Drugmakers May Face Inflation Fines

Companies that raise prices of medication faster than inflation will have to offer rebates to Medicare beneficiaries or be subject to fines in the U.S., the latest development in President Joe Biden's plan to lower the costs of prescription drugs.

Move Lowers Costs for Medicare Recipients

Starting in April, Medicare beneficiaries will pay lower coinsurance for Part B drugs that raise prices faster than inflation, White House Domestic Policy Adviser Susan Rice said Wednesday.

Drugmakers will be required to reimburse Medicare for price increases exceeding inflation rates, potentially lowering drug costs for Medicare beneficiaries with disabilities or aged 65 and older. If they fail to do that, the company will have to pay a penalty of 125% of the rebate amount.

The government said 27 drugs would incur inflation penalties, in a move that could reduce out-of-pocket costs for Medicare recipients by as much as $390 per average dose. That list includes cancer drugs from Pfizer (PFE), Gilead Sciences (GILD) and Seagen (SGEN) and Abbvie's (ABBV) arthritis drug Humira.

The new provision will “discourage drug companies from making those big annual price increases that often exceed inflation,” according to Leigh Purvis, AARP’s director of health care costs and access. 

Medicare will begin reducing out-of-pocket costs for members on April 1, but the government will begin invoicing companies for rebates in 2025.

One of the first provisions of the Inflation Reduction Act, signed by President Biden last August, prohibits companies from raising a drug's price above what it would have been if it had been raised at or below inflation multiplied by what Medicare paid for all sales of the drug.

Will Higher Prices Follow?

According to a White House release, Americans pay two to three times more for prescription drugs than citizens in other countries.

From 2019 to 2020, the prices of half of all Medicare-covered drugs rose more than the inflation rate, according to a Kaiser Family Foundation report. A third of those drugs with price increases over even the modest 1% inflation in effect before the recent surge had increases of 7.5% or more.

While this is seen as a move that will aid those most in need, the rebate provision may lead drug makers to set higher prices than they would have before the Inflation Reduction Act clamped down on price increases. 

“This is an important first step,” said Purvis. “Launch prices are likely the next big battle.”