How the Government Created Exorbitant Insulin Prices

by
Isaac Deak
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The high price of insulin is increasingly present in American political discourse as presidential candidates boast of interventions; whereas, the Federal Trade Commission, states, and even counties and school boards have brought forth lawsuits, alleging price gouging and collusion between pharmaceutical giants and pharmacies. However, as is par for the course in American politics, policymakers ignore the reality that they—not the market—created these problems, and their proposed solutions will only exacerbate them.

Indeed, insulin prices have skyrocketed. One variety—Humalog—though initially priced at $21 a bottle, now sells for more than ten times that, and obviously, such prices are hurting consumers, some of whom are forced to pay upwards of 40 percent of their post-subsistence income for the life-sustaining drug. Individuals using expired insulin and rationing it at a cost to their own health are not uncommon occurrences. Predictably, desperation has driven some to the underground economy—bartering and donating or buying it for a fraction of the price in Mexico and then smuggling it back across the border.

Applying basic price theory, we know prices are not arbitrary, but are in fact manifestations of underlying realities. The diabetic population is growing, and their demand is largely inelastic, so we should, on one side of the coin, expect this demand to be reflected in the price. However, on the other side of the coin, we have supply, which—under normal market conditions—should rise to meet the growing demand, as producers, motivated by prospective profits, endeavor to satisfy consumer needs. 

Why is the supply not rising to meet the demand? The costs of production have not increased, in fact, they have decreased by 20 percent between 2007 and 2021. Whereas this problem is particularly prevalent in the United States, as a report to Congress notes, “prices for insulin analogs cost 10 times more in the United States than any other developed country.”

Under free market capitalism, competitive producers should be perpetually pushing market prices downward. However, that evidently is not happening, and as the same report explains, the market is dominated by three firms—Ely Lily, Novo-Nordisk, and Sanofi—which are the exclusive producers for US consumption, and together, they capture approximately 90 percent of the worldwide market.

The obvious conclusion? This is not a free market at all, but one where supply is forcibly restricted by state-granted monopoly privileges. There are several contributing factors to the monopolization. Those suing would do well to remember no collusion would be possible if individuals were free to purchase insulin themselves rather than through a licensed pharmacy and with a prescription from a licensed medical practitioner. A world in which individuals may bypass licensed professionals may offend some sensibilities, but that licensure creates monopoly and restricts supply is beyond dispute.

While a free market incentivizes producers to innovate, the regulatory state discourages innovation at home and prevents outside innovations from reaching consumers. Insulin alternatives do, in fact, exist. “Biosimilars,” for instance, are an alternative to the “biologic” insulins dominating the American market. The Food and Drug Administration (FDA), however, has been slow to act. A 2018 study found, “at least 11 insulin biosimilars are marketed (under less stringent regulatory frameworks) at considerably lower price points in China, India, Mexico, Pakistan, Peru, and Thailand.” However, the FDA refused to approve a biosimilar insulin product until 2021.

Worse yet, the patent system restricts supply by granting monopoly privilege to a sole producer. Empirical research affirms, the patent system’s monopoly grants, extensions thereof, and patents for complementary goods (e.g., insulin-delivery devices), combined with the FDA’s refusal to approve competing products have directly contributed to higher prices.

Of course, critics retort that there would be no innovation without patent protection, especially in the pharmaceutical industry. The data, however, suggests the opposite. In their 2008 book, Against Intellectual Monopoly, Michele Boldrin and David Levine found pharmaceutical innovations fell in countries once a patent system was adopted. In Italy, they found pharmaceutical innovations dropped from 9.28 percent of the global total to 7.5 percent once patents were introduced. They found, “India has taken over as the primary center of pharmaceutical production without patent protection. The growth and vitality of the Indian industry is similar to that of the pre-1978 industry in Italy.” Coincidentally, insulin is one of the many drugs they found was discovered with little to no influence of the patent system.

Furthermore, if government were removed from the picture, the monopolists would be dethroned and competitors would return to moving the market toward equilibrium. This entails dismantling monopolies wherever they may be found—licensure, regulations, and patents. The political clamor is not entirely unjustified. Prices are exorbitant, but it is—as with other cases of supposed “market failure”—the government’s fault. The prices are high because there is an artificially insufficient supply to meet demand. What supply does exist exists because producers can profit (granted by fleecing the diabetic population in the process). If prices were forcibly capped—as politicians ignorantly propose—such incentives would be eliminated. Moreover, the solution to lower the price of insulin is not price controls or lawsuits but letting the market work.