Posted on May 9, 2022 by Austin Lang
Not sure which Medicare plan works for you? Use our easy tool to shop, compare, and enroll in plans from top providers.
Posted on May 9, 2022 by Austin Lang
On March 31, 2022, the House of Representatives passed a bill that would cap insulin prices at $35 a month for Americans with health insurance. This insulin price cap, which was first proposed as part of President Biden’s Build Back Better Act, is a direct response to concerns over spiking insulin prices. The bill now awaits Senate approval, though critics claim that the act fails to address the root of the problem.
Insulin is the hormone responsible for regulating the amount of glucose in the bloodstream. In a healthy individual, the pancreas releases insulin in response to changes in blood sugar levels. This prevents glucose levels from rising too high or dropping too low, which can lead to severe complications. However, some individuals do not produce insulin due to pancreatic damage.
This condition, which results from the immune system attacking the pancreas, is called Type 1 Diabetes. Individuals with type 1 diabetes are insulin-dependent. Without regular infusions via injection or an insulin pump, their livers will begin breaking down fat into ketones, leading to a state known as diabetic ketoacidosis. This is a life-threatening condition where the blood turns acidic, and the body cannot properly regulate itself, causing weakness, loss of consciousness, and eventually death.
Type 1 diabetics are the minority. Most diabetics have Type 2 Diabetes, resulting from the body failing to respond to insulin appropriately. These people with diabetes are not insulin-dependent in most cases, though many end up requiring insulin as their condition progresses.
Regardless of the condition’s origins, people with diabetes walk a fine line. When properly managed, diabetes can have a minimal impact on one’s everyday life. However, without continued access to insulin, even an otherwise healthy individual can quickly succumb to diabetic ketoacidosis. Such is the tragic case of 26-year-old Alec Raeshawn Smith, who died less than one month after aging out of his mother’s insurance plan.
Smith, whose diabetes supplies cost over $1,300 a month without insurance, was forced to ration his limited supply of insulin. Worse, getting insured wouldn’t help: he made too much for financial assistance, yet not enough to afford the massive insulin bill he would need to pay each month until he met his $7,600 deductible. He was found dead in his apartment with an empty insulin pen just three days before payday.
Smith’s case, along with many others, is the rallying point behind the Affordable Insulin Now Act. Should the act pass the senate, insurers would be required to place a $35 cap on insulin prices. This would also apply to individuals under Medicare Part D. Currently, only Medicare plans that have adopted the Senior Savings Model have a cap on insulin prices. This bill would protect people in situations similar to Smith’s. However, some opponents of the bill claim it fails to address the actual problem.
While the Affordable Insulin Now Act is rare legislation with bipartisan support, some Republican senators are skeptical, claiming that the insulin bill places a price cap on insulin by shifting the cost to insurers. Under the current model, insurers may shift a portion of that cost to consumers through copayments and deductibles. With this new insulin bill, such practices will no longer be legal. However, industry lobbyists claim that the bill’s focus on insurers ignores a deeper problem with the pharmaceutical industry.
The process of how drug prices are determined is infamously opaque, with negotiations taking place between drug manufacturers, pharmacy benefit managers (PBMs), and insurers. There are no regulations to cap prices on the manufacturing end. Instead, pharmaceutical companies select a price based on the drug’s estimated value, much like any other product. This price is what it would cost to purchase the drug without insurance. However, as most Americans purchase drugs through their insurance plan, manufacturers have an incentive to get their products on as many plan formularies as possible. Enter the PBM.
The PBM negotiates with manufacturers. The pharmaceutical company will offer a rebate to the PBM to get their drug onto a plan’s formulary. The PBM either receives a portion of this rebate as compensation or charges the insurer a flat fee for their services. The insurer still pays the list price but receives a portion of that money back in exchange for making the drug available to their beneficiaries.
So, if a pharmaceutical company offered a drug for $1,000, and a PBM negotiated a $500 rebate, they could choose to take $50 of that rebate as compensation. The insurer pays the full $1,000, then receives $450 in rebates, with the PBM taking $50 for each transaction. The pharmaceutical company still makes $500 per sale, but the insurer pays $550 for that drug. To afford this, they use a combination of monthly premiums and cost-sharing measures.
For instance, you may be required to pay 20 percent of the cost ($110 in this example) as a copayment, with the remaining $440 being paid for by the insurance premiums charged to all beneficiaries. If you have a deductible, you may be required to pay that $550 out of pocket until the deductible is met. Other factors, like manufacturer coupons or even the specific pharmacy you go to, can also affect the final cost.
This system of rebate negotiations leads to the astronomical rise in prescription drug prices seen in recent years. Because the cost savings take the form of rebates rather than lower list prices, PBMs have a financial incentive to pursue more expensive drugs. Because of this, pharmaceutical companies have an incentive to raise drug prices to obscene levels to offer those more significant rebates.
Returning to the previous example, if the price of our hypothetical drug was raised to $10,000, but the PBM was able to negotiate a $9,500 rebate, the pharmaceutical company would make the same $500 as before. However, the PBM would be able to take home $950 of that rebate as their 10 percent cut, leaving a final price of $1,450 for the insurer. This is an 85.5 percent reduction in the drug’s cost, compared to the 45 percent reduction from the previous example, which looks great on paper. However, it fails to consider that the pharmaceutical company inflated the drug price to incentivize the PBM to choose it over the cheaper alternative.
Moreover, consumers would need to make a $290 copayment under the 20 percent cost-sharing scheme — nearly triple the price. Insurers can mask this by spreading the cost across its various beneficiaries in the form of higher premiums, lowering the copayment for the drug in question. This is precisely what the insulin price cap is set to do.
Also, all of the above examples assume that the insurer is passing 100 percent of the rebate on to the consumer, which is seldom the case. Private insurers are for-profit companies and are incentivized to hold on to a portion of the rebates, leaving consumers with higher premiums and copayments. For this reason, fixing the problem is highly complicated: who do we even blame for these higher prices? The manufacturers for inflating list prices? The PBMs for favoring drugs with more significant rebates over more affordable alternatives? The insurers for keeping portions of these rebates for themselves instead of passing them on to the consumer? When the problem is a part of the price negotiation system itself, finding a solution can be difficult.
Critics of the Affordable Insulin Now Act claim that instituting a price cap on the insurers is a band aid that spreads the price of insulin across all consumers rather than addressing the inflated prices at their core. Many critics claim that the entire drug rebate system would need to be overhauled to address the rise in prices fully. While proponents of the bill agree, many claim that the lives of American diabetics simply cannot wait for Congress to arrive at a long-term solution.
The Affordable Insulin Now Act is set to go before the Senate, where it will need to attract bipartisan support to become law. If passed, the bill will come into effect in 2023.
If you are having trouble affording your medication, a Medicare Advantage or Medicare Part D plan may be able to help. Call us at (800) 950-0608 to speak with a licensed insurance agent today.