Is Insulin as Cheap As Water? Analyzing High Drug Costs

During the first United States presidential debate, President Donald Trump claimed he’s made insulin so cheap, “it’s like water.” Unless people are buying the most expensive water in the world…that just isn’t true.

In 2016, insulin cost diabetic patients an average of over $5,000 a year. Without insurance, a vial of insulin could cost anywhere between $25 to $300 a vial. Even with insurance, people with diabetes still could pay upwards of $100 a month and insulin prices continue to increase. From 2001 to 2017, Eli Lilly’s insulin, Humalong, increased from $35 to $275. As insulin prices increase, patients must decide between paying for food or medication. Because there are so many types of insulin on the market, it is hard to give one average price. However, a recent study from the American Action Forum found that, on average, all types of insulin’s prices have increased 14% annually between 2012–2018.

The exorbitant price of insulin is not unique to the United States. A WHO survey found that in lower-middle-income-countries (LMICs) the cost of insulin was, on average, over a fifth of the take-home pay of a worker in Ghana and a study by T1 International found that diabetes sends people around the world into debt, with some paying 118% of their monthly income on diabetes medication. Clearly, there is a problem.

Why Are Drugs So Expensive?

Many may wonder why drugs are expensive. If they are basic life necessities, why do they remain inaccessible to so many? The answer lies in the drug development process and understanding of risk versus reward.

Drugs take a long time to develop; it takes about 12 years on average from the time a company discovers a new drug to the time the drug hits the market. During those 12 years, drug companies can spend anywhere between $314 million to $2.8 billion on research and development. And only about 10% of drugs make it from phase 1 development to market — adding to the high development risk. Medications for chronic diseases such as cancer and cardiovascular drugs are even riskier investments, with only 4.7% and 5.7% success rates respectively. To ensure the reward is significant enough for these high risks, drug companies are rewarded temporary market exclusivity for their drugs in the form of patents and can charge high prices from the resulting monopoly.

In countries such as the US and the EU, market exclusivity lasts an average of 8–10 years before generics enter the market, and the competition leads to over a 50% price reduction. This is not the case in LMICs. Generic competition is not a panacea for high drug prices, but it’s been proven to help and is an important first step. Unfortunately, it is rare in LMICs. In those countries, the generic market remains much smaller and the impact of competition does little to alleviate the high prices. Entering a new market is expensive and many generic drug companies avoid the high costs of entering LMIC markets because they cannot make the necessary returns. A lack of regulation and subsequent safety issues cause people to avoid generic drugs and choose the more expensive brand name drugs. In Zambia, for example, one company controls 85% of the market.

To combat the high prices of drugs in LMICs, international development agencies help procure pharmaceuticals at a lower price. But in recent years, as LMICs become wealthier and lose donor aid, they also lose their procurement deals. LMICs are not able to negotiate lower prices on their own and drug prices go up.

These variables have enormous implications for drug prices. One study found that LMICs pay 20–30 times more for drugs than higher-income countries. A 2017 analysis even found that people in Ghana may be paying up to 50 times more than people in the UK.

Effects of High Drug Prices?

Extensive evidence points to high drug prices hurting health and wealth. LMICs spend up to 20–60% of their health expenditure on medicines, leaving less money for other essential health services. Higher drug prices, in turn, result in poor resource allocation and inefficient health systems. For example, high drug costs in hospitals are associated with worse patient outcomes and lower-quality care.

In LMICs with low insurance rates and high out-of-pocket expenditure, high drug prices can lead to catastrophic health spending, when people spend over 10% of their household budget on medication. According to a 2019 WHO report, LMICs have a higher number of people facing catastrophic health spending compared to higher-income countries. And as catastrophic health spending has continued to increase from rising pharmaceutical prices, the number of people with chronic diseases requiring maintenance medications has also increased, both of which will lead to more and more people being forced into poverty.

In cases of catastrophic healthcare costs, people are forced to choose whether they should pay for medication or food. In turn, LMICs have issues with prescription adherence. A study in Sub-Saharan Africa found that 26% of people stopped their medicines due to financial hardships. Low adherence means that people cannot control their conditions and leads to worse health outcomes.

How Do We Lower Drug Prices?

Private and public stakeholders have implemented supply- and demand-side policies to reduce high drug prices. For example, the Pan-American Health Organization and the Association of Southeast Asian Nations are teaming up to pool their medical purchasing so countries can procure cheaper drugs. Similarly, the WHO issued Pharmaceutical Pricing Guidelines for Countries, but research shows they have not been successful in lowering drug prices and need to better reflect the real circumstances of LMICs. Other methods to lower drug prices include de-linking research and development costs of a drug to its sales, updating patent laws, strengthening regulatory bodies, restricting price increases, and using collaborative procedures to facilitate the assessment and registration of pharmaceuticals. In September 2020, the World Health Organization (WHO) introduced a Pricing Policy Guideline to Improve Affordable Access to Medicines. These guidelines include focusing on policies including reference pricing, tendering and negotiations, and emphasizes the need to increase generic penetration.

Implementation of these policies has been mixed, and there will be challenges in effectively employing the WHO guidelines. But as more countries lose international aid, drugs become more expensive due to life-cycle changes, and more people develop chronic diseases that require life-long medication, these countries need a more sustainable solution to combat high drug prices.

Blended finance models offer one such solution. These models bring together partners from the private and public sector and mobilize local resources to fund health initiatives. By engaging with the private sector, governments can better negotiate lower drug prices and increasing domestic funds leads to prices not dependent on international aid. As mentioned, drugs are expensive because of the high risk of development. Blended finance de-risks this development by sharing the risks amongst the different stakeholders. More so, funding from the various partners can help offset the high costs associated with bringing generics into LMIC markets. Through the resulting higher generic penetration, competition can drive drug prices down.

Successes already exist using blended finance for pharmaceuticals. For example, the Global Health Investment Fund, a social impact investment fund, is a partnership between the Bill & Melinda Gates Foundation, Swedish International Development Cooperation Agency, Grand Challenges Canada, and pharmaceutical companies to provide financing for drug development and lower prices of medicines.

Drug prices are not going to decrease on their own. As medicine advances and we can cure more diseases, they will only get more expensive. Innovative techniques such as blended finance are essential to ensure everyone can benefit from these medical technologies. Insulin may never be as cheap as water, but there are ways to make sure it is affordable and accessible to keep people alive and healthy.

Written by Debra Winberg

Heart of a non-profit. Engine of an investment bank. We use economic data to facilitate investments to prevent diseases.