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Drugmakers Face Penalties for Price Hikes Above Inflation 

Starting in April, companies will rebate Medicare for excessive increases


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One of the first provisions of the Inflation Reduction Act — designed to help lower prescription drug prices — that is taking effect is the requirement that pharmaceutical companies that raise the price of their products more than the rate of general inflation will have to pay Medicare a rebate for those outsize price hikes. 

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Starting in 2023, companies that market both Part D prescription drugs, which beneficiaries buy at the pharmacy, and Part B drugs, which are typically administered in doctors’ offices, will face penalties if they increase prices more than the rate of inflation. The rebates the companies owe will be the amount they raised a drug’s price above what the price would have been if it had been raised at or less than inflation, multiplied by what Medicare paid for all sales of that drug.

The U.S. Department of Health and Human Services (HHS) will regularly look at prescription drug price increases. Then the HHS secretary will report to manufacturers what rebates they owe. The companies will have 30 days to pay Medicare. Drugmakers that don’t comply initially will have to pay a penalty that’s 125 percent of the rebate they owe the program. 

This provision “is going to discourage drug companies from making those big annual price increases that often exceed inflation,” says Leigh Purvis, AARP’s director of health care costs and access, and coauthor of AARP’s “Rx Price Watch” report, which has tracked the trajectory of pharmaceutical prices since 2006. 

The 2021 AARP “Rx Price Watch” report found that in 2020, prices for 260 widely used medications increased 2.9 percent while the general rate of inflation was 1.3 percent. The report also found, for example, that between 2015 and 2020 the annual price of Victoza, a diabetes medication, increased by 42 percent, with the price of a year’s supply rising from $7,936 to $11,300. During that same period the price of Lyrica, used to treat fibromyalgia, increased by 47 percent — from $5,827 a year to $8,562. 

According to a recent Kaiser Family Foundation report, from 2019 to 2020, the prices of half of all drugs covered by Medicare increased more than the rate of inflation. And among those drugs with price increases above even the modest 1 percent inflation in effect before the recent inflation surge, one-third had price increases of 7.5 percent or more.

The data did show that the average price increases in 2020 represented the slowest average annual hike since 2006, something Purvis attributed to recent legislative efforts at the state and federal levels to combat high drug prices.

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Some analysts have predicted that the rebate provision will lead Big Pharma companies to set higher prices for new drugs than they would have before the crackdown on price increases included in the Inflation Reduction Act. 

But there is a lot of evidence, Purvis says, that drugmakers were “already heading in that direction.” A study by the Journal of the American Medical Association found that between 2008 and 2021, average initial launch prices for U.S. prescription drugs grew 20 percent per year.

“This is an important first step,” Purvis said of the inflation-based penalty provision. “Launch prices are likely the next big battle.” 

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