The high cost of insulin has been a niggling thorn in the side of regulators and patients for decades: Prices for the 100-year-old drug have increased more than 600% in the past 20 years, and stories of patients rationing doses abound. Even the most conservative economists point to it as an example of a market gone sour.

Despite repeated efforts at the federal and state level to rein in the cost of pharmaceuticals, prices go up each year, growing quicker than any other health care service and routinely outpacing the rate of inflation.

This year, California is poised to do something different to cut the cost of insulin, attacking the problem on three fronts. And if it works for insulin prices, it could work for other drugs:

• Lawmakers have introduced a bevy of bills targeting out-of-pocket insulin costs. They have also advanced legislation ensuring cost savings for all drugs get passed down to patients;
• Attorney General Rob Bonta is suing the nation’s largest insulin manufacturers and pharmaceutical benefit managers for driving up the cost of the life-saving drug, alleging unfair business practices;
• And Gov. Gavin Newsom recently announced a $50 million state contract with generic drug company Civica Rx to manufacture three types of cheap biosimilar — or generic — insulin for diabetic Californians.

This three-pronged approach isn’t perfect — measures like the ones suggested by lawmakers this year have failed several times — but legislators are hopeful the resources of usual opponents will be divided among the state’s other efforts. Health economists and patient advocates believe the state’s lawsuit will lift the veil on opaque pricing tactics for the first time nationwide, potentially shifting how industry players behave.

“It’s good the state of California is using its power as a purchaser, a regulator (and) a litigator to try to address this issue,” said Anthony Wright, executive director of Health Access California, a consumer advocacy group that routinely sponsors health care affordability measures. “This is such a multi-faceted problem that it requires a lot of different solutions.”

Insulin: The poster child for a broken market

So who’s to blame for the skyrocketing cost of pharmaceutical drugs? Ask any number of industry players and you’ll get stuck in an endless loop of finger pointing. Manufacturers blame insurers and intermediaries known as pharmaceutical benefit managers for exploiting profit models. Those groups in turn blame manufacturers for setting high prices to begin with. In the end, the patient pays.

“There are no heroes in health care,” said Kevin Schulman, a professor of medicine and operations, information and technology at Stanford University. Schulman sits on the scientific advisory board for Civica Rx.

In California, between 2017 and 2021, state-regulated health plans increased spending on prescription drugs by more than 22%, or $2.1 billion, according to a recent price transparency report. By comparison, medical expenses increased 18.4% during the same time period. Prior to the COVID-19 pandemic, medical expenses had increased just 8.2% while drug spending increased 14.4%.

For many people with health insurance, increasing pharmaceutical prices are obscured because insurance picks up a majority of the tab. However, people who are uninsured or who have not hit their annual deductible pay the full drug price out-of-pocket.

The cost of insulin has become the consistent linchpin of these drug price discussions. Some people with diabetes — approximately 37 million in the United States and about 3 million in California — need insulin to regulate their blood sugar. Without it they will die.

“There are no heroes in health care.”
— Kevin Schulman, professor of medicine and operations, information and technology at Stanford University

Until very recently, the average list price of insulin increased about 11% annually, with some common brands exceeding $400 per vial. Actions by the federal government to impose out-of-pocket price caps and penalize manufacturers that raise prices faster than the rate of inflation spurred the three largest insulin manufacturers to drop prices to $35 earlier this year. However, during a U.S. Senate committee hearing last week, executives from Novo Nordisk and Sanofi would not commit to keeping prices that low.

“We’ve seen a little bit of a collapse these last few weeks…this will provide some relief, but at the end of the day the thing we don’t know is how (pharmaceutical benefit managers) are going to respond to these cuts,” Schulman, who researches the pharmaceutical market, said. “In theory, they have no interest in supporting these low-cost products.”

Why wouldn’t these intermediaries support low cost drugs? The answer lies in a complex and convoluted system of rebates that drug companies pay pharmaceutical benefit managers. Pharmaceutical benefit managers control the list of drugs that health insurance plans cover, also known as a formulary. Consolidation has resulted in three companies — CVS Caremark, Express Scripts and OptumRx — representing more than 80% of the market. To incentivize benefit managers and insurers to cover their products, manufacturers offer them a cut of the sale price, or a rebate.

The trade group representing pharmaceutical benefit managers claims more than 90% of these rebates, also known as discounts, are passed on to insurers to help lower the cost of health insurance premiums. But researchers say without regulation mandating transparency, it’s impossible to know who exactly keeps the rebates and how they’re used.

Erin Trish, an associate professor of pharmaceutical and health economics at the University of Southern California, said what results is a competitive market where prices for many drugs are driven higher rather than lower.

“It creates incentive for these (pharmaceutical benefit managers), who are making money as a share of the list price of the drug, to negotiate for drugs that have higher list prices with bigger discounts rather than lower prices,” Trish said.

It also results in a system where the sickest patients — those who use the most prescription drugs — subsidize the cost of insurance for everyone else, which is the opposite of how insurance typically works.

In a study analyzing financial reports from 13 of the largest drug manufacturers, Schulman found that from 2011 to 2019, manufacturers went from sharing nearly 30% of their annual revenue with pharmaceutical benefit managers to more than 67% in the form of rebates and other discounts. In fact, with insulin, as prices have gone up, manufacturers’ profits have decreased.

Pharmaceutical benefit managers disagree that they are the bad actors in this equation. In a statement reacting to California’s insulin manufacturing deal, the Pharmaceutical Care Management Association said assertions that pharmaceutical benefit managers are responsible for increased prices are “just not true.”

“We applaud any move to lower high drug prices, recognizing that these are the root cause of gaps in prescription drug affordability, including for insulins,” the statement said. “The savings pharmacy benefit companies negotiate with drug companies are used to either lower health insurance premiums or prices at the pharmacy counter, usually a combination of both.”

Bill Head, assistant vice president of state affairs for the Pharmaceutical Care Management Association, said his members’ job is to lower costs for health insurers. Manufacturers, not pharmaceutical benefit managers, control the prices, he said.

“We will always go with whatever the lowest net cost to the payor is, so if (manufacturers) want to just lower the cost and make it more attractive, great,” Head said. “If that’s what’s going to save the payor, the health plan…or the employer money…that’s where we’ll go.”

Can California get around the middlemen?

Tackling the market distortions will take action at the federal level, but in many ways California’s new deal to manufacture its own insulin and other generic drugs circumvents the problem and may influence how industry players behave.

“We have already done something to disrupt the market,” Dr. Mark Ghaly, state secretary of health and human services, told CalMatters. “What we’re doing is starting to take some of the price games away that are traditionally played.”

Civica Rx will produce for the state three of the most commonly used insulins, interchangeable with the brand name drugs Lantus, Humalog and Novolog. Patients will be able to purchase them out-of-pocket for $30 per vial, far less than brand name equivalents, at pharmacies throughout the state, according to the Department of Health Care Access and Information, the regulatory body overseeing the initiative. The state has set an aggressive target of making the first vials available by 2024, although Allan Coukell, Civica senior vice president of public policy, told CalMatters it can’t control how quickly the FDA will approve the drug.

Wright, with Health Access California, said this strategy applies unusual pressure to the pharmaceutical market. As both a purchaser representing nearly 3.2 million diabetic adults and a manufacturer, the state has different motivations than shareholders do.

“A typical investor is not going to put up the money to develop a new generic for fear of being undercut,” Wright said. “The state of California has a different incentive. If we don’t sell a vial we get the savings as a purchaser. We also have the public policy goal to try and bring down the costs for everybody.”

But it doesn’t entirely dampen the influence of middlemen in the distribution supply chain. The same manufacturers that make brand name insulin have also sold lower-priced generic insulins for years, but by and large patients have not switched to them.

“What we’re doing is starting to take some of the price games away that are traditionally played.”
— Dr. Mark Ghaly, state Secretary of Health and Human Services

In 2021, the state’s prescription drug cost transparency report showed generic insulins were not among the top 25 most commonly prescribed generic drugs. In contrast, excluding COVID-19 vaccines, Humulin, a fast-acting insulin, was the most commonly prescribed brand name drug that year. Other brand name insulins ranked fourth, fifth and eighteenth on the list of top 25 most commonly prescribed brand name drugs.

Brand name drugs accounted for only 10.2% of all prescriptions that year but made up 20.8% of spending, according to the report. Health plans spent the second-most amount of money on Humalog, another fast-acting insulin, among the top 25 most costly brand name drugs in 2021. Other brand name insulins ranked fourth, seventh and nineteenth.

The reason lower-cost generic insulins aren’t more commonly prescribed: Manufacturers don’t offer rebates for them, which means intermediaries and health plans can’t profit, said Neeraj Sood, a health economist and professor at the USC Price School of Public Policy.

The state will have to find a way to entice middlemen and health plans to cover its cheaper insulin or else patients with insurance won’t necessarily benefit, Sood said. Of the more than 3 million adult diabetics in California, only about 95,500 are uninsured and use insulin, according to the state Department of Health Care Access and Information.

The department refused to make anyone available for an interview and asked for emailed questions. According to an unattributed statement from the department, Civica will be responsible for distributing the state’s insulin and will “engage with major wholesalers, retail pharmacies and health plans.”

Medi-Cal, the state insurance program for low-income Californians, will conduct a “fiscal analysis” to determine whether the drug will be covered for enrollees, said Anthony Cava, spokesperson for the Department of Health Care Services.

It’s unclear whether California can mandate that private insurers cover state-produced insulins, but Civica Vice President Coukell said the company is confident most health plans will cover its insulin.

“Health insurance is not monolithic,” Coukell said. “There may be some that continue to pursue rebates, but there are other plans that are going to go for the lowest net cost, and our strategy is a lowest net cost strategy.”

According to Head, with the Pharmaceutical Care Management Association, that strategy aligns with his industry’s goals.

“Any time there’s more competition, any time there’s somebody who’s driving down the cost in the brands, from our members’ standpoint, that’s always a good thing,” Head said.

Mary Ellen Grant, a spokesperson for the California Association of Health Plans, said the plans “strongly support” the use of lower-cost alternatives and “look forward to the opportunity to provide a lower cost version to their members when it becomes available.”

Other state strategies

In the meantime, other state leaders are trying to lower costs through litigation and direct regulation.

The lawsuit filed by Attorney General Bonta alleges the nation’s three largest insulin manufacturers and pharmaceutical benefits managers have engaged in unfair and illegal business practices to artificially increase prices. Five other states have filed similar lawsuits. Researchers and policymakers hope that legal action will shed light on how backroom price deals are made and help drive down consumer costs.

And a bill brought forward by Sen. Steven Bradford, a Democrat from Gardena, proposes requiring health plans to use at least 90% of rebates passed down from pharmaceutical benefit managers to cut what consumers pay at the pharmacy.

The bill, which is sponsored by a coalition of patient advocacy groups and drug manufacturers, has been quietly killed in committee three times in the past three years, with health insurers and pharmaceutical benefit managers opposed. The controversy stems from the proposal’s potential to increase insurance premiums for all enrollees by $200 million annually, according to a fiscal analysis from the non-partisan California Health Benefits Review Program. Attempts to do the same thing at the federal level have also failed out of fear of increasing insurance costs, although several states have implemented similar mandates.

Le Ondra Clark Harvey, executive director of the California Access Coalition, which is sponsoring the bill, said claims of increased health care costs are misleading. The $200 million represents just a 0.3% premium increase, Clark Harvey said, and the same report estimates patients with brand name prescriptions would save upwards of $70 million collectively.

“There will be an increase but not a significant one,” Clark Harvey said. “We’re not trying to beat up on health insurers and pharmaceutical benefit managers — we think that everyone has a role. But in this particular scenario, there has been what can be described as a loophole or cushion for them to collect this extra money after they’ve negotiated.”

In opposition, health plans and their intermediaries argue that “cushion” is exactly what helps them keep premiums down.

“(Point-of-sale) rebates won’t help the majority of patients who use generics or lower-cost brands and instead will lead to an increase in everyone’s premiums,” Head said during a recent Senate health committee hearing.

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CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.