Insulin to become cheaper

Kaiser Health News reported that Eli Lilly announced that it would reduce the list price of some insulin products. In this era of corporate profits and rapidly rising drug costs, why did Eli Lilly decide to reduce prices? For reference, the price one of the company's insulin products rose from $21 per vial to $255, from 1996 to 2016. The article reports on two theories for the price reduction.

One theory is that recent legislation eliminated what is known as the Medicaid drug rebate cap. Apparently, drug manufacturers who want their drugs to be covered by Medicaid must agree that prices above a certain amount must be rebated back to the government. That limit has two components, one of which has a limit itself. When pricing is enough that that secondary limit is triggered, manufacturers do not need to increase the rebate that they owe the government. The American Rescue Plan Act removed that secondary limit. As a result, drug manufacturers have less financial incentive to maintain a high price. This theory seems less plausible since Medicaid insurance coverage accounts for a relatively small portion of the insurance market. Even if the profits from Medicaid are reduced, it seems that manufacturers can maintain their margins when selling to other insurers.

The other theory that the article offers is that other suppliers are entering the market. For example, a nonprofit drugmaker based in Utah has plans to sell insulin inexpensively, as does CostPlus Drug Company. Additionally, California plans on getting into the business. This increased supply seems like the more likely explanation for Eli Lilly's pricing decrease, although the two reasons are not mutually exclusive.