In January 2023, drug companies hiked prices for nearly 1,000 brand-name drugs, repeating a practice that has become as much a fixture of the start of the year as the Super Bowl and the Oscars. Yet this year, the price hikes came after new penalties were enacted for drug companies that raise prices, as part of the Inflation Reduction Act. Is this a sign that Congress' attempt to restrain drug price increases is failing?
Efforts Toward Reform
Drug companies raised prices by an average of 9.1% per year from 2007 to 2018, often without any new clinical evidence to justify these changes. These yearly changes add up over time. For example, the price of adalimumab (Humira), an immunomodulatory medicine used to treat rheumatoid arthritis and other diseases, increased by 470% from 2003 to 2021. While politicians have publicly vilified drug companies for these price hikes for years, efforts to tackle the problem were stonewalled until recently.
In August 2022, Congress passed the most important drug pricing reforms in decades, and key among them was a provision requiring drug companies to pay rebates (i.e., penalties) to Medicare when they raise prices faster than inflation. These new penalties took effect in January 2023.
But the policy was designed to halt historic drug price increases that far outpaced the roughly 2-3% annual inflation that had been consistent for the past few decades. With inflation exceeding 8% for much of 2022, many of the price increases companies might have already been planning for 2023 were allowable with no penalties. So far in 2023, drug companies have raised prices by 5% on average.
The Potential Impact of the New Legislation
This does not mean the policy will never make a difference. In fact, the savings to Medicare could eventually be substantial. In an analysis published in JAMA, we found that Medicare Part B, which covers drugs administered by clinicians, would have saved approximately $3.7 billion or 3% had the inflationary rebates been in effect between 2018 and 2020.
The policy also applies to certain generic drugs, which may prevent price spikes still too common among older, off-patent drugs. From 2014-2017, 1 in 5 generic drugs doubled in price within a year.
The big unanswered question is whether the new rebates will alter drug companies' behavior and disincentivize them from raising prices not just in Medicare, but altogether once general price inflation returns to usual levels.
Medicaid, which has had inflationary rebates in effect since 1993, may offer clues. The inflationary rebates to state Medicaid programs have contributed to substantial savings; in 2017, Medicaid paid roughly one-third the prices Medicare did for same brand-name drugs. However, Medicaid comprises only 10% of U.S. retail prescription drug sales, so many drugmakers were easily able to offset these rebates by raising prices for patients covered by Medicare or commercial insurance.
Medicare represents an additional 30% of the U.S. pharmaceutical market, which means that close to half (40%) of drug sales will now be susceptible to rebates for excessive price increases. Congressional Democrats originally sought to apply the rebates to those with private insurance too, but to meet the rules of reconciliation the legislation was narrowed to only include those on Medicare. However, there is hope that the new policy may have a spillover effect to patients without Medicare or Medicaid, including the half of patients with private insurance.
It has been argued that manufacturers may increase prices in the private market to offset losses in Medicare. But this concern is based on conjecture rather than evidence. If drug companies could raise prices for private insurers, there is nothing stopping them from doing so now. In fact, research has found that drugs with a higher share of sales affected by existing inflationary rebates experienced fewer price increases. This evidence suggests that expanding these rebates to Medicare may have a spillover effect and lead to savings for patients with private insurance, too.
Of course, the complexity of the drug market makes it hard to predict the rebates' impact in practice. Drug companies already negotiate confidential rebates and discounts with insurers, and these might become less generous now that drug companies can no longer freely raise prices. Ultimately, this might still be a good effect, since patient out-of-pocket costs are based on prices before rebates, so if the policy slows the growth of prices this could lead to direct savings for patients who use expensive medications.
Limitations of the New Legislation
While we're optimistic about the Inflation Reduction Act framework, the current environment in which inflation has reached a 40-year high over the past year has demonstrated one of the policy's key limitations. By tying price increases to the rate of inflation, politicians may have inadvertently provided drug companies cover to raise prices during periods of high inflation.
Why should drugmakers even be able to raise prices with inflation in the first place? Brand-name drugs are priced far above their cost of manufacturing and distribution, and a multi-year investigation by the House Oversight committee found that companies typically hiked prices to increase revenue, not to cover higher costs of manufacturing or research and development.
Another concern is that limiting drug companies' ability to raise prices on existing drugs might result in higher prices at the time new drugs launch. Launch prices already increased by 20% per year from 2008-2021, and it will be important to monitor whether this trend accelerates with the enactment of the Inflation Reduction Act.
Congress should also prevent launch price increases by expanding the Medicare negotiation authorities that were included in the Inflation Reduction Act to include all new drugs at the time they are approved, like many peer countries already do. Currently, the Inflation Reduction Act prevents price negotiation until 9-13 years after drug approval, limiting potential savings since the drugs can be priced excessively out of the gate.
There is good reason to believe that the new inflation rebate policy included in the Inflation Reduction Act will meaningfully lower drug costs in Medicare and potentially beyond. But in the current period of historically high inflation, it's no surprise that drug companies have continued to raise prices.
Alexander C. Egilman is a senior research assistant at the Program on Regulation, Therapeutics, and Law in the Division of Pharmacoepidemiology and Pharmacoeconomics at Harvard Medical School. Aaron S. Kesselheim, MD, JD, MPH, is a professor of medicine at Harvard Medical School, and director of the Program on Regulation, Therapeutics, and Law in the Division of Pharmacoepidemiology and Pharmacoeconomics. Benjamin N. Rome, MD, MPH, is an instructor in medicine at Harvard Medical School and faculty of the Program on Regulation, Therapeutics, and Law in the Division of Pharmacoepidemiology and Pharmacoeconomics.
Disclosures
Kesselheim and Rome disclosed that their research in this area is funded in part by Arnold Ventures.