Case Study 1 — The Insulin Pricing Crisis: Information Asymmetry, Monopoly Power, and the Limits of the Market

Insulin was discovered in 1921 by Frederick Banting and Charles Best at the University of Toronto. Banting sold the patent to the university for $1, saying: "Insulin does not belong to me, it belongs to the world." For decades, insulin was inexpensive. As late as the 1990s, a vial of insulin in the United States cost about $20.

By 2019, the same kind of insulin cost more than $300 per vial. Over the course of a year, a type-1 diabetic might need 3–4 vials per month — meaning an annual insulin cost of $10,000–$15,000, not including syringes, test strips, and other supplies. Many patients rationed their insulin — taking less than the prescribed dose to make it last — with sometimes fatal consequences. Between 2017 and 2019, multiple news stories documented Americans dying because they could not afford insulin.

This case study walks through the insulin pricing crisis using the healthcare economics framework from Chapter 14 and the elasticity and market structure tools from earlier chapters.

Why insulin prices rose

Factor 1 — Near-zero demand elasticity

As Chapter 6's case study documented, insulin demand is essentially perfectly inelastic for type-1 diabetics. They need it to survive. There is no substitute. They cannot use less without risking death. This gives manufacturers extraordinary pricing power — they can raise prices and the quantity demanded barely changes.

Factor 2 — Concentrated market structure (oligopoly)

Three companies — Eli Lilly, Novo Nordisk, and Sanofi — control roughly 90% of the global insulin market. This is an oligopoly (Chapter 20). The three companies produce slightly different insulin formulations, but for practical purposes they are close substitutes. In a competitive market, three producers of close substitutes would compete aggressively on price. In the insulin market, they did the opposite: all three raised prices in rough synchrony, roughly tripling the list price of their products between 2002 and 2019. Whether this constituted explicit collusion (illegal under antitrust law) or tacit parallel behavior (legal but economically similar) is debated and has been the subject of Congressional hearings and state lawsuits.

Factor 3 — The pharmacy benefit manager (PBM) middleman

Between the insulin manufacturer and the patient sits a complex chain of intermediaries: the PBM (pharmacy benefit manager), the insurer, the pharmacy, and the wholesaler. PBMs negotiate "rebates" from manufacturers — essentially, kickbacks that reduce the insurer's cost but do not reduce the patient's out-of-pocket price if the patient hasn't met their deductible. The rebate system creates a perverse incentive: manufacturers raise list prices to offer larger rebates to PBMs, who then share the rebates with insurers. The list price goes up, the rebate goes up, and the insurer's net cost may actually stay flat — but the patient who hasn't met their deductible pays the full list price.

This is an information asymmetry problem: the patient sees the list price ($300/vial) and has no idea that the insurer's actual cost (after rebates) might be $150. The pricing system is opaque by design, and the opacity benefits the intermediaries at the expense of the patient.

Factor 4 — Patent and regulatory barriers to competition

Insulin is a biologic (a protein made by living cells), not a small-molecule drug. The regulatory pathway for "biosimilar" insulin (the biologic equivalent of a generic drug) is more complex and expensive than the pathway for generic pills. As a result, generic insulin has been slow to enter the U.S. market. Some biosimilar insulin has become available in recent years, but at prices that are still higher than insulin costs in other countries. The regulatory barriers insulate the three major manufacturers from the competition that would normally drive prices down.

What happened (2019–2025)

The insulin pricing crisis became a major political issue in the late 2010s. Several responses followed:

Congressional action. The Inflation Reduction Act of 2022 capped insulin costs at $35/month for Medicare beneficiaries (people 65+ and those with disabilities). This was a significant win for the affected population — about 3.3 million Medicare beneficiaries use insulin — but it did not cover the roughly 5 million privately insured or uninsured insulin users.

Manufacturer response. In March 2023, Eli Lilly announced it would cap out-of-pocket insulin costs at $35/month for all patients, regardless of insurance. Novo Nordisk and Sanofi followed with similar announcements. The industry move was widely seen as a response to political pressure and the threat of more aggressive regulation.

State-level action. Several states (Colorado, Illinois, Maine, and others) passed laws capping insulin copays at $25–$100/month. The enforcement mechanisms vary.

Biosimilar entry. The first interchangeable biosimilar insulin (Civica Rx's partnership with several manufacturers) began to reach the market in 2024 at prices significantly below the branded products.

The net result: by 2025, most insulin users in the U.S. face out-of-pocket costs of $35/month or less. This is a dramatic improvement from 2019 and represents one of the most visible consumer-facing healthcare policy wins of the decade. Whether the improvement is durable (or whether manufacturers will find ways to circumvent the caps) remains to be seen.

What the case study illustrates

Lesson 1 — Inelastic demand + concentrated supply = extreme pricing power. The insulin case is a textbook illustration of what happens when a life-saving product with no substitutes is sold by an oligopoly. The market does not self-correct because the demand elasticity is approximately zero.

Lesson 2 — The intermediary structure can obscure the problem. The PBM/rebate system added opacity to an already opaque market. Patients paid high list prices that didn't reflect the lower net costs insurers actually faced. Information asymmetry benefited the intermediaries at the expense of the most vulnerable patients.

Lesson 3 — Political pressure can force change where market competition can't. The $35 cap did not emerge from market forces. It emerged from public outrage, Congressional action, and the threat of regulation. When markets fail this severely, political intervention is sometimes the only effective remedy.

Lesson 4 — Regulatory design matters. The slow approval pathway for biosimilar insulin protected the incumbents for years longer than would have been the case for a small-molecule drug with an easier generic pathway. Regulatory reform (faster biosimilar approval) could have addressed part of the problem earlier.

Lesson 5 — "Free markets" in healthcare is a complicated claim. The insulin market is nominally "free" — no price controls existed until the recent caps. But the market is not competitive in any meaningful sense (three producers, opaque pricing, inelastic demand, high barriers to entry). Calling it "free" obscures the structural features that produced the crisis.

Discussion questions

1. Should the government set a permanent price cap on insulin (and other life-saving drugs with no substitutes)? Use the market failure framework to argue for or against.

2. The PBM/rebate system has been widely criticized. What would a better drug pricing structure look like? Is transparency enough, or is structural reform needed?

3. Eli Lilly's $35 cap was announced in response to political pressure, not market competition. Is this a good way for drug prices to be set? What are the risks?

4. Biosimilar insulin is entering the market but at prices still higher than other countries pay for equivalent products. What explains the price gap?

5. The chapter's framework says healthcare fails because of information asymmetry, moral hazard, and adverse selection. Which of these three is most relevant to the insulin crisis?