This year marks the 100th anniversary of insulin being isolated for the first time. Remarkably, within a year of that discovery, a 14-year-old boy became the first patient to be successfully treated with the drug. It is difficult to overstate the impact that insulin has had. In 1909, life expectancy for a Type I diabetes patient after diagnosis was around four years, with even lower life expectancies for the young. By the 1940s, a 10-year-old diabetic could expect to live, not one year, but 45 years, thanks to insulin. What’s even more remarkable is that the team that was eventually awarded the Nobel prize for insulin’s isolation sold the patent to the University of Toronto for just $1 each (the equivalent of around $15 today) because they thought it would be wrong to cash in and that the compound belonged to everyone.

Fast forward to today and you see Meghana Keshavan, a biotechnology reporter for Boston-based medical publican STAT, tweeting: “Holy sh*t. My doc prescribed me insulin, but my new insurer doesn’t cover the brand. Out of pocket the Humulin is $2,500. What a way for my professional life to intersect with the personal.” It’s not just Eli Lilly’s Humulin. Sanofi reported a 140 percent increase in the list price for their insulins between 2012 and 2019.  Annual expenditure on insulin per person for people with Type I diabetes went up from $2,864 in 2012 to $5,705 in 2016.

How did we get here? A combination of extremely high market concentration, little price transparency, and perverse incentives. The top pharmacy benefit managers (PBMs), Express Scripts, CVS Caremark, and OptumRx, control around 80 percent of the market and incentivize pharmaceutical companies to raise list prices as PBMs are typically paid approximately 5 percent of the list price as their cut. Unlike any normal industry, where competitors might cut prices and a company needs to decide whether to follow suit, the pharmaceutical industry is the exact opposite, with companies immediately raising prices once they see a competitor do so. They have to. If they don’t, the PBMs might drop coverage of their drug or put it in a less favorable tier.

The process for lockstep price increases can be seen in emails discovered through a Senate Finance Committee investigation that showed Novo Nordisk deciding the same day that Sanofi raised insulin prices by 16.1 percent to also raise prices by 16.1 percent, effective the next day.

The pharmaceutical industry has a couple of counters to this, including that reacting to other market participants’ actions isn’t illegal as it isn’t collusion. They do have a point. That Senate Finance Committee investigation, which spanned two years and went through 100,000 pages of internal company documents, never found a “smoking gun” showing the pharmaceutical companies working together to raise prices at the same time.

Another argument is that while the list prices have increased, net prices after rebates and discounts have decreased. This can be regarded as either a half truth or a complicated lie. The net prices are what the pharmaceutical company receives, not what consumers pay, and many have seen their insulin prices skyrocket as the PBM’s have pocketed many of the savings and not passed them on.

For example, between 2014 and 2018, Medicare patients, who make up almost half of diabetics, saw their insulin prices rise by nearly 20 percent, according to a report by the Iqvia Institute. Another group that is negatively affected are people with high-deductible health plans (HDHP), who often have a pharmacy plan deductible. They will typically have to pay the full list price (not the net price) of the drug until their deductible is met. This is not an inconsequential number of people, as over 40 percent of employer-based health plans counted as HDHP in 2017, up from about 15 percent ten years earlier.

Besides deductibles, there is also coinsurance in which the patient pays a percentage of the total cost of a product even after the deductible is met. This coinsurance rate generally ranges from 18 percent to 37 percent and is typically based on a price that approximates the list price rather than the net price. There’s a reason why a Yale study found one in four diabetics underusing their insulin due to cost.

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This brings up another issue, the lack of generics. Normally, when we are talking about a 100-year-old pharmaceutical product, there are at least several generic products to choose from as all the patents are expired. Not in this case. There have been several generations of insulin developed since it was first isolated in 1921, most notably the recombinant human insulins that entered the market in the 1980s, replacing the animal extract insulin that was causing some people to have allergic responses or reduced efficacy.

Every generation of insulin has typically been either incrementally safer or more effective or more convenient, so there is some actual innovation at work that can be patented. The problem is that once a newer version is released, older versions often become unavailable as the manufacturers pull them from the market. If you wanted a lower cost, older insulin, you might not be able to buy it. This has left Eli Lilly, Novo Nordisk, and Sanofi in control of 90 percent of the global insulin market and just about all of the insulin supply in the United States.

There is also no regulatory pathway for a generic to be approved. Potential competitors can attempt to gain approval for a “biosimilar,” but that requires large, expensive trials, which typical generic companies don’t do as that is not their business model. Biosimilars also don’t have as clear a pathway to market penetration as traditional generics, as they are not substitutable at the pharmacy and require a specific prescription (the FDA can change that, but they haven’t as of yet).

It’s also not an inconsequential feat to be able to get around the patent protection. The pharmaceutical giant Merck was effectively chased out of the insulin biosimilar market after Sanofi sued. The situation is so bad that the first two biosimilars approved (Basaglar in 2015 and Admelog in 2017) were actually manufactured by two of the existing insulin giants, Eli Lilly and Sanofi.

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Another way to effect change is through legislation. Eight states have passed legislation for price caps on insulin ranging from $25 to $100 for a 30-day supply. However, this legislation can be imperfect. For example, Colorado implemented a $100 out-of-pocket limit. There were two major problems. This was a $100 per prescription limit, and often diabetics are taking multiple types of insulin (such as long-acting and short-acting for mealtimes), so they still end up paying $200 to $300 per month for their insulin. Also, certain plans, such as those self-funded by an employer, were exempt. In one case a woman expecting to pay $900 for a three-month supply was told she needed to pay $5,600 even after the legislation went into effect.

That is still better than the situation federally, where little progress has been made despite what seems to be bipartisan agreement on a need to do something. Insulin or general drug pricing bills do get introduced, but they don’t make it past press conferences. Even Chuck Grassley, powerful chairman of the Senate Finance Committee, couldn’t make headway on the issue. He introduced a “Prescription Drug Pricing Reduction Act” in both 2019 and 2020 but the legislation never got out of his own committee.

Why all this talk and little action? Part of the reason may be a politician’s instinct not to bite the hand that feeds. According to a STAT analysis, the pharma companies and industry trade groups sent checks to 356 members of Congress for the 2020 election cycle. That’s two thirds of the total number of sitting senators and representatives. Due in part to Republican control of the Senate, the pharmaceutical industry sent six Republican senators over $100,000 for help with their reelections.

There’s also a bit of regulatory capture on the federal level. Alex Azar, who was Trump’s secretary of Health and Human Services from 2018 to 2021, was president of Eli Lilly’s U.S. division from 2012 to 2017 and also a member of the board of directors for the Biotechnology Innovation Organization (BIO), the biotech industry group. It’s not terribly surprising that a senior executive at Eli Lilly didn’t do more to control insulin pricing. Also, Billy Tauzin, who was a congressman from Louisiana for 25 years (as a Democrat before switching parties in 1995), left office to become the head of the Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry trade group for the pharmaceutical industry. Tauzin had been the chair of the House Committee on Energy and Commerce, which oversaw the pharmaceutical industry, and had been instrumental in passing the Medicare drug benefit just before resigning to join PhRMA.

Insulin pricing is a major problem and will likely remain so as long as we have a health care industry where companies are incentivized to raise prices by an opaque and oligopolistic structure. Thanks to the lack of competition and price transparency, health care is probably by far the least free market of all the industries in the U.S. We need to reduce market concentration, eliminate the use of rebates, change how PBMs get paid, make biosimilars substitutable for brand-name insulins, and streamline the approval process for the biosimilars. That will go a long way to bringing some sort of free-market competition to an industry that isn’t used to it.

Maxim Jacobs is a managing partner and director of research for North America for Edison Group, an investment research, investor relations and consulting firm.