As prescription drug prices continue to skyrocket, Walmart’s new program shows that markets—not government mandates—are key to keeping live-saving drugs like insulin affordable.
The nation’s largest retailer is providing a 75% discount from the list price of a 10mL vial of NovoLog, and for the five-pen box of NovoLog FlexPen, Walmart is offering an 85% discount from the list price.
How is this possible? Instead of giving the manufacturer’s deep discounts to insurers and their Pharmacy Benefits Managers (PBMs), Walmart is passing along the discount to its customers. In other words, patients—not insurance companies—get the benefit.
“Sales discounts and sales rebates are predominantly issued in the U.S.,” Novo Nordisk’s annual report says. “As such, rebates amount to 74% of gross sales in the US (71% in 2019 and 68% in 2018). Provisions for sales rebates includes U.S. Managed Care, Medicare, Medicaid and other minor U.S. rebate types, as well as rebates in a number of European countries and Canada.”
What this means is that Walmart is getting roughly the same discount that insurers, their PBMs, as well as Medicaid and Medicare receive. Could Walmart charge more? Sure—but Walmart’s business model is providing inexpensive goods with minimal markup, combined with unimaginable economies of scale.
These deep discounts are nothing new. Patients merely haven’t seen them before. That’s because the insurers have kept them for themselves. But this hidden factor has been driving up prices of drugs like insulin, as a Senate Finance Committee report found in January.
“Based on internal memoranda and correspondence collected for this investigation, the practice of offering rebates in the insulin therapeutic class appears to be contributing to both increasing insulin WAC prices and limited uptake of lower-priced products,” the report explains. “Drug manufacturers—typically on an annual, but sometimes more frequent, basis—submit bids to PBMs which reflect a variety of different rebate offers that manufacturers are willing to pay depending on where the drug is placed on a health plan’s formulary.”
That report, titled “Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug,” found that “the opaque business practices of pharmaceutical manufacturers and pharmacy benefit managers (PBMs) impact patients, Medicare Part D, and private health plans.” (Though the authors of the report later supported some fixes we don’t agree with, their evaluation of the current structure is spot on.)
Diabetes is the costliest chronic disease in the U.S., with an estimated price tag of $327 billion annually. Insulin costs make up about 20% percent of direct medical costs.
Texas has taken action; House Bill 18, signed by Gov. Greg Abbott in June establishes a prescription drug savings program for 3 million uninsured Texans. But that’s not a prescription for the real ailment here—PBMs distorting the market for the benefit of insurers.
Neither are government mandates—price controls. Price controls cannot address the problem at hand—scarcity. Price controls are merely another way for government to distort a market.
As a report from the Federal Trade Commission notes, “Drug manufacturers pay large ‘rebates’ to PBMs to ensure they get prominent placement on the formulary. Manufacturers may offer larger rebates – sometimes up to 50 percent of a drug’s list price – conditioned on giving their product preferred status over a competing one, or for achieving a market share requirement. This creates a ‘wall’ around their lucrative products in ways that can squelch out competitors… This raises the question of whether PBMs are incentivized to select higher list price drugs instead of lower list price drugs for their formularies in order to collect a higher rebate.”
The broken American health care system is often said to be a failure of the free market; the truth is that our health care markets are anything but free and transparent.
Based on what we know, we should ask if the current system is meant to benefit patients, or if it is really built to sustain the status quo for insurers and middlemen. PBMs are a middleman, and thus serve a purpose. But is it the right one, in this case?
Walmart is also a middleman, and it’s just doing what Walmart does—buying in bulk and passing the savings on to the consumer. Perhaps the middlemen in the current model (which is terribly opaque and not serving American patients) should be disempowered. Perhaps the patient should be the recipient of all such discounts. Perhaps the patient should be in charge.