JURIST Digital Scholars
Challenging Deceptive Drug Pricing
stevepb / Pixabay
Challenging Deceptive Drug Pricing

Consumers rely on listed prices being accurate. Imagine walking into your favorite store, bringing your desired item to the counter, and being told that the price you had to pay had little relation to the listed price. Remarkable as it is, this is commonplace in the pharmaceutical industry.

Minnesota Attorney General Lori Swanson recently filed a lawsuit challenging deceptive pricing among insulin manufacturers Novo Nordisk, Sanofi-Aventis, and Eli Lilly. The complaint alleges that the list prices charged by these companies have little to do with the actual prices paid by consumers. The complaint also alleges that such deceptive pricing harms patients who have high-deductible health plans, patients who have no insurance or pay coinsurance, and patients who are Medicare beneficiaries or in the Minnesota Department of Corrections.

For the nearly 10% of Americans with diabetes, insulin can mean the difference between life and death. Many of these individuals require insulin injections because their pancreas is unable to effectively regulate blood sugar levels. In fact, diabetic patients who do not take their prescribed insulin doses “have increased risks of macrovascular complications (such as heart failure and cardiovascular disease) [and] microvascular complications (including lower limb amputation, blindness, kidney failure).” Insulin takes two forms: rapid-acting (which begins working 15 minutes after injection and lasts two to four hours) and long-acting (which begins working several hours after injection and lasts 24 hours).

There is no question that insulin saves lives. But is it a product of recent innovation that justifies high prices? It is not. Manufacturers often justify price increases by pointing to research expenditures, which can be significant and not certain to result in successful new products. A high-priced drug is better than no drug, so the argument goes.

That argument does not work here, however. Insulin is not a recent phenomenon — it was discovered in 1922! And by the mid-1990s, “scientists had created man-made, or analog, insulin, which could be adjusted to allow for different absorption times and more effective management of blood sugar.” The complaint alleges that list price increases are not justified because the manufacturers “have made no meaningful improvement to their products since they introduced them to the market.” In fact, between 2009 and 2014, medical costs fell 14% while pharmacy costs increased 36%.

The complaint notes dramatic price hikes in recent years. Take, for example, the two leading long-acting insulin treatments, whose current prices have nearly tripled within the past decade. Sanofi’s Lantus increased from roughly $99 in 2010 to $270 in 2018, and Novo Nordisk’s Levemir increased from $114 in 2008 to $294. Similarly, the price of rapid-acting insulin also skyrocketed: Novo Nordisk’s NovoLog increased from $133 in 2008 to $289 in 2018; Eli Lilly’s Humalog rose from $123 in 2011 to $275; and Sanofi’s Apidra increased from $93 in 2010 to $270.

The list price of pharmaceuticals is known in the industry as the wholesale acquisition cost (“WAC”). This figure reflects the price at which a manufacturer sells to a wholesaler and does not include rebates or other discounts. The WAC also serves as the benchmark for the average wholesale price (“AWP”)—typically the WAC price plus a 20% markup—which is used to determine the price at which health plans reimburse pharmacies.

One explanation for high prices, ironically enough, involves rebates provided to pharmacy benefit managers (PBMs). PBMs manage prescription drug benefits for health plans and self-insured employers and are designed to lower price by aggregating purchasing power. In particular, PBMs create networks of pharmacies for health plans and negotiate the rates at which the health plans reimburse pharmacies. While PBMs may have initially reduced prices, the evidence now points in the opposite direction.

One reason for this reversal is that the PBMs run formularies (lists of drugs covered by health plans). It is crucial for manufacturers that their drugs appear on formularies; otherwise, health plans will not cover them. PBMs have particular power in the context of insulin drugs, which are “largely interchangeable.” As a result, PBMs need only include one long-acting insulin and one rapid-acting insulin on their formularies, which encourages manufacturers to do everything possible to enter into PBMs’ good graces.

How do they do that? By providing rebates. As the complaint alleges: “[M]anufacturers obtain placement of their products on PBM formularies by offering rebates to the PBM.” Drugmakers “offer PBMs larger rebates for giving their product preferred status over a competing one,” which means that the drug will be less expensive and might even benefit from its rival’s exclusion from the formulary.

And how do manufacturers pay for increasing rebates? By increasing the list price. The complaint points to statements from drugmakers that admitted this. Novo Nordisk conceded that “as the rebates, discounts and price concessions got steeper,” it was “losing considerable revenue,” which led to it “increas[ing] the list [price] in an attempt . . . to maintain a profitable and sustainable business.” Similarly, Eli Lilly “admitted that it increases its list prices because ‘PBMs demand higher rebates in exchange for including the drug on their preferred-drug lists.’”

Exacerbating the situation, the manufacturers have an incentive to follow their rivals in increasing list prices. This is unlike other markets, where a rival’s price hike typically is not matched by competitors, who could attract more customers by offering a lower price. In contrast, in this setting, one company’s increased list price signals a heightened rebate to the PBM. To be able to compete with the first-mover’s rebates (while maintaining profit margins), the follower will increase its list price as well. That explains why the price of insulin drugs has significantly risen across the board.

The complaint notes the deceptive nature of this wide gap between list price (which is published) and net price (which is secret). For example, the difference between Lantus’s list and net prices increased from 16 to 136 percent between 2009 and 2015, and the difference between NovoLog’s list and net prices is more than 315 percent. Patients with high-deductible health plans, those who are uninsured or pay coinsurance, and Medicare Part D beneficiaries all lack information regarding rebates and “expect that [list] prices are an accurate representation” of a drug’s value. This information may lead them to find that “their life-saving medications [have become] unaffordable.” In short: “the list prices that [drugmakers] set are so far from their net prices that [they] no longer are an accurate approximation of the actual net price of insulin and are deceptive and misleading.”

The complaint alleges RICO violations, deceptive trade practices, false advertising, and unjust enrichment against each of the manufacturers. It seeks an injunction preventing the defendants from “publishing or otherwise disseminating deceptive or misleading list prices” and seeks damages, including disgorgement of profits.

With list prices having little to do with reality, pricing in the pharmaceutical industry is notoriously secretive and misleading. In shining a bright light on this model, this lawsuit promises to be important.

Michael A. Carrier is Distinguished Professor at Rutgers Law School, where he specializes in antitrust and IP law. Among his publications, he is co-author of the leading IP/antitrust treatise, IP and Antitrust Law: An Analysis of Antitrust Principles Applied to Intellectual Property Law. Professor Carrier has also testified before the FDA, FTC, National Academies, and Senate Judiciary Committee.

Suggested Citation: Michael Carrier, Challenging Deceptive Drug Pricing, JURIST – Academic Commentary, November 30, 2018, http://www.jurist.org/commentary/2018/11/michael-carrier-drug-pricing/


This article was prepared for publication by Stephanie Sundier, a JURIST Staff Editor. Please direct any questions or comments to her at commentary@jurist.org


Opinions expressed in JURIST Commentary are the sole responsibility of the author and do not necessarily reflect the views of JURIST's editors, staff, donors or the University of Pittsburgh.