Drug manufacturers would be on the hook to pay the federal government hundreds of millions of dollars in rebates per year should the Build Back Better Act (BBBA) — and a key inflation-based penalty provision within it — become the law of the land. The breadth of the penalties, however, hinges on various factors, including the current runaway rate of inflation.
While the BBBA, passed by the House in November 2021, remains stalled, lawmakers have expressed a renewed sense of interest in picking up the pieces following President Joe Biden’s March 1 State of the Union address.
A previous holdout to the Democrats’ wide-ranging spending plan, Sen. Joe Manchin (D-W.V.) recently issued an informal counteroffer to Biden’s speech, calling for prescription drug spending to remain central to any legislation that moves ahead.
“In general, I do not expect drug pricing provisions along the lines we saw in Build Back Better to be controversial inclusions into a new bill,” Benedic Ippolito, senior fellow in economic policy studies with the American Enterprise Institute, tells AIS Health, a division of MMIT.
Should Manchin’s support propel a razor-thin Senate approval of the BBBA or a slimmed down version of that legislation, numerous drug manufacturers with longstanding products on the market would face a rash of penalties if their drug prices rise faster than inflation.
The House-passed BBBA contained several provisions aimed at lowering drug spending, including permitting price negotiations for certain high-cost drugs under Medicare Part B and Part D and capping insulin cost-sharing amounts. It also contained an inflation-based penalty for drugmakers that would force manufacturers to pay a rebate to the government if individual drug prices rose faster than the rate of inflation.
The provision is likely to have a substantial impact on manufacturers of commonly prescribed, high-spend drugs, according to two recent studies looking at year-to-year drug price levels amid the backdrop of inflation trends.
Rebates Would Eat Into Profit
Running a hypothetical model based on the premise that the inflation penalty was in action, researchers from the Council for Informed Drug Spending Analysis (CIDSA) found that, for a roster of high-spend drugs, manufacturers would have been forced to pay $152 million in fees in the first quarter of 2022.
Yet the full impact may be far more extensive. The CIDSA study, limited to 25 selected drugs covered under Medicare Part D, covers only a slice of the possible penalties. The $152 million does “not include penalty payments for the commercial market, suggesting that actual payments would be much higher,” according to the study.
Several drugs would have been assessed a penalty totaling in the tens of millions of dollars in the first quarter alone. That group includes the Humira Pen from AbbVie Inc., tied to $60 million in inflation-based rebate payments; Janssen’s Stelara, for which the drugmaker would owe $35 million; and Trulicity from Eli Lilly & Co., on pace for $24 million in penalties.
Whether Democrats can convince Manchin to help resurrect the BBBA remains a central question as Biden embarks on his second year in office — and as midterm elections beckon. Yet the West Virginia senator’s focus on addressing pharmaceutical costs, combined with the unique approach of inflation rebate model, appears to indicate that part of the legislation is not moribund.
Direct price controls that give off the sense of stifling future development and innovation are generally on lawmakers’ do-not-touch list, but an inflation-based model tends to garner more support, according to Mariana Socal, M.D., Ph.D., associate scientist with the Johns Hopkins Bloomberg School of Public Health.
“That’s one thing that may help this type of policy to cross the finish line,” Socal says.
Inflation Approach Holds Appeal
Despite the partisan divides that define today’s legislative environment, an inflation-based approach to combat rising prices is something that has gained at least some bipartisan support in recent years, Juliette Cubanski, deputy director for program on Medicare policy with the Kaiser Family Foundation, tells AIS Health.
Penalties levied on companies that raise prices faster than the rate of inflation have “an aura of greater acceptability” among lawmakers, including centrists and conservatives, says Cubanski, who co-authored a study, released Feb. 25, that monitored the pricing trends of high-use drugs in Part B and Part D compared to inflation rates (see infographic below).
The Kaiser study, using drug pricing and inflation data from 2019 to 2020, found that 50% of the 3,343 drugs covered under Part D had price increases that surpassed the inflation rate during that time period. The price of almost as many (48%) of the 568 drugs covered under Part B eclipsed inflation.
Yet Cubanski says that under the current rate of inflation of 7.5%, the impact of penalties would be less severe. Her research integrates an increased inflation rate to show what the impact of the provision would be under current conditions: Instead of half of Part D drugs falling into the penalty category, just 17% would be assessed a penalty with an inflation rate of more than 7%. And under the same conditions, the penalties would drop from 48% of Part B drugs to 18%.
“It sounded better when inflation was running at 1% to 2% annually,” Cubanski says.
Yet in times of lower inflation, the rebate provision would have an even more substantial material impact than the penalties projected by CIDSA. According to the Kaiser analysis, 23 of the top 25 Part D drugs, categorized by gross spending, had price increases that surpassed the inflation rate in 2020. Of the six leaders in gross spending in 2020, pricing changes included Eliquis (+5.9%), Revlimid (+6.5%), Xarelto (+4.1%), Januvia (+5.3%), Trulicity (+5.0%) and Imbruvica (+8.1%).
Only two drugs associated with the highest spending — Lantus Solostar from Sanofi-Aventis and Levemir Flextouch from Novo Nordisk — had an annual price increase under the 1% rate of inflation in 2020. In Part B, 16 of the top 25 drugs had pricing updates that outpaced inflation, according to the Kaiser study. Three of the top four drugs by total spend in Medicare Part B had larger-than-inflation increases: Keytruda (+3.3%), Prolia (+4.7%) and Opdivo (+3.2%). Across all Part D drugs with year-to-year price increases, the median rate of the increase was 5.6%, according to the Kaiser study. For Part B drugs with increases, the median rate was 5.4%.
While the inflation rebate provision would likely cut federal spending, researchers caution that a penalty-based model could have a key downside.
“There would be nothing in this proposal to stop drug manufacturers from increasing their launch prices,” Cubanski says.
“The effects of some inflation provisions can be partially mitigated by altering the launch price of new drugs,” Ippolito says. “In particular, that seems most true for non-physician administered drugs (those purchased through Medicare Part D). In that case, drugs which are already on the market will likely sustain larger relative revenue losses than those which come to market in the future and can adjust their launch price strategy.”
Yet addressing prescription drug prices remains favorable among voters, and the penalty-driven provision would return real funds to the Medicare Supplementary Medical Insurance trust fund. The provision may also have a “deterrent effect” on drugmakers, Socal tells AIS Health.
“I would argue that is the most important factor,” Socal says, “if the total rebate is large enough that the manufacturer changes their behavior.”
Those factors may be compelling enough to elicit action.
“The prescription drug proposals themselves were generally favorably looked on by Democrats,” Cubanski adds, noting that Manchin has expressed continued support for those proposals helping pay for the rest of the BBBA. And the financial impact is projected to be significant: The Congressional Budget Office estimates that the legislation’s inflation rebates would result in a net reduction to the federal deficit of $83.6 billion over 10 years, with $62 billion in savings for the Medicare program.
Among lawmakers, “all of the talk now seems to be: Let’s come to a consensus,” Cubanski says.
By Richard Scott
Price Hikes for Half of Medicare-Covered Drugs Exceed Inflation
by Jinghong Chen
Half of drugs covered by Medicare Part D and 48% of drugs covered by Medicare Part B saw price increases greater than the rate of inflation (1.0%) between 2019 and 2020, according to a recent Kaiser Family Foundation analysis. Among drugs with the highest total gross spending, 23 of the top 25 Part D medications and 16 of the top 25 Part B medications had price increases higher than inflation between 2019 and 2020. The price of Eliquis (apixaban), the top Part D drug by total spending in 2020 with more than 2.6 million users, went up 5.9%. Meanwhile, Keytruda (pembrolizumab) — the top Part B drug with almost 59,000 users — had a 3.3% price increase.
NOTES: The analysis is based on data from the CMS’s most recent releases for Medicare Part D drug spending and Medicare Part B drug spending. Prices are based on average spending per dosage unit and do not account for rebates. 2019-2020 price changes are compared to the increase in the Consumer Price Index for all urban consumers (CPI-U) over the same time, based on the values for CPI-U in July 2019 and July 2020.
SOURCE: “Prices Increased Faster Than Inflation for Half of all Drugs Covered by Medicare in 2020,” Kaiser Family Foundation.
This story and infographic were reprinted from AIS Health’s biweekly publication RADAR on Drug Benefits.