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Insulin: A Story of Market and Government Failures

by D.J. McGuire

One of the more confusing – and for diabetes sufferers, outright frightening – market realities is the recent increase in insulin prices. Given that insulin is not exactly a new product (first discovered in the 1920s), a sudden increase in price seems a bit odd at first. When combined with numerous anecdotes about patients reducing their intake of insulin for financial reasons, the failure of the insulin market becomes a matter of life and death.

When something like this happens, economists call it market failure – and in this case, it usually has three complementary causes: a spike in demand, market concentration, and barriers to entry. All three exist where insulin is concerned, providing an example not only of market failure, but government failure as well.

Whether it’s due to greater awareness inspiring more diagnoses or poorer diets, diabetes is more prevalent today than even 20 years ago. According to the Centers for Disease Control and Prevention, diabetes sufferers numbered over 23 million in 2015, more than two-and-a-half times the number in 1995. Even in a competitive market, demand growth like that will lead to price fluctuations (thankfully, overall inflation has been rather tame during this period).

Still, if the insulin market were competitive, one would expect existing firms to largely hold any price increases to inflation over time – absent a dramatic increase in resource cost which does not seem to be present here. That simply isn’t the case. As Nicholas Florko notes in StatNews

Just three pharmaceutical companies, all of them massive, global enterprises, control the vast majority of the $27 billion global insulin market: Sanofi, Eli Lilly, and Novo Nordisk. And they always have, virtually since the drug was discovered back in 1921.

One way economists measure market concentration is the four-firm index. The larger share of the market controlled by the four biggest firms, the closer to an oligopoly it is. In the case of insulin, there isn’t even a fourth firm, so we’re talking about a ratio of 100. The opportunity for anti-competitive profits is pretty large – and indeed, according to healthline, that opportunity was already taken back in the last century.

The insulin market is ripe for market failure in a similar manner to those for all life-preserving drugs: the consumers are unable to leave the market. While this barrier to exit certainly makes it harder to bring competitive pressures on firms, free entry into the market can usually do the job.

Indeed, certain markets that look monopolistic or oligopolistic can still have competitive pricing and quality if the existing firms fear new entrants. Such markets may not be competitive, but they are contestable, which for consumers would be a distinction without a difference.

In the case of insulin, however, there is a barrier to entry – the Food and Drug Administration.

To be clear, I am not referring to the usual role the FDA plays in regulating new entrants into drug markets. That can impede competition, but the justifications for the FDA’s regulatory role should be obvious. In this case, however, a combination of changing law and apparent FDA inertia may have created the perfect storm for insulin consumers.

In 2010, as part of “Obamacare,” Congress created a fast-track for FDA approval of biologics (simple definition: drugs that are created within living things rather than via chemical reactions). Insulin falls into this category.

However, the insulin fast-track doesn’t come into force until next March. Making matters worse, various FDA interpretations of the law virtually ensured any attempt to create a generic alternative to insulin (a “biosimilar”) would go nowhere until next spring. Andrew Dunn describes the problem in Biopharmadive:

…when Congress established a path to regulatory approval for biosimilars in 2010, lawmakers created a gray area for manufacturers seeking OKs for insulin copies prior to March 2020. With that transition date approaching, drugmakers run the risk of being caught between two legal frameworks governing approval of copycat insulin products.

The FDA hasn’t solved the problem, saying it’s restricted by law from converting pending applications under the older legal pathway to the new framework governing biosimilars.

What does this mean for would-be competitors to the Big 3 of insulin? Dunn explains:

Suppose you’re a pharma exec with an (sic) copycat insulin in your drug pipeline. Today, your R&D head comes into your office and gives good news — clinical testing is done and the therapy is set to be submitted for regulatory approval.

Your drug could feasibly reach the market under two legal frameworks.
Framework A: The Hatch-Waxman pathway, which would treat your product as a “follow-on biologic,” not legally a biosimilar but functionally analogous.

But there’s a risk: The FDA has stated it won’t approve such applications for insulin products after March 23, 2020. If your product submitted via Hatch-Waxman legal pathways doesn’t get a regulatory OK by then, you’ll have to withdraw and start over with Framework B, which means paying more user fees and waiting even longer for approval.

Framework B: The biosimilar pathway, created in 2010 through the Biologics Price Competition and Innovation Act.

Your drug would be treated as a biosimilar, if approved. However, biosimilars, like generics, need reference products. And all the branded insulin products were approved under Framework A, Hatch-Waxman, meaning you can’t use those as a reference product for a biosimilar until the FDA converts those licenses on March 23, 2020. Effectively, you can’t submit your copycat insulin as a biosimilar until then.

Neither framework is of much use to you today.

Dunn refers to the result as a “regulatory dead zone” which effectively blocks anyone looking to enter the insulin market. He’s not wrong.

The FDA says it is merely interpreting the law – which also provides an avenue to change the law: Congress. If Congress were to move the date up from next March to ASAP, it would at least remove this barrier to entry and no longer have government failure being added to market failure. Then we can figure out if the insulin market will be competitive or remain concentrated.

As it is, Dick Armey’s “invisible foot” is causing serious problems in the insulin market.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Do Lower Interest Rates Actually Make Income Inequality Worse?

by D.J. McGuire

Ever since John Maynard Keynes revolutionized the field of macroeconomics, left-wing and center-left politicians have included “expansionary monetary policy” – quoted because it’s the actual term – as part of their platform. Higher money supply and lower interest rates have been loudly endorsed by Democrats (and quietly cheered by many Republicans) since the Second World War at least.

President Trump himself has railed against the Federal Reserve’s recent (and paused) attempt to normalize interest rates from the period of extremely low levels following the Great Recession. Meanwhile, the left is also complaining loudly about income inequality, while recommending a radically expansionary monetary policy – known as Modern Monetary Theory – to “pay for it.”

The usual critique to “loose money” has been the threat of inflation. However, the lack of inflationary pressures during the past decade has eroded the power of that argument. Indeed, the lack of strength in the post-Great-Recession recovery has led many to wonder if quantitative easing was not expansionary enough.

A new paper from Ernest Liu (Princeton), Atif Mian (also Princeton), and Amir Sufi (University of Chicago) casts doubt on that theory. In fact, they propose that extremely low interest rates might have causedthe problems of slow growth and income inequality.

Liu, Mian, and Sufitheorize that excessively low interest rates – designed to encourage business investment – actually skew said investment towards larger and more dominant firms. This makes them moredominant in the process, turning more markets from competitive to monopolistic.

Now, microeconomic market structure normally isn’t considered a major factor in macroeconomic policies. In this case, however, Liu et al show that monopolistic markets lead to lower productivity and to slower growth. Moreover, while Liu et al don’t address income inequality per se, increased market power has been known to lead to suppressed wage growth and thus greater income inequality.

In short, Liu et al present an entirely different set of expected consequences for extremely low interest rates. Instead of faster growth, they lead to slower growth. Instead of higher productivity growth, the lead to lower productivity growth. While in theory enabling government to address income inequality, they actually exacerbate it by encouraging market concentration and monopolization.

More time and research is needed, of course, to see how much impact the market concentration effect truly has. More than a few economists will have questions about the paper, as it should be.

However, at the very least, advocates for looser money in general – and MMT in particular – might want to take into account the strong possibility that their methods are running contrary to their avowed policy goals.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.