I was listening to an episode of the Cheeky Pint podcast with John and Patrick Collison, where they interviewed Dave Ricks, the CEO of Eli Lilly. There was a section about insulin pricing that explained the internal wiring of the system that produces drug prices in the United States. What really struck me was how the middlemen who are supposed to lower costs can actually drive certain prices higher, especially for those without insurance.
This is my attempt to retell that part of the conversation in plain language, because it gave me a much clearer picture of what had gone wrong.
Ricks uses insulin as his main example. At one point, the list price of a typical monthly insulin prescription in the United States had climbed to around $275. That is the number an uninsured person sees at the pharmacy counter when they ask to fill their prescription and pay cash.
The surprising part is what happens after that list price enters the system. Once you account for all the rebates, discounts, and fees that are negotiated behind the scenes, Lilly itself ends up with something more like $34 out of that $275. The real economic price of the drug for the manufacturer is only a small fraction of what appears on the label.
The gap between the sticker price and the amount the manufacturer actually receives is sometimes called the gross-to-net bubble. From the outside, everyone sees the high list price and assumes the manufacturer is collecting it. Inside the system, the game is almost entirely about what happens within that bubble, where different intermediaries carve out their share.
The part that really clicked for me was the way Ricks described the role of pharmacy benefit managers, or PBMs. These are the companies that manage prescription drug benefits for health insurers and large employers. They are the ones who build the lists of covered drugs, known as formularies, and they decide which products get favorable placement.
According to Ricks, PBMs often run something like an auction when they decide which insulin product will get preferred status. Drug companies are invited to offer their best deal in order to secure that access. The twist is that best deal usually does not mean the lowest final price to the patient. It means the biggest rebate off the list price.
That detail creates a strange incentive. Imagine one manufacturer that has a list price of $100 and offers a rebate of 20 percent. Now imagine a competitor that sets a list price of $200 and offers a rebate of 60 percent. On paper, the second offer looks more attractive to the PBM, because the rebate is larger in absolute terms, even if the net prices are very similar.
Over time, everyone learns the same lesson. If you raise the list price, you can offer a bigger rebate. If you offer a bigger rebate, you have a better chance of winning more business and more favorable placement on formularies. PBMs often take a share of those rebates as part of their revenue model, so their income grows as the gap between list and net prices widens.
The system ends up rewarding higher list prices and larger discounts off those inflated numbers. The infrastructure that was originally built to negotiate and manage costs slowly evolves into something that pushes list prices higher and higher, while all the economic action shifts into the murky world of rebates and back end deals.
If this setup is so distorted, it is natural to wonder why generics or biosimilars did not simply enter the insulin market and blow up the whole thing by offering a much lower price. That is usually how we imagine drug markets working once patents expire.
Ricks offers a simple explanation once you start thinking in terms of net price instead of list price. By the time public anger over insulin pricing really erupted, the core insulin products were already off patent. On paper, that should have made it easy for cheaper competitors to enter. But in reality, the net price, after rebates and discounts, had already been driven down to roughly thirty to forty dollars per month for the major manufacturers.
Companies like Lilly and Novo Nordisk already had factories, supply chains and regulatory expertise in place. They had spent decades learning how to make insulin safely and at scale. For a newcomer looking at that market, the picture would be very different from the public narrative. They would see a product with a relatively low net price, heavy capital requirements and significant regulatory hurdles. In other words, it would not look like a juicy profit pool. It would look like a tough, low margin business. The same rebate driven structure that inflates list prices also blunts the usual mechanism where generic competition forces prices down in a simple and transparent way.
The most painful part of this whole story is who ends up facing the inflated list price directly. Most people with insurance never pay anything close to $275 for their insulin.
If you are insured, your health plan or your employer has negotiated a series of discounts and rebates in the background. You may see a fixed copay, or a percentage based coinsurance, or some other cost sharing method that is pegged closer to the net price. Large payers benefit from the supposed savings off the list price, even if that list price has been inflated in order to generate bigger rebates.
There is one group that does not benefit from any of that negotiation. People without insurance who pay cash at the counter are exposed to the full sticker price. They are the ones who walk into a pharmacy, present their prescription and are told the cash price is two hundred seventy five dollars, with no negotiated discount riding to the rescue.
This is the part that lingers for me. A structure that was built in the name of cost management ends up concentrating the worst effects on the people with the least financial cushion. The uninsured and the underinsured are the ones who are asked to pay the price that only exists in order to support a rebate machine that operates entirely above their heads.
Ricks also tells a story about how Lilly tried to break out of this trap from the manufacturer side. The company introduced insulin lispro as a lower priced version of its own branded insulin product. In practical terms, it was the same underlying insulin with a different label and a much lower list price, while the net price to payers stayed in roughly the same range.
The goal was not to redesign the whole system overnight. It was to create an option that would protect people who were paying cash, so that they would not be crushed by the inflated list price. If insurers and PBMs still wanted to play the rebate game on the higher-priced product, they could. But at least there would be a more affordable path for patients outside that system.
According to Ricks, the response from some PBMs and insurers was far from enthusiastic. A lower list price meant a smaller gap between list and net, and therefore a smaller rebate. In his telling, some of those players saw the new product as a threat to their business model, because it reduced the spread that they had been drawing revenue from.
That part really underlined the problem for me. Even when a manufacturer tries to lower the headline price in a way that would clearly help cash-paying patients, they can end up swimming against the financial interests of the intermediaries who control access to those same patients. The system punishes attempts to simplify and reduce prices, because so many stakeholders are now tied to the size of the spread between the fake number on the label and the real number in the contract.
We have built a system where important middlemen are paid based on the size of the discount they can extract from a high list price, rather than on the absolute cost that a patient or a plan actually pays. Manufacturers are forced to participate in that rebate competition if they want their drugs to be covered at all. And the people without insurance are left as the ones who actually pay the inflated list price that exists largely to support that competition.
