bucket of money, sticker shock, rebates

The free market system is supposed to encourage competition. One of the key tenets of capitalism is that prices of products are determined primarily by a competitive marketplace. If company A sells a mousetrap for $5 and company B can make a similar mousetrap that works equally well for less and sell it for $4, then company B would, in theory, capture the market for mousetraps. That’s the way it’s supposed to work. The theory seems to break down when it comes to the pharmaceutical industry.

The Insulin Investigation: Price Collusion?

Two Congressmen have asked the Justice Department and the Federal Trade Commission to look into why insulin prices from different companies have been rising in lockstep. For example, in 2001 the insulin Novolog had a list price of $39.75. So did its competitor Humalog. In 2002, on January 16th, both drugs went up to $41.74. In July they rose to $45.08. In December prices for both brands went to $49.14.

Some people might wonder how these prices could have risen in tandem down to the penny for so long. If the free market were working as intended, there should have been price competition between these competitors.

Even after more than a decade, in November 2015, prices were still extremely close. Novalog’s price rose to $236.70 while Humalog’s price went to $237.00. Theoretically, these companies are in competition but the parallel pricing has Senator Bernie Senators and Representative Elijah Cummings concerned about possible collusion.

Shadow Pricing?

Bloomberg News (May 6, 2015) reported on something called “shadow pricing.” Here is a report that describes a practice that should not exist under true capitalism:

“On May 30 last year, the price for a vial of the blockbuster diabetes medication Lantus went up by 16.1 percent. On the next day, Lantus’s direct competitor, Levemir, also registered a price increase — of 16.1 percent.

“The pattern repeated itself six months later when Lantus, from French drugmaker Sanofi, was marked up 11.9 percent, and Levemir, made by Novo Nordisk A/S, matched again exactly.

“In 13 instances since 2009, prices of Lantus and Levemir — which dominate the global market for long-acting injectable insulin with $11 billion in combined sales — have gone up in tandem in the U.S., according to SSR Health, a market researcher in Montclair, New Jersey.”

What Has Happened to Competition?

We were all taught that under capitalism rivals are supposed to challenge each other on quality, innovation and price. That’s why the makers of computers, smart phones and other electronic equipment are constantly trying to edge out the competition. When it comes to buying a car, people arm wrestle the salesman to get the best deal possible. Consumers are constantly searching for gas stations that charge a little less for a gallon of gas.

The pharmaceutical industry may not be colluding on prices, but they do not seem to be competing either. Prices of brand name insulin products have gone up dramatically in recent years to the point where many people with diabetes have had a hard time paying for their life-saving vials. By the way, the patent on insulin expired over 70 years ago and yet there is virtually no generic competition for some of the most popular insulin products on the market.

Through the Looking Glass:

The pharma industry has responded to charges of price collusion by stating that list prices do not reflect actual cost to payers. Companies insist that they set their prices independently of the competition. They get away with that argument because there is a totally opaque pricing system that involves rebates and reimbursements, which are almost never disclosed. This is an Alice-in-Wonderland world where it is virtually impossible to figure out what anyone pays for anything.

If you find this more than a little aggravating, you are likely to want to read our recently revised Guide to Saving Money on Medicine. This 20-page downloadable PDF booklet will demonstrate how prices for brand name drugs have skyrocketed over the last few decades. You will learn about systemic problems with generic drugs and how to use such medications wisely. You will also discover some secrets about buying medicines from Canada. Here is a link to this downloadable guide.

Saving Money on Medicines

What Do You think?

Do you find the parallel pricing of insulin too close for comfort? We would like to read your opinion in the comment section below. What do you think about the entire pricing system for prescription drugs? Has capitalism failed consumers when it comes to Big Pharma?

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  1. Anne

    Here’s an example of when government needs to get involved. One of the reasons insurance is so expensive is because of the cost of healthcare, including prescription drugs. Even worse, we are not allowed to buy from other countries, but that’s where our generics are coming from. My biggest gripe with the ACA has been the big increase in insurance premiums and deductibles, with no apparent effort in finding ways to lower costs.

  2. Madashell

    I agree that term limits are a part of the solution to this problem. However, since Congress would be voting on the issue, its hard to see that they would ever agree to limit themselves. Perhaps some savvy lawyer will figure out a way to get this to the Supreme Court. We can insist that our states stop gerrymandering and define districts built on fair criteria. Lobbying can be restrained or forbidden. I have seen physicians put a stop to drug companies bringing food and other gratuities to them in exchange for prescribing new drugs, so it can be done. In fact Senators and Representatives could do this themselves if they would put the country and the people they supposedly represent first.

  3. Rick

    Over pricing is one think but the secondary injuries caused by these expensive medications is a separate problem and governments are so frightened of the political pharmaceutical lobby they will not touch it. If you visit the essential medications needed to operate a basic health care system you will find that most of the medications listed will insure a Doctor his tenure for life but you can not say that about the patient as the risks (side effects) far out preform the rewards as many of these so called pharmaceuticals are in fact metabolic toxins and poisons that damage DNA, cause aberrations to chromosomes, inhibit liver , kidney functions thus impairing the one thing that heals our bodies and that is a fully functioning and non inhibited immune system.

  4. Penelope

    This problem should be part of the “replace” or “revise” of Obama care!!!

  5. Louise
    Carbondale, IL

    My plea to pharmaceutical researchers: please create an nsaid that has an element that will protect kidney function. I am age 84, and routinely took naprosyn twice a day for my various arthitic complaints. This kept me quite comfortable and active. Then it was discovered that I had decreased kidney function, so no more nsaids for me. My doctor said “what can it hurt” to take it on rare occasions. So not surprisingly when I do, my body still responds. Big pharma probably isn’t interested in OTC’s that would help millions of people. What a shame.

  6. Katy
    Las Cruces, NM

    My recent experience was with rattlesnake antivenin. I was not the only one shocked by the $65,000 price tag: the pharmacist, ER Doc, nurses, administrator, and orderly all questioned if that really was the cost. I guess it’s because they have you over a barrel-you sure can’t shop around! We still haven’t seen if the insurance cost will be discounted.

  7. Edwinna

    It does not matter that new drugs are being created by pharmaceutical companies because many people cannot afford drugs already available. The drug companies on these two insulins ate evidently in collusion. The government should not allow this!

  8. stan parks
    spokane. wa.

    I believe that one of the things brought up drug prices was the advertising of drugs on TV. First of all it should be the practitioner who should select the proper drug for his patient. Confusing the public with drug information has put the physician in the position of being seduced by drug companies. The public puts them in the position of prescribing a drug because a patient is looking for the newest and best. That could be corrected by proper legislation. Obviously, the media would also be opposed to such legislation.
    But it would definitely put a dent in the cost of drugs.
    Stan Parks , DDS

  9. Howard

    Pharmaceutical price “shadowing” – Capitalism is alive and well in the pharma industry. Its about increasing profits, not being competitive. Pharma is doing a remarkably good job! Consumers of course are being screwed.

  10. JoAnn

    I have 2 examples of the outrageous pricing by US drug companies. Several years ago we were in Rome when I developed bronchitis, and the doctor there prescribed the usual combination of prednisone, azithromycin, and cough suppressant. The total cost for all 3 was 27 euros with no insurance coverage. In the other instance my husband ran out of his Ventolin inhaler in Paris so we stopped at a pharmacy, showed the empty inhaler to the pharmacist, and walked out with a refill, even without a prescription. The cost was 7 euros for something that runs $45 a piece with insurance. The products were identical from the same manufacturer. These cases make it clear to me that there is something seriously wrong with drug pricing in our country.

    • JEN

      We find the exact same situation as we travel to many countries. Inhaler for my nephew, same one, only $6 just over the border in the Mexico pharmacy. NOTHING inferior about it!

      My 2 types of insulin, Lantus & Humalog, I buy in any country EXCEPT the USA for a fraction of the USA price. I get so frustrated that Americans don’t understand how deeply we’re being gouged; the rest of the world is “market price” that is FAR FAR less than what people pay in the USA!

      People say, “Oh but it’s not as good quality…” PPFFTTT. Scare-tactic marketing only – I check who the manufacturer is, and most come out of the same labs.

  11. lin

    If you were a fly on the wall in Washington, you would see the hoards of lobbyists from big pharma and others corporations, colluding with our elected officials in exchange for campaign contributions and other favors. There are also members of these corporations sitting on committees that affect decision making in their fields. Eat well live well get off your meds

  12. Mary Jane

    Corporate executives are all in bed with one another, agreeing on the golf course which company will act to screw the consumer, and when. Legislators all gather ’round the bed, eager from crumbs thrown to them.

  13. Doug
    Eau Gallie, FL

    I bought insulin for my diabetic cat without a prescription. Why should I need a prescription to buy the same insulin for myself?

  14. Linda

    Centuries ago the pharm. companies virtually wiped out the common sense treatments. Homeopathy, herbs etc. were relegated to near extinction by companies in favor of big profits, big business and power. Yet many of our best drugs come from plants. Our Earth freely gave us these plants to use to heal. Unfortunately, love of money and pure greed supercedes where many big business is concerned. However, if people will keep in mind “you are what you eat”, and try to maintain a healthy diet, this alone would help generate more competition within companies since people would be healthier and perhaps need less medication.

  15. Bobby

    Antitrust laws used to be enforced. They no longer are. We don’t have capitalism anymore, at least not in industries like the Pharmaceuticals. We have allowed the largest companies in pharma, oil, banking, insurance, etc. to merge until now there are just a handful of companies in each industry. Yes, the guy that mows lawns or does plumbing work is basically operating in an arena that has many competitors. But the big stuff, no way. I remember when AT&T was broken up in the early 80’s. Since then most of the components have gotten back together. When Exxon-Mobil was allowed to combine it became vividly clear that the tale was wagging the dog. Eight years ago we had the financial debacle and the term “too big to fail” emerged. Well today there are fewer but larger financial institutions. Nothing was done to remedy the situation.

  16. Dale

    It’s not so much price collusion as it is inelastic markets. The companies don’t compete on price, because they don’t HAVE to. Usually, if you raise prices too high, consumers stop buying it. But you can’t stop buying drugs that save your life. So Pharma companies have a captured market that resists any need for price competition.

  17. Brad
    New York

    The question of the pricing of drugs belongs primarily in the larger debate about healthcare financing. Unless there is evidence of illegal collusion between drug companies to “fix” pricing, I don’t see the problem here — even if I think the steep rise in prices is existentially obnoxious. But in the story above, one word is missing: scarcity. I don’t know all the facts, but IF there are just two insulin products available, and IF those who need the products cannot source what they need elsewhere, and especially IN a system of payment supports/subsidies (insurance, Medicare, Medicaid), then the price should go up. In more competitive markets (for HDTVs or aspirin or automobiles) prices actually tend to fall over time. The only exceptions are in instances where the government steps in to impose price controls, and that is a double-edged sword.

  18. Roseanne

    I recently bought a medication imported from a reputable Canadian company that I have been using for several years. The drug came in blister packages packed in boxes. On each package and on the box, something was redacted in black. I was concerned and called the Canadian pharmacist to inquire. He explained that the drug was made by the leading generic drug maker in India and that in India, the price in Rupees is printed on the package according to law.

    Therefore, the drug price is known to everyone. That price was redacted since it is not applicable in our currency. Here, in the US, each pharmacy charges a different price and doctors are increasingly using E prescribe so the patient has to provide the name of a pharmacy and the prescription is sent directly to that pharmacy. The consumer has no opportunity to shop for prices. Everyone who has ever called around to different pharmacies to inquire about prices knows that the prices are vastly different from one pharmacy to another.

    • JEN

      So true!! I ran out of short-acting insulin on a trip that I can only get by scrip. I called around for an older (& cheaper) type of insulin to get me through since I didn’t need a scrip for it. Most places were over $100 – I had NO IDEA they had raised the prices so much! Thankfully, one pharmacist told me to check with WalMart. They have it for about $25 OTC. I was dumb-founded…

  19. patriot

    This is not competition or capitalism. What the drug companies are doing is pure greed, just like the oil companies. I heard this med was going for over $700.00; does it take another person to die to get congress off their asses and do their jobs? Why don’t we demand that these people who are making these decisions and well over $700k a year in salary be prosecuted and the key thrown away? When someone cannot afford to purchase a med that is vital to life itself and may ultimately die without it, that should be called murder. It’s time these people were held accountable for their actions.

  20. Bob M

    With the advent of medical “insurance” the free market concept goes out the window. The end consumer is not really a part of the choice. Doctors & medical professionals are making the choices and in many cases they are being provided incentives to make those choices. End users are only indirectly paying and not fully aware of total costs and because of their trust in their medical professionals and a lack of discussion about treatment alternatives…. they generally are not even aware of the option of choices.

    The insurance companies should be concerned with price competition, since they are paying, yet their system is not welcoming when patients attempt to bring issues to their attention. (Who knows how they actually handle cost complaints internally? I have literally been asked, “What do you care? You are not paying for it.”) It is my belief that it is easier for them to raise their rates (because of increased costs) than it is to attempt to address the apparent collusion and hold someone’s feet to the fire.

  21. Jim

    There are only 3 reasons drug manufacturers have to raise prices
    Sales are down (recover profit)
    Sales are flat (increase profits)
    Sales are up (accelarate profits)
    With the consolidation in the drug companies have more leverage
    On pricing. Pricing is a right of business in the free market

  22. Anthony A

    Big pharma owns the US senators..term limits is the answer…I hope

  23. Paul

    The only way I can see to control run-a-way prices for prescriptions without abandoning the free enterprise system, which is so necessary to avoid the proven failure of governmental control of prices, is to open up the US market to competition. Allowing us to buy meds from Canadian government approved Canadian suppliers would add real world competition to our markets. The FDA’s current monitoring of foreign drug manufacturing facilities has proven to be broken. I doubt that drugs from approved Canadian facilities would prove to be less acceptable than what is now imported from some drug manufacturers located in India.

  24. jeri
    Charleston wv

    I think the entire problem is capitalism. Let the government nationalize the pharmaceutical industry. Our tax money is researching and developing drugs already so take it a step further. Monopoly is inevitable stage of capitalism, as inherent as the profit (always before people) motive. No making it friendlier.

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