In a move that came as a surprise to many, pharmaceutical titan Eli Lilly announced yesterday that it will drastically cut prices on insulin and limit out-of-pocket (OOP) costs for patients. In a move that came as a surprise to none, the Biden Administration is already taking credit for Lilly’s decision. But there’s more than just the threat of government price controls or humanitarian goodwill that is motivating Lilly. Let’s explore what exactly Lilly did and, more important, the reasons behind it.  

To begin, Eli Lilly is capping OOP insulin costs at $35 for a month’s supply for those that are privately insured and providing discounts so the uninsured can get insulin at the same price. The company is dropping list prices for its most commonly used insulin products, Humalog and Humulin, by 70 percent starting in the 4th quarter of 2023. It will slash the list price of Humalog’s generic version to $25 per vial. Lilly also announced it would launch a new biosimilar insulin to compete with Sanofi’s Lantus at $92 for a five-pack of injector pens. A caveat: Lilly says these cuts only apply to its older products (such as Humalog and Humulin), but newer products will still have premium pricing attached. 

The broad consensus is that Lilly’s changes will help patients, especially those who are uninsured or have high-deductible insurance plans – so naturally politicians want credit for the company’s decision. President Biden took full credit for the move, pointing to the Inflation Reduction Act’s $35 cap on insulin OOP costs for seniors in Part D and his recent calls for legislation to extend that cap to everyone nationwide. Lilly’s chosen OOP limit seems to indicate the IRA and increased political pressure influenced its decision, but that isn’t the full picture. Lilly is also facing competition from other biosimilars, and the pricing changes will help Lilly remain competitive – as well as grab customers from other brand-name insulin manufacturers. Given Lilly’s claim that the average OOP cost for its insulin is $21.80, the company’s price drops probably won’t hurt its bottom line considerably. Still, Lilly risks losing out on formulary placements courtesy of rebate-focused pharmacy benefit manufacturers (PBMs). 

There’s another aspect to Lilly’s drop in list prices: the 100-percent cap on rebates in the Medicaid Drug Rebate Program (MDRP) expires at the start of 2024, courtesy of the American Rescue Plan Act. As a reminder, the MDRP requires that drug manufacturers provide rebates to Medicaid programs of either 23.1 percent of the average manufacturer price (AMP) or AMP minus the best price given to purchasers (aka the “best price rule”), whichever is greater. In addition, if a drug’s AMP outpaces inflation, the difference between the drug’s actual AMP and what the drug’s AMP would have been if it kept pace with inflation are added on top of the rebate. High list prices, in part driven by incentives in the PBM negotiation structure, can mean higher AMPs. These rebates were capped at 100 percent of the AMP. But in 2024 – with AMP increases above inflation, the best price rule, and the end of the 100-percent cap – manufacturers could end up not just giving Medicaid their drugs for free, but even paying Medicaid to provide beneficiaries with their drugs. Capitalist enterprises are not in the business of paying people to use their products, so Lilly’s list price moves may have been made with an eye on the MDRP changes in 2024. 

It appears that market forces and changing regulations in Medicaid had a lot more to do with Lilly’s move than the IRA and pressure from politicians. The big takeaway: A private company decided that what was best for its bottom line was also a major win for its customers. It looks like the market works – if we let it.