The price of insulin and other lifesaving prescription drugs are increasingly more expensive. In response, the Democrats’ so-called “Inflation Reduction Act” imposed a $35 monthly out-of-pocket price ceiling on insulin for Medicare recipients. But does this actually address the reason why these drugs are so expensive, or are they missing the mark? On this episode, we expose the root cause of the high cost of insulin (and other life-saving prescription drugs), and what must happen to ensure these prices are affordable and treatment options are abundant. 

Tim Doescher: From The Heritage Foundation, I'm Tim Doescher and this is Heritage Explains.

President Biden: First, cut the cost of prescription drugs. We pay more for the same drug produced by the same company in America than any other country in the world. Just look at insulin. One in 10 Americans has diabetes. Insulin costs about $10 a vial to make. That's what it costs the pharmaceutical company. But drug companies charge families like Joshua and his dad up to 30 times that amount. Let's cap the cost of insulin at $35 a month so everyone can afford it. And drug companies will do very, very well, their profit margins. And while we're at it, I know we have great disagreements on this floor with this, let's let Medicare negotiate the price of prescription drugs.

Doescher: That was President Biden at the 2022 State of the Union Address casting his vision for lowering the price of insulin. It was a very popular talking point because for many Type 1 diabetics like me who are totally insulin dependent, several injections a day, that monthly pharmacy bill can be absolutely daunting. It was nice to be acknowledged.

>>> What Congress Shouldn’t (and Should) Do About Cost of Insulin

Doescher: The story of insulin's development, like many other life-saving drugs, is very inspiring. It was a modern miracle when Frederick Banting invented it in 1923 using the pancreases of cows and pigs. It changed the game because it gave diabetics a chance at life where it once was a certain death sentence. It was so meaningful that Banting refused to put his name on the patent and sold it to the University of Toronto for $1 because he believed all people should be able to have access to insulin. Thank you, Dr. Banting.

Doescher: But fast forward almost 100 years, and we find ourselves in a situation where the cost of insulin continues to rise and so-called generic options are limited. It's true, insulin is expensive and getting more expensive. How can this be? Why does the cost continue to rise? Is it the so-called drug companies that Biden refers to? Well, I'm afraid it's a bit more complex than this. So as an exercise, we're going to walk through the steps of how drugs like insulin are priced. Buckle up folks. You ready? Okay, John Popp, start the mood music.

Doescher: Pharmaceutical companies or manufacturers develop the insulin and set a list price. Then you have wholesalers who transport the insulin and sell it to the pharmacy. The patient, you and me, pays the copay amount to the pharmacist, then the pharmacy sends a bill to the insurer. But this transaction doesn't happen seamlessly. There's a middleman called the pharmacy benefit manager or PBM who facilitates this entire transaction. The PBM contracts with payers and offers to reduce their costs by negotiating discounts and rebates from the manufacturer. After the rebate is negotiated, the PBM passes on a portion of the rebate it receives from the manufacturer to the payer or insurance company. It's only after this that each payer decides how much of the rebate savings are passed on to us, the patient, in the form of lower costs at the counter.

Doescher: So what is this rebate thing? Well, the way the system works, the higher the rebate, the more favorable the listing in terms of insulin and other drugs covered by insurance. The more favorable the listing or formularies, the less consumers have to pay for it. And how do these rebates get negotiated? Good question. The process is extremely opaque and data are not readily available to know the process.

Doescher: So there you have it. You still with me? I know, it's about as clear as the Mississippi River running through St. Louis. And that's the point. With a system this complex, is it as simple as saying a prescription will cost $35 max for everyone like President Biden and the Democrats have now done with the so-called Inflation Reduction Act or is this just adding to the complexity of an already complex system? Congress and the President talk about doing something to lower costs, but unfortunately, doing something is not necessarily the same as enacting an effective solution.

Doescher: So what are the sensible reforms that would actually lead to lower costs and more generic options? Why not pursue those? Ed Haislmaier is the Preston Wells Senior Research Fellow here at The Heritage Foundation. On this episode, he puts this all in context and talks about the changes in the so-called Inflation Reduction Act. Yes, it does limit Medicare copays to $35, but Ed talks about how Congress missed an opportunity by targeting only insulin when they should have made changes across the board. Our informative chat after this. Stay with us.

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Doescher: Ed, the recently passed so-called Inflation Reduction Act, there are elements in it to reform Medicare drug pricing policy. This is in response, as we heard at the top of the episode, to the cry of the high price of insulin. This is a big deal, especially for me, who is a Type 1 diabetic. And I have seen the price of insulin and it is high. So when I heard this come back into the spotlight, I wanted to get you in here to kind of set the record straight a little bit as to what's going on. You said in your recent piece, "When Congress enacts badly designed 'solutions,' it often creates new problems or even if it makes the original problem worse." Please start us out here. What are they doing with Medicare right now in this bill?

Ed Haislmaier: One of the things that they're just doing is they're saying, "Well, for those plans, you can't charge enrollees more than 35 bucks." I mean, the thing is it's not about the drug manufacturers. It's about what the enrollee gets charged. And so you can't charge the enrollee more than 35 bucks per prescription for the insulin. So, okay, that's not too bad. I mean, I wish they'd done more to fix the Medicare Part D overhaul, but that's something for another day. The really bad stuff in here is they took the first step to setting price controls on new drugs in Medicare. And that has long-term ramifications.

Doescher: Sure.

Haislmaier: And that's the concern here is that it would make it less likely that those new drugs will come to market. So that's concern.

Doescher: In the top of the episode, we went through the pricing scheme of how things work. You know, you go from the manufacturer, you go, we have this "middleman" that negotiates a price, that then you go to the pharmacy and you get your script and there's rebates involved. And it's super, super complex and confusing. Yet, I've noticed that many people who are on the left say, "We need to put pressure on Big Pharma in order to lower prices." But it seems to me that they're the ones that set up the convoluted system in the first place. Where are they off here? Kind of bridge that gap for us.

Haislmaier: Yeah, sure. And it is very convoluted. And the thing we have to go back to is some of this was government, but some of this was also the market. And part, a large part of this, and this gets back to the insulin, is that in the 90s, we had the development of something called pharmacy benefit managers. And basically, they were a set of middlemen who were doing financial transactions. And what they did is they went to the payers. The payers could be the private insurance companies, the private employers, a government program, like Medicare, Medicaid. They went to these payers and said, "Look, we'll get you better deals from the drug companies if you let us negotiate on your behalf."

Doescher: Do our thing.

Haislmaier: Yeah. Which is, by the way, one...

Doescher: The special sauce as they say.

Haislmaier: Right. Yeah. Which, by the way, all this stuff about Medicare negotiating. Medicare's 40 million beneficiary sounds like a lot, but it's actually less than what the pharmacy benefit managers have to play with.

Doescher: Wow.

Haislmaier: They've got several hundred million beneficiaries that they can go to these drug companies. Okay? So the idea is we'll use this leverage to get the drug companies to give us better prices. Okay, fine. What exactly is their leverage? Well, their leverage is control over the access. What does that mean? They can steer doctors and patients to go towards drug A, not drug B. If drug A is more expensive than drug B, let's set up the payment structure or the rules so that people go to drug A not drug B. Well, okay. Within reason that works. If you start excluding too many drugs, though, patients suffer. The problem that comes in, and we see this with insulin, is, okay, you're getting those savings. Who's getting those savings?

Doescher: As I've been studying this, because I am concerned about it as a Type 1 diabetic. Blessed to have a health care plan. Blessed to have that be taken care of in that way. As I'm seeing this, the secrecy that kind of is covering these...

Haislmaier: Yeah, it's opaque.

Doescher: ... pharmacy benefit managers and how they're getting this price. But the bottom line is this. They get involved and somehow that unit, that base price of insulin, we'll say, continues to go up.

Haislmaier: Well, and this is where it gets really kind of goofy.

Doescher: And it's like, how are they getting to that? The price isn't dropping. You know?

Haislmaier: Yeah. And so, well, this is where it gets goofy. And this is where it's important to understand follow the money as they say.

Doescher: Yeah.

Haislmaier: Okay? And the data, which I published reference to some of this data, the data shows that the same time as the price to the patient has been going up, as the list price that the drugmaker charges is going up, what the drugmaker actually gets after giving all these negotiated discounts and rebates is going down.

Doescher: Wait a minute. Hold on a second. Wait. So we pay more. Wait, say that one more time.

Haislmaier: Yeah.

Doescher: I just want to make sure I get that.

Haislmaier: The drug, the list price goes up.

Doescher: Yes. The price for my insulin goes up.

Haislmaier: And you may be paying more as the patient, as a co-pay, but what the drugmaker actually gets at the end of the day after it's paid out the rebates and the discounts to the pharmacy benefit manager is actually been going down.

Doescher: Wow.

Haislmaier: Okay? And so, and you have that perversity because essentially what they're saying is, "Well, who's going to give me a bigger discount? I'll go with that one."

Doescher: Right.

Haislmaier: Well, then you artificially raise the price so that the discount looks bigger.

Doescher: As I read your writing and as I read your solutions to this, which, folks, I'll link to it. It's really, really important that you understand this. It affects all of us. We all get sick, we all need prescriptions, and it all goes through this process in order to get it to us to help us feel better and be healthy. I want you to focus a little bit on the pharmacy benefit managers here. And it seems to me, if that's the issue, then we should be focusing on that to reform, not saying you're going to pay this price and we're going to set it at this kind of a thing. It doesn't seem like it's getting to the problem.

Haislmaier: Let's just take it out of that context and look at it as a concept. Okay?

Doescher: Yeah.

Haislmaier: Let's say you come to me and say, "I want to buy something." It doesn't matter what it is. Could be drugs, could be something else. And you're an expert in that area. And you know all the people who make the something I want to buy. And you say, "Ed, I can get you a discount. I can get you a deal."

Doescher: Yeah.

Haislmaier: Okay. Now, how do I compensate you? Do I pay you a fee and say, "Hey, Tim, thanks. If you can get me a better deal, I'll give you X dollars"? Or do you say, "Hey, Ed, I'll get you a deal and I'll save you this much, and then I'll just keep the rest."

Doescher: Yeah. Yeah.

Haislmaier: Well, what do your incentives look like under that arrangement? Okay. But that's the whole point of this. Okay? It's not that this is a bad thing to do. Okay? It's a good thing. You've got expertise, you know the industry, you know the players, you know everybody who... You know? I mean, and again, it could be cars. It could be anything.

Doescher: Yep.

Haislmaier: Right? But how are you compensated? What's that agent relationship?

Doescher: Yeah. It creates a perverse...

Haislmaier: Exactly.

Doescher: ... consult outcome.

Haislmaier: And so the solution here, as I see it, is to really clarify that that agent relationship is, yeah, you want to do it, you get a fee.

Doescher: How come there isn't a generic insulin, "generic insulin," because we know generic drugs lower prices? You know?

Haislmaier: Yes.

Doescher: It's not the name brand thing anymore.

Haislmaier: Yeah.

Doescher: Go through that a little bit because you mention that in your piece a lot, about how what they're doing right now is going to make it more difficult to make generic versions of insulin more accessible. So talk a little bit about that.

Haislmaier: And this is something interesting that we need to adjust to going forward. Look, there's basically two kinds of medicine. One is a chemical entity. You often hear it called small molecule. The other is a living organism and that's called a biologic. So when you hear the terms biologic, that's what the term means.

Doescher: Okay.

Haislmaier: So insulin is a biologic.

Doescher: Okay.

Haislmaier: It's produced from living cells. Okay? Your flu shot is a biologic. You know, these are biologics. And increasingly, that's where the science is going. When you look at the newest breakthroughs in treating cancer or any of these diseases, it's biologics. Now, here's the distinction. Because it's a living organism, there's several things about it. One, you can't ingest it. Biologics will be dissolved. They'll be eaten in your system.

Doescher: Right.

Haislmaier: So that's why you inject these things. That's why drug companies have been working on things like inhalable versions.

Doescher: Ah, yes.

Haislmaier: Okay? I remember Pfizer was working on inhalable insulin.

Doescher: Sure.

Haislmaier: Okay, because you need a different administrative route.

Doescher: One of the first things I asked my doctor when I read it, "Can I get it? Do I have to take a shot anymore?"

Haislmaier: Right. Well, the reason you have to with a biologic is because if you put that into your digestive tract, it'll get digested. Whereas, when you put a chemical pill into your digestive tract, it dissolves and gets absorbed...

Doescher: Absorbed.

Haislmaier: ... and into the bloodstream. So those are important distinctions. Now, here's the big distinction when it comes to the FDA regulating it and the way the law works on things like market exclusivity and generic...

Doescher: Generics, yeah.

Haislmaier: ... and that is that if it's a chemical entity, if you have the right chemicals and the right formula, you can just stamp out an identical pill.

Doescher: Right.

Haislmaier: Right?

Doescher: Yep.

Haislmaier: So the law said, hey, and this was back in 1984, we changed the law to say, hey, if you want to do that, we're going to make it easy for you to do it. And we're going to do it in such a way that you don't have to prove the drug works. You just have to prove that yours is identical. And that's why in the United States we have more generic drugs and cheaper generic drugs than any country in the world. So on the one hand, yes, we have the most expensive brand new therapies. We also get them before everybody else does.

Doescher: Right.

Haislmaier: But we also have the cheapest generic drugs. Almost 90% of all prescriptions written in this country are generic.

Doescher: Wow.

Haislmaier: Now, here's the problem with a biologic...

Doescher: Which is insulin, basically.

Haislmaier: Which is insulin or think about the flu shot.

Doescher: Flu shots. Yeah.

Haislmaier: Because people have seen this where a whole flu shot batch went bad. Okay? It's much tougher to make it consistently. You can't just stamp it out like a pill. It's a whole different process.

Doescher: So they're, each batch is different than the next one?

Haislmaier: We had this back when you had, well, the goal is how much can it vary without being a problem?

Doescher: Wow.

Haislmaier: And how do you regulate that? And how do you test it? You have to test every batch on this.

Doescher: Yeah.

Haislmaier: Okay? And how do you achieve that consistency? That's an issue for both the manufacturer and the regulator, like FDA. And so the legal question is, well, if it can't be an exact replica, how close is close enough...

Doescher: I see.

Haislmaier: ... to be a generic equivalent. FDA is in the process of revising as part of that some of the rules to make it a smoother, easier path for another company to come in and say, "Well, my insulin product is close enough to the others that it ought to be treated as a generic," et cetera. That's what I'm concerned that this would interfere with. Okay?

Doescher: I see.

Haislmaier: We're in the process of trying to work that out. And it's important because going forward, we've gotten used to have very cheap generics and insulin and other biologics are not as cheap to manufacture and they're not as easy to do that kind of duplicate. And that's an issue. That's a challenge going forward.

Doescher: What do we need to do in order to get those across the finish line? I mean, we can figure it out. Yeah.

Haislmaier: Well, they're getting across the finish line right now.

Doescher: When am I going to stop using Lilly, using Humalog and start using a generic or biosimilar?

Haislmaier: Well, they have...

Doescher: Yeah.

Haislmaier: So, first of all, there are several insulin makers already.

Doescher: Okay.

Haislmaier: Okay? And there are competing brands. And so that comes back to the question of is a PBM excluding you from using the others because they're not getting as good a deal from those others?

Doescher: Wow.

Haislmaier: And that comes into that. But yes, there are other companies teeing up to try to come into the market. So we don't want to disrupt that.

Doescher: Yeah.

Haislmaier: We want to encourage that. And FDA, I think, is going in the right direction on that. And Congress generally has gone on the right direction on that. It's a tough issue to think through.

Doescher: All right, Ed. Hypothetical world, you're running the show, you have everything at your disposal, and everybody agrees with you 100%. Okay. How's that for a setup?

Haislmaier: Okay. I'll take that.

Doescher: What is your move to lower the price of insulin because this isn't going to do it?

Haislmaier: I will start by saying that despite the temptation you just put in front of me, I will look for the least disruptive...

Doescher: Okay.

Haislmaier: ... solution because that's the smartest thing to do.

Doescher: Yeah.

Haislmaier: Do as little as will do the trick. I think the first place to do this is to simply say pharmacy benefit managers should be treated as fiduciaries by the plans they contract with. The law should treat them as fiduciaries where they have a responsibility to the plan to pass the savings on. They work for them, not for themselves.

Doescher: Right.

Haislmaier: Now, they're not going to like that because instead of taking a slice and being profitable, they're just going to have to work for fees. On all of this stuff, drugs, pharmacy benefit managers, but also hospitals and everybody else, we need greater transparency.

Doescher: Yeah. Yes.

Haislmaier: Rather than regulate, disclose.

Doescher: That to me is huge. Yeah.

Haislmaier: But rather than regulate, disclose. You know, you should know up front what the price is.

Doescher: Yeah. Well, we're a long way from Frederick Banting who invented insulin and ended up selling the patent for a dollar to the University of Toronto because he just believed this should be in the hands of everybody and not hard to get. And now here we are. It's an incredible problem. It's an incredible issue. And I sense, Ed, that the recent so-called Inflation Reduction Act is not going to be the silver bullet solution to the price of insulin.

Haislmaier: Oh, no.

Doescher: Yeah. Well, thank you so much for being here with us. And we're going to keep tracking it. As we always say, "We can turn the mics on and come back in here and do this anytime." So thank you for being here.

Haislmaier: Thanks for having me.

Doescher: Okay, folks, I know it was a lot of information covered on this episode. So for more context or, "Hey, I didn't understand that part," head over to the show notes. I have linked to everything that helped build out this episode. If you're interested in it, you can go on right now and learn more. Thank you so much for rating us. Thank you so much for sharing us with your friends and family. Leave us a comment. You can send us an email at [email protected]. Michelle's up next episode and we'll see you then.

Heritage Explains is brought to you by more than half a million members of The Heritage Foundation. It is produced by Michelle Cordero and Tim Doescher with editing by John Popp.