OP-ED: What "everyday low prices" can teach us about health care

"Everyday low prices" are coming to health care. Walmart recently launched its own analog insulin, a synthetic form of the hormone that's genetically modified to be released rapidly or slowly, depending on a person's needs. It will be manufactured by pharmaceutical giant Novo Nordisk — but cost 75% less than brand-name analog insulin.

The deal stands out as proof that markets can deliver outcomes that work for producers and consumers alike — if we let them.

Generally speaking, the "market" for medicines is dysfunctional. It bears little resemblance to the markets for groceries or electronics, where consumers can compare prices and product reviews, shop around for the best deal, and purchase what they want.

Instead, patients typically pay for prescription drugs through their insurance plans. They may be responsible for a co-pay or co-insurance — a set percentage of a drug's nominal price — and their insurer pays the rest.

The exact co-pays and co-insurance are determined by entities called pharmacy benefit managers — middlemen hired by insurers to administer drug plans and negotiate drug prices with pharmaceutical companies.

Because PBMs decide which medicines are, and aren't, available through a given plan, they have immense leverage over pharmaceutical companies. Three PBMs handle more than 70 percent of prescriptions filled in the United States.

That leverage allows them to extract deep discounts from drug manufacturers. If drug makers want to have their products included on an insurer's formulary, they have to pay up. If they don't, the PBM will simply go with a drug maker that will.

In The market for insulin, PBMs routinely extract discounts exceeding 70%. They pocket some of that money and pass the bulk along to insurers.

Patients, meanwhile, pay a percentage of the insulin's full list price, which is many times higher than what the PBM negotiated with the manufacturer.

Consider the insulin made by Sanofi. From 2012 to 2019, its list price increased 140%, from about $150 to more than $350 per vial. But the amount of net revenue that Sanofi received, after paying discounts to insurers and PBMs, declined 41% during that time period.

Those insurers and PBMs didn't share those rebates directly with the people buying insulin. Instead, consumers had to cover for co-pays and co-insurance based on the escalating list price.

A patient with a 25% co-insurance requirement on a $350 drug got a bill for $87.50 at the pharmacy. That co-pay is greater than Sanofi actually received in total.

By cutting out these middlemen and selling directly to retailers like Walmart, drug makers can maintain or even increase their profit margins. The retailers charge a small mark-up, just as they do for everything they sell.

And in this case, patients save money, too.

Middlemen siphon billions of dollars out of the healthcare system each year — while providing questionable value to consumers. As the deal between Walmart and Novo Nordisk shows, market principles offer a better way.

Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute.