Earlier this month, President Biden gave Eli Lilly & Co. a shoutout on Twitter for its decision to slash insulin prices on the heels of his administration’s cap on insulin costs for Medicare recipients. He ended with a call to action: “Let’s keep it going.”

Novo Nordisk apparently was listening. Last week, the company announced price cuts to its own insulin products, and industry watchers expect Sanofi, the third main player in the insulin market, will eventually follow suit.

Drug companies are riding a positive PR wave over the moves, but let’s be clear: The cuts weren’t an act of altruism or even, in the end, pharma caving to public outcries over the soaring cost of insulin. Their decisions were driven by market incentives that are finally starting to align in patients’ favor.

Insulin manufacturers are responding to two strong economic forces, says Gerard Anderson, a health policy expert at the Johns Hopkins University Bloomberg School Public Health. The first force is related to how much Medicaid pays for drugs.

State Medicaid programs use a well-defined, legally prescribed formula for determining the portion of a drug’s list price they will pay. It factors in things like how long a drug has been on the market, whether it’s for children or adults and how much private insurers are paying for it.

That formula also includes a bigger rebate to Medicaid if a drug’s price has been rising faster than inflation. (In other words, the more companies raise prices, the less Medicaid pays them.) Because companies have spent years pushing forward price increases on insulin products, that discount could add up to more than 100%, meaning the drugmakers would actually owe Medicaid money to sell their products. They’ve long escaped that fate, though, thanks to an older law that capped the discount at 100%.


But starting in January 2024, a provision in the American Rescue Plan Act of 2021 will do away with those rebate caps. So by lowering prices this month, Lilly and Novo Nordisk (and Sanofi, if they follow suit) will now be paid by Medicaid rather than losing money to Medicaid. “If they didn’t change their list prices, they would potentially owe tens of millions or hundreds of millions of dollars to Medicaid each year to make up for that difference,” explains Benjamin Rome, a health policy researcher at Harvard Medical School.

Medicaid isn’t insulin manufacturers’ only problem. The second economic pressure driving the recent price cuts comes from the private sector, where insurers and pharmacy benefit managers (the middlemen between manufacturers and insurers) have been accruing many of the benefits of manufacturers’ rebates on insulin.

Manufacturers have a perverse incentive to raise list prices on their drugs so that they then can give pharmacy benefit managers higher rebates, which in turn helps ensure companies’ products are included on an insurer’s prescription plan. But this is bad for manufacturers’ profits; a 2021 study found that as the list price on insulin increased between 2014 and 2018, the share of the proceeds coming back to the company actually decreased. That situation also harms patients, regardless of whether they have insurance: Those with insurance may see out-of-pocket costs go up with prices, and those without pay even more.

If none of this makes sense, that’s because it isn’t designed to make sense. The real problem is the opaque way drugs in the U.S. are delivered and sold to patients.

To that end, it’s worth mentioning one more pressure point for drug companies: experiments to lower the price of drugs and inject more transparency into the system.

The two most prominent efforts are Mark Cuban’s Cost Plus Drugs and CivicaRx, both of which aim to offer products at a straightforward price (Cost Plus Drugs, for example, charges customers 15% above what it pays manufacturers, and a shipping fee). Civica, a nonprofit, has a plan to offer generic versions of several popular insulin products at a low fixed cost.

These kinds of alternatives to the conventional pharma business model need to keep pushing – the pressure they are putting on the market is clearly having a positive effect for patients, even the ones who might not be buying their products.

Insulin is a good example that when the right incentives are in place, the various actors in the health care system can be convinced “to stop playing games with prices,” Rome says.

That sunlight in the system might not fix the bigger problems with drug prices, but it’s a start.

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