Insurance Companies Benefit the Most From Rising Insulin Prices
- By Matt Winkler
Diabetes sufferers are having a hard time surviving these days. The cost of insulin in the United States has doubled since 2012, up an astonishing 1,000% since 2000, and there is no consensus as to why this is happening. Without insulin, diabetes patients will die, and many simply cannot afford to keep living. So what is responsible for the price explosion and how can it be stopped?
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The finger-pointing rages between insulin manufacturers and pharmacy benefit managers, but the truth may be that neither of them are responsible. Let's take a look and see why.
We often hear about the much-maligned rebate system between the manufacturers and PBMs as the culprit, but is it? The first thing to keep in mind is manufacturers like Novo Nordisk (NVO), Eli Lilly (LLY) and Sanofi (SNY) insist that despite the price increases for insulin, realized prices are stable to falling.
Looking at their filings, this is true. Sanofi CEO Olivier Brandicourt testified to the Senate Finance Committee last month that the average net price of its insulin product Lantus has declined by over 30% since 2012. For Novo Nordisk, rebates given out had accounted for 68% of insulin sales in 2018, up from 59% in 2016, so it seems the manufacturers at least aren't the ones taking home the higher revenues.
In his testimony, Brandicourt accused PBMs saying that "not only are discounts apparently not being passed on to patients, but patients are in fact being asked to pay more when PBMs and health plans are paying less for the medicine." But is this true or just more finger pointing?
A quick look at the gross profit margins of Express Scripts, now part of Cigna (CI), from 2013 to 2017 show PBMs don't seem to be benefiting all that much from price increases.The company's gross profit margins have been pretty stable, rising less than 1% since 2012 while insulin costs have doubled. Gross profit margins in 2013 were 7.8%, and now they are 8.7%. Since the rebates that PBMs receive from manufacturers count against cost of revenues, sharply increasing gross profit margins that would prove Brandicourt's point. But it's not happening.
While it is true net margins had climbed from 1.8% in 2013 to 4.5% in 2017 for Express Scripts, this is due to much lower selling, general and administrative expenses and lower income taxes, not from pocketing rebates meant for consumers.
As for CVS (CVS), which acquired Aetna, it's a similar story. And besides, according to the company's latest investor presentation, it passes 100% of rebates to consumers in what it calls the "Guaranteed Net Cost" contracting model. So holding on to rebates can't be the issue here, certainly not going forward.
Nor is it drug wholesalers like Amerisource Bergen (ABC), whose gross profit margins are actually down since 2012, from 2.85% then to 2.75% now. That takes care of every link in the pharmaceutical chain except health insurance companies. Eliminate everything else and they must be the culprits. This does make a fair amount of sense because of the labyrinth of government regulation around this sector. Insurance copays are based on list prices, not rebates, so the higher rebates go, the higher list prices go, the higher copays go and the more money insurance companies take home from patients.
So what seems to be happening is that as rebates increase, insurance companies earn more money. And since the federal government requires everyone buy health insurance, there is little incentive to please consumers here.
The more drugs cost, the more insurance companies can charge for premiums, and their stock prices just keep rising. Take a look at Humana (HUM), United Health (UNH) and Anthem (ANTM) and you'll get a good look at who is really benefiting from higher drug prices through higher copays. Is it a coincidence that insulin costs have risen so quickly since the Affordable Care Act went into effect?
So how do we get insulin costs down? Getting government out of health insurance would do it. Since that probably won't happen anytime soon, then mandated copays based on the rebated price rather than list prices may help somewhat, or simply importing the same insulin products from Canada where it is much cheaper. Or both.
Disclosure: No positions.
This article first appeared on GuruFocus.
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