The goal is to use the real world example provided by the article to master the analytical tools acquired in this class. Managing to shed light on the issue being discussed is a plus. Each group will write 3 pages maximum evaluating the content of the article and presenting the economic analysis (plus 2 additional pages including all graphs, figures, and charts necessary).
This way you can concentrate on analyzing the article, not repeating it in your paper.
The document will be rated by clarity of presentation, relevance to the subject matter, diversity of analysis, and adherence to assignment instructions.
Note that this is not intended to be a research paper. Citations and other sources are unnecessary. It is merely an exercise in applying economic analysis to real-life happenings as reported by an everyday article.
DRAW CHARTS AND TABLE IF NECESSARY AS WELL
The article discusses the rising cost of insulin for consumers, primarily how their affordability has been affecting the prescription medication industry and consumer choices. Since the pharmaceutical industry is for-profit, companies are looking to make the most amount of money they can per item sold. When it comes to drugs like insulin, which effectively manages diabetes, companies are not hesitant to increase their prices to make a larger profit margin. This can lead to patients using outdated insulin to save money, changing their dietary habits in a negative way to avoid paying for the drug, and other harmful deterring methods. The article examines the reasons why prices are rising and also identifies methods to solve the pricing issue with insulin medication.
Economic Analysis
1. Elasticity of Insulin
PLEASE DRAW A DIAGRAM SHOWING ELASTICITY OF ISULIN AND EXPLAIN
Insulin is a medication that reduces long term complications for people with diabetes. According to the American Diabetes Association, insulin is a very unique medication; when needed, there are no alternative therapies to preserve health and life. Thus, insulin is a very inelastic (0.2) good since people with diabetes are willing to pay any price in order to make sure they receive this medication. Even with a price increase in insulin, we can still assume that demand for the product will be high.
Due to the rising price of insulin, we may also see an increase in medication that is similar to modern day insulin. Human insulin, while not as beneficial and convenient for long term-health, can act as a more affordable substitute for consumers who would rather avoid paying a high price for insulin analogs. For example, a consumer may want to make a switch from Lantus (an insulin analog) to Humulin 70/30 (a mix of two types of human insulin). If this switch is made, a consumer can save over $50 per vial with insurance, thus increasing the demand of the substitute.
PLEASE DRAW DIAGRAM SHOWING COMPETITION AND MARKET
2. Competition and Markets
The market for insulin is not very competitive in the United States. This is because the federal government does not regulate the price of prescription drugs. This is primarily because diabetic people need insulin to survive, and drug companies can set the starting price. Only a few companies make insulin, so these companies can choose any price they'd like to offer people: either way, there will be a need for supply of the drugs to satiate the ever-growing demand.
Furthermore, cheaper alternative medications called biosimilars are still a few years away from hitting the market as well. It's possible that pharmaceutical companies are keeping prices high in order to get as much money as possible before their profits decrease once biosimilars are released in the U.S. Once this happens, companies will have to decrease their price and supply in order to raise consumer demand for their product again.
3. Opportunity Cost
PLEASE DRAW DIAGRAM SHOWING OPPORTUNITY COST AND EXPLAIN
As the article states, some brands of insulin including Humulin R, Levemir and Lantus have increased in wholesale price by more than 160 percent in the past five years. Due to the increased prices, many patients are engaging in risky behavior to avoid paying as much for their insulin that used to be more affordable. Some people are stretching their insulin by severely limiting carb intake or just letting their blood glucose run high, which can lead to a host of complication. Others are rationing insulin to save the amount they have on hand, or lying to their prescribing physicians that they have enough of their medication when in reality, the consumer simply cannot afford to fill the prescription that the doctor is willing to write.
Thus, patients have to choose: do they spend that extra $100 on more medicine, or do they use the money towards providing food, clothes or shelter for their loved ones? This is a choice that is faced by many consumers in the wake of rising industrial prices. Fortunately, there are a few solutions to fixing the price. Supporting the authorization of the Centers for Medicare and Medicaid Services to negotiate prices for prescription drugs and supporting a movement towards a value based benefit design from the current fee-for-service system to incentivize better outcomes will also benefit consumers. If these solutions can be realized, then consumer demand will continue to remain steady and pharmaceutical companies should still make a healthy profit off of insulin sales.
4. Asymmetric Information
The insulin market should also be vigilant about asymmetric information and its detrimental consequences. Given the intervention of drug wholesalers and distributors (i.e. the middlemen) in the market, each manufacturer's set price does not equal to the price buyers pay, hence losing the characteristic of a competitive market. There are certain features and information hidden between the manufacturers and middlemen, and it is possible that the middlemen also hide some information from the consumers. This advantage in information creates buyer's distrust, creating an adverse selection. People may buy cheaper alternatives at the expense of losing high quality insulin in the market.
5. Externality
PLEASE DRAW DIAGRAM SHOWING EXTERNALITY AND EXPLAIN
Finally, the insulin market touches the topic of externality. The production of insulin not only brings satisfaction to the consumer, but also impacts the general well being of society. The drug reduces the frequency of people with diabetes going to the hospital, which decreases general health care cost. Since healthcare is a cost shared by all members of society, a reduction in cost will benefit everyone. Therefore, insulin production creates a positive externality of reduced healthcare cost. The government can then encourage such positive externality by increasing its supply or demand.