers walking away, is weak. The rationing reported by Herkert et al. (2019) shows that demand is not perfectly inelastic among those paying out of pocket, and that the quantity reduction comes as dangerous underuse.

Market Structure

The U.S. insulin market is far from the perfectly competitive model. Three manufacturers supply most insulin, a concentrated market in which firms can set prices above marginal cost. Newer analog insulins are protected by patents and incremental product changes, and biosimilar entry has been slow. Prices are also shaped by pharmacy benefit managers, which negotiate rebates from manufacturers in exchange for formulary placement. Because rebates are often a percentage of list price, the system can reward higher list prices even when net prices paid by insurers are lower (Cefalu et al., 2018).

Insurance and Incentives

Insurance usually shields patients from prices, which can raise use through moral hazard. For an essential drug with inelastic demand, moral hazard is a small concern, and cost sharing mainly shifts costs to the sick. Patients in high-deductible plans, in the coverage gap of older Medicare drug plans or without insurance paid amounts based on list price, not the discounted net price. The uncertainty and information problems that Arrow (2001) identified in medical care markets appear here too: patients cannot judge the supply chain behind their pharmacy price.

Externalities

Rationing insulin causes hyperglycemia, diabetic ketoacidosis and long-term complications. Much of the cost of these outcomes falls on hospitals, public programs and other insurance enrollees rather than on the patient or the manufacturer, a negative externality of high prices. This strengthens the economic case for public intervention.

Policy Responses

The Inflation Reduction Act's cap protects Medicare enrollees but not most commercially insured or uninsured patients, which is why the list price cuts mattered. Those cuts also responded to policy changes that made high list prices more costly for manufacturers.

Evaluation

Each policy addresses a different failure. Caps reduce the burden on patients but do not lower prices in the system and may raise premiums. List price cuts help those who pay list prices but leave the rebate structure in place. Competition addresses market power but works slowly. A combination is needed: caps for protection now, transparency in rebates and stronger competition for lasting change.

Conclusion

Insulin became unaffordable because inelastic demand, concentrated supply, rebate-driven pricing and insurance designs that exposed patients to list prices combined. Economics explains why markets did not correct the problem on their own and why public policy, rather than competition alone, was needed to restore access.

References

Arrow, K. J. (2001). Uncertainty and the welfare economics of medical care. Journal of Health Politics, Policy and Law, 26(5), 851-883. https://doi.org/10.1215/03616878-26-5-851

Cefalu, W. T., Dawes, D. E., Gavlak, G., Goldman, D., Herman, W. H., Van Nuys, K., Powers, A. C., Taylor, S. I., & Yatvin, A. L. (2018). Insulin access and affordability working group: Conclusions and recommendations. Diabetes Care, 41(6), 1299-1311. https://doi.org/10.2337/dci18-0019

Herkert, D., Vijayakumar, P., Luo, J., Schwartz, J. I., Rabin, T. L., DeFilippo, E., & Lipska, K. J. (2019). Cost-related insulin underuse among patients with diabetes. JAMA Internal Medicine, 179(1), 112-114. https://doi.org/10.1001/jamainternmed.2018.5008