How an Insulin Price Cap Works

There’s been a lot of news about work in Congress to cap the cost of insulin. But how actually would such a cap on prices work, and could this potentially leave out other issues related to drug pricing and access?

First, we must start with why the price of insulin matters, which requires understanding why it must be prescribed.

Diabetes is a general term for a number of diseases that affect the way the body utilizes glucose, more commonly known as blood sugar. Glucose is critical due to its role as “fuel” for muscle and tissue. (Source: Mayo Clinic)

When blood sugar increases, the pancreas release a hormone called insulin that enables blood sugar in the blood stream to be used. When diabetics’ bodies do not produce enough insulin or if cells do not respond to insulin effectively, heightened blood sugar in the blood stream can lead to serious medical conditions ranging from vision loss to kidney and heart diseases (Source: CDC).

For many who have no ability to produce enough insulin, as is the case for those with Type 1 diabetes, prescriptions of insulin are a necessity. Consider the following statistic from late 2021:

This is a sobering statistic, made more concerning by insulin’s reputation as an increasingly unaffordable medication.

In the world of economics, goods that are considered a necessity are generally called inelastic. In inelastic product markets, increases in price don’t typically lead to a sharp change in the amount of people buying the good. Inelastic goods require more significant price increases to see the same decrease in buyers that an elastic good like an entertainment product would require.

Increasing cases of Americans skipping on this critical drug are just more evidence that the rise in the cost of insulin is indeed abnormally intense, because an inelastic good like insulin would only see such a drop in those buying insulin due to staggering price hikes.

In late March 2022, the House of Representatives passed the Affordable Insulin Now Act, which has since been received by the Senate and has yet to be voted on.

The law would put a cap on cost sharing of insulin so that the patient pays no more than $35 or 25% of the health plan’s negotiated price, whichever results in a lower cost. In this case, the term cost sharing refers to the amount that the patient pays in out-of-pocket costs.

This law applies to both private health insurers and the Medicare Part D program, which offers members with prescription drug coverage.

Further, the law states that the cap on the cost sharing is in place even if the individual hasn’t hit their deductible. Recall, the deductible is the amount of money that you must spend in total over a year before the insurer starts helping to pay for your medical bills. If your total health spending is less than the deductible, you have to pay the full cost of a health service out-of-pocket.

If your deductible is $1,000, and your total health expenses so far only added up to $450, the maximum price of insulin is still $35. The law also says that this amount paid out of pocket would add to the deductible, so your total expenses for the year would be considered $485.

The effect of this is that patients purchasing insulin can still get affordable rates, and purchasing insulin with this discounted amount still allows the patient to add up to hitting their deductible that year.

Some Republicans in opposition have criticized the bill as “socialist”, and it’s important to not get bogged down in partisan bickering. The law would not directly change peoples’ choice of insurance or impose government ownership of private health plans. As we will see below, it doesn’t even really have much to do with the price of insulin that the manufacturers charge, because the bill controls cost sharing, which is how the insurer and patient split the bill for insulin.

We can speculate that the bill has sat in the Senate because of efforts of Senate Democrats over the summer to craft a bill that would package the insulin cost sharing cap into a larger social program spending bill.

The Biden administration has touted the insulin cost sharing cap as a key provision of the former Build Back Better plan, which was stalled after the administration was unable to secure the support of Senators Joe Manchin (D-West Virgina) and Kyrsten Sinema (D-Arizona) in late 2021.

In the past few weeks, there have been rumblings at attempts at a scaled-down version of Build Back Better, but the fate of the insulin cap remains uncertain. Negotiations between the Senate Majority Leader Chuck Schumer (D-New York) and Joe Manchin seem to have led to the insulin cap being dropped from consideration in the new spending bill.

A bill to vote on just the insulin cap from a bipartisan duo of Senators Susan Collins (R-Maine) and Jeanne Shaheen (D-New Hampshire) may be voted on, but is lacking sufficient support from Republicans needed to pass the bill.

The passage of the Affordable Insulin Now Act, or a similar bill, into law would deliver much-needed economic relief to millions of Americans. However, this will likely not solve the root issue, and instead, the burden of the cost of insulin will shift to insurers.

Because the cost sharing will be capped, health plans will have to pay for larger portions of these increasingly expensive insulin prescriptions. If insulin prices continue their upward trajectory, the total cost in the healthcare system will not reduce. In fact, more diabetics able to pay for insulin may lead to rising total costs for payers.

While it might not be dramatic, this could lead to gradual increases in premiums and deductibles for some plans while they may have higher co-pays and co-insurance on other services to offset costs.

Such an insulin cost sharing cap is necessary to prevent life-threatening situations for Americans right now, but further legislation must also target the root cause of insulin’s rising prices. Hopefully, these tactics can be used to control costs of other drugs and, more generally, other healthcare services and treatments.

One direction a Mayo Clinic proceeding suggests to look into is the role of pharmacy benefit managers (PBMs). The first issue of this newsletter digs into the role of PBMs, but in short, PBMs are the middlemen that negotiate the price that insurers must pay for drugs that they cover.

Getting a drug covered by an insurer is important for drug manufacturers, because few people can afford the full manufacture price of a drug. These manufacturer prices must allow the manufacturer to offset the cost of research and development. PBMs negotiate the amount that insurers are willing to pay manufacturers for coverage of a drug. Through a complex system of rebates which incentivizes the drug manufacturer to raise the price of a drug to pay the PBM more (I know, this is dizzying), these PBMs can be partly attributed to a huge increase in insulin costs.

Further, consider that the manufacture of insulin is also largely controlled by three companies which have taken advantage of patent law to extend their monopoly rights to produce insulin. Such market dominance gives these companies flexibility to raise prices as they wish. This excessive market concentration can only be fought off with a revision of patenting laws related to drug manufacturing so that other players could have the chance to enter and compete lower prices into the market.

If anything is certain, while an immediate law to cap the out-of-pocket costs of drugs like insulin may deliver much-needed (and perhaps necessary) relief to Americans, there will still be more work to reign in rising healthcare costs after such a law is passed.