When the inventors of insulin filed for a patent in 1923, they each sold it to the University of Toronto for $1, in the hopes that going public with the method for production would prohibit a profitable monopoly from forming. Today, three companies control the vast majority of the global insulin market: Eli Lilly, Novo Nordisk (NVO), and Sanofi (SNY) Aventis. Since the 1990s, they have raised the price of insulin by more than 1,200%. How was this oligopoly able to racket up the price of a life-preserving drug required by millions of Americans?
The high price of insulin is due to a market failure caused by a variety of factors: increased demand, a large percentage of the market owned by a few firms, and barriers for entry. Due to the diabetes epidemic and the insulin oligopoly crushing companies attempting entry, the three companies are able to freely set the price of insulin. Another main reason why both insulin and most life-preserving drugs are so prone to market failure is because consumers are unable to exit the market. This would be preventable if the barriers for entry were manageable enough for new firms to enter the market and create competition. Some industries that would initially seem oligopolistic require existing firms to set competitive, lower pricing out of fear of new entrants. To the consumer, the price would remain relatively unchanged and would be unnoticeable. However, the high price spike shown in the graph starting around 2010 may be a result of the Food and Drug Administration’s recent change in regulation. As part of Obamacare in 2010, Congress approved a fast-track for FDA approval for biologics, drugs created within living beings rather than through chemical reactions. This is the current method of production for insulin. However, this fast-track only comes into effect in March 2020, and various interpretations of FDA law ensures that creating a generic substitute good for insulin (a biosimilar) would go nowhere until March. Essentially, there is no reason for potential competitors to submit their newly developed insulin for regulatory approval until March 2020, out of fear that a product waiting for regulatory approval will have to start over using the new FDA framework if it isn’t approved by March. This lack of competition for the oligopoly has allowed them to drive prices as high as they like since 2010, caused by a regulatory dead zone blocking entry into the market.
https://prospect.org/health/insulin-racket/
https://www.statnews.com/2019/09/10/insulin-public-option-pharmaceutical-industry/
https://bearingdrift.com/2019/06/17/insulin-a-story-of-market-and-government-failures/
This supports the nature of how an oligopoly operates. With such substantial barriers of entry, the infrastructure of the firms in an oligopoly, for the most part, remain unchanged. They are able to be price makers and not price takers (in perfect competition), and often make prices exceedingly high, which is detrimental to the consumers. Ultimately, it would not be wise for someone to try and enter into an industry where there is already an existing oligopoly.
ReplyDeleteActually, pretty recently, this has started to change for the better. I believe that, pretty recently, the WHO agreed to certify generic versions of insulin drugs. This could actually be really important, since it will introduce competition into the insulin market. In the past, insulin companies have introduced minor changes to their drug repeatedly, to extend the copyright of their drug and ensure that there is no one who can sell insulin other than them. If other drug companies are allowed to produce these drugs, the current insulin producers will be forced to lower prices.
ReplyDelete