It has been a century since insulin was discovered by a coterie of scientists dedicated to making diabetes a disease that can be managed, instead of a death sentence. Today, an estimated 34.2 million Americans have either Type 1 or Type 2 diabetes, and many rely on daily doses of insulin to control their blood sugar levels. Yet costs for many pharmaceuticals — and insulin in particular — have risen in the U.S. in recent years, making it difficult for some to afford lifesaving medications, says Carmel Shachar J.D./M.P.H. ’10, executive director of the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School.

“Sometimes, drugs are expensive because we are pioneering new treatments that are really pushing the boundaries of what we are able to do medically,” she says. “But sometimes prices rise on medications or medical devices that have been around for a really long time, such as insulin, which has skyrocketed in price in the last decade. There is a real conversation to be had about whether these drugs should be getting more expensive if there isn’t a clear justification for that cost.”

Some in the U.S. are ready to have that conversation. Recently, California became the latest state to sue the three main producers of insulin, claiming that the companies had violated its laws on competition to keep prices for the indispensable drug artificially high. Shachar spoke with Harvard Law Today about why Americans pay more for their insulin, the merits of the Golden State’s lawsuit, and what the suit — and others — could do for consumers.

Harvard Law Today: What is the aim of California’s lawsuit?

Carmel Shachar: Insulin is a really critical medicine for managing diabetes. It’s also one of those medicines that, for the majority of people, you need to take for pretty much the rest of your life after you’re diagnosed with diabetes. Insulin is also sold at much higher prices in the U.S. as compared to the rest of the world by orders of magnitude, and studies have shown that something like 20 percent of diabetics who need insulin have had to ration their insulin because of the costs.

California is really reacting to several elements: that this is an important lifesaving medicine, that diabetes is chronic and requires continuous use of insulin, the pricing disparity between the cost of insulin in the U.S. and the rest of the world, and that this is a medicine that has been around for a very long time. That latter point matters because that means there is relatively little argument about the drug costing a lot in research and development.

HLT: Why does insulin cost more in the US than in other places in the world?

Shachar: The U.S. largely feels uncomfortable with price control. We view healthcare as a big business in America; it drives the economy. For countries that have a more nationalized healthcare system, they may say ‘Okay, this is what we’re willing to pay for insulin.’ But in the U.S., we consider it a market, and markets will charge what the market will bear.

Now, there are some distortions in the U.S. market that prevent downward cost pressure on insulin. That’s part of what the California Attorney General’s Office is reacting to as well. Essentially, there are three companies that produce the majority of the world’s insulin: Eli Lilly, Novo Nordisk, and Sanofi. There are also three major pharmacy benefit managers: CVS Caremark, Express Scripts, and Optum RX, who capture about 80 percent of the prescription claims market. The pharmacy benefit managers act as middlemen between the pharmaceutical companies and health insurers. They create formularies — or drug lists — for your health insurer, and they also are supposed to negotiate for the best prices of those drugs. And so, you have this very small group, negotiating prices among themselves — it’s not consumers negotiating prices.

Much of how pricing discounts are accomplished is through rebates: The pharmacy benefit manager will go to the pharmaceutical company and say, “Okay, you’re charging X, we want to pay 30 percent off the cost.” This looks like a win, like you’re getting the drug for less money, but it becomes sticky, because what we see from studies is that instead of things actually becoming cheaper, what happens is pharmaceutical companies will inflate the list price, knowing that they will need to offer the rebate. And the pharmacy benefit managers themselves are very focused on the rebate, because that’s how they show their value, but they’re in fact getting paid from that rebate. They’re capturing a certain amount of the rebate as their payment from the health insurance, so they have an incentive to value rebates over empirically lower costs. There is a one-to-one relationship between the cost of pharmaceuticals and rebates — rebates actually increase the cost of pharmaceuticals.

“If California wins, there will be pressure on manufacturers and on pharmacy benefit managers who will know that simply offering a large rebate is not sufficient.”

HLT: California claims that the drug producers are violating its laws on competition. What do they mean by that?

Shachar: What they’re saying in their complaint is that these three pharmaceutical manufacturers meet with the pharmacy benefit managers to maximize rebates as opposed to lower costs, and that this happens in a couple of ways. First, the manufacturers really aggressively raise the list price of insulin, and they all do it together. That’s an antitrust claim, essentially. But also, the pharmacy benefits managers are focused on getting significant secret rebates in exchange for placing the insulin on their formularies, so the manufacturers are incentivized to have really high list prices, in order to offer really good rebates to make it onto the formularies. They’re all benefiting from this pricing scheme, and that pricing scheme amounts to false discounts as well as misleading statements around the false discounts, as well as abuse of market power to set prices at unconscionable levels. These things are all considered unlawful, unfair, and deceptive acts that are prohibited by California’s Unfair Competition Law.

HLT: What do you think the companies will say in their defense?

Shachar: I think they’re going to argue that they negotiate in good faith with one another. I think that the pharmaceutical benefit managers are going to say, “Look, we are not involved with setting the list prices. We’re not consulted on that. Our job is purely to obtain rebates to get the lowest price for our clients, the health insurers and their customers.” And the manufacturers are going to say, “It’s a free market. We’re charging what the market will bear. We have a lot of costs, including running our research and development for other drugs. And we offer significant rebates that are freely and openly negotiated.”

HLT: If California wins its suit, what kind of impact might it have on consumers?

Shachar: I think that it could have a significant impact. Rebates are widely used across the pharmaceutical industry. They’re not limited to insulin. If California wins, there will be pressure on manufacturers and on pharmacy benefit managers who will know that simply offering a large rebate is not sufficient, that they have to indicate some sort of value or some sort of reasonable price, and that they can’t abuse their market share. Because California has such a large market, it could have really big impact throughout the United States.

HLT: Are there any other lawsuits of this kind out there right now?

Shachar: Arkansas, Kansas, Kentucky, Minnesota, and Mississippi have all filed suit. These lawsuits are fairly new, so they’re still working their way through the courts. I think that California is especially significant, because it’s such a major market that it can really set the standard. I also think a lot of other state attorneys general are watching to see whether they can file suit under their own state laws, especially if these existing suits are settling for significant amount of money or changing the way that pharmaceutical companies and pharmaceutical benefits managers are doing business in those states.

HLT: Is the situation with insulin particularly unique due to the number of Americans with diabetes and the drug’s development history?

Shachar: I think insulin is a particularly good test case for attorneys general, in part because it’s an older drug, so there’s less of the argument that it’s really expensive to develop something new and cutting edge, and that you don’t want to stifle innovation, which has traditionally been the response to price controls on the pharmaceutical industry in the United States.

I think it also helps that it is an extremely widely used drug — there are millions and millions of diabetics within the U.S., and it’s a chronic use drug.  Also, as I mentioned, if patients ration or even try to do without insulin, that demonstratively harms their health. This on its own is a bad thing, but also makes it more expensive for the healthcare system to deal with, because then you’re dealing with the ramifications of poorly managed diabetes. I think this conversation could probably be had about a lot of drugs, but I definitely see why insulin has become the flashpoint.

HLT: Could you talk about other efforts to lower the cost of pharmaceuticals in the U.S., including any recent legislation?

Shachar: I think we’re going to see a big push to address drug pricing in the U.S., especially with the skyrocketing cost of drugs. Here, I want to highlight the Inflation Reduction Act that was passed last summer, which gave Medicare the power to negotiate with pharmaceutical companies, not on every drug, but on a certain number of high-cost drugs. This was notable, and it capped the out-of-pocket price for insulin for Medicare Part D enrollees at $35 a month starting this year. That isn’t going to revolutionize everything, because that bill was really limited to Medicare, which is a certain segment of our population — an older segment. But it really shows that in this day and age, where it can be difficult to pass meaningful legislation, there’s a real appetite to say we have to do something about drug pricing.

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