The Inflation Reduction Balancing Act on Rebate Clawbacks

Among the Inflation Reduction Act’s many healthcare-related provisions, is the ability for Medicare to negotiate drug pricing for a subset of high-cost drugs. Payers and policy makers have sought this provision for several years. The pharmaceutical industry has been a fierce opponent, as one would expect.

This week, the Department of Health and Human Services released guidance on another contentious component: the provision that compels drug makers to rebate Medicare for price increases exceeding the inflation rate. For instances where HHS demands a rebate, that will be up to 125% (if a penalty is involved) of the difference in monies paid by Medicare between the inflation rate and the actual price increase. The effective start date was set retrospectively for October 1, 2022, kicking off the first 12-month period for which manufacturers will be required to pay rebates to Medicare if their part D drug(s) price increases exceeds the rate of inflation over the 12 months. January 1 marked the start of the first quarter that applies to part B drugs. Drug companies will only be invoiced for the inflation rebates owed in September 2025 for part B drugs and December 2025 for part D drugs. In the meantime, the comment period begins (revised guidance is expected in Q4 2023), seeking perspectives on the calculation of the inflationary drug rebates and how rebates are distributed.

High Price Hikes Common

Kaiser Family Foundation estimates the inflationary drug rebates would contribute $72 billion in savings to Medicare over 10 years. An analysis by the organization found that half of all drugs analyzed had price increases that exceeded the rate of inflation from 2019 to 2020. This is likely higher for part B drugs. Savings estimates, of course, depend on the potential exploitation of loopholes or unintended consequences of the legislation. We’ve previously reported on the question of whether Medicare drug price negotiation, as written in the Act, will negatively affect biosimilar development. The inflationary rebate provision may add to this chilling effect: Say a prospective biosimilar manufacturer is (re)calculating its potential revenue on a biologic subject to a patent expiring 5–7 years from now, the difference between anticipated 4% annual price increases and 10% price increases could be substantial. For biologic agents with annual sales of around $1 billion, that could be the difference between a worthwhile investment and an unacceptable opportunity cost. (Keep in mind, this argument does not justify high annual WAC increases; it simply portrays how biosimilar competition may be discouraged.)

According to the guidance, the inflationary rebates will apply to drugs covered under part B or D, but does not apply to drugs reimbursed by commercial plans. With 64 million Americans covered by Medicare, and more than half of these enrolled in Medicare Advantage plans (which generally also cover commercial members), this initiative will likely affect both to an extent. The provision may serve as a strong disincentive to raise prices unnecessarily, but one could certainly envision a scenario where the wholesale acquisition cost (WAC) or retail price is restricted to the inflation rate for Medicare-eligible patients but larger price increases foisted on the commercial plans, insurers, and PBMs. Keep in mind, however, that commercial contracting generally incorporates (1) price guarantees and (2) rebating that blunts the effects of significant WAC increases.  

How Much Will the Market Bear?

Pharmaceutical company price increases are driven by what the market will bear and not by any improvement in drug value. From this standpoint, a price-hike restriction of this type can be viewed positively, especially if one views pharmaceuticals as a public good. If one views drug manufacturing as simply another for-profit business that is trying to maximize revenues, this is a thorn in the side of capitalism. Shareholders expect optimal returns on their investment, driving manufacturers to raise prices by 7% to 10% year over year. Although the inflation rate has trended higher the past two years, this was not the case for the previous 10. Unless a manufacturing facility has experienced catastrophic issues, or a pharma company has lost a massive class action lawsuit, it may be hard to justify the need to raise the cost of medications substantially, which has been the case with some insulins and many biologics.

You may accept that the manufacturer of a single-source product has the right to price a product as it wishes, and the consumer has the right to decline to purchase it. This also depends on the assumption that alternative medications are available, which may not be the case. There is no etanercept biosimilar, but there are several anti-TNF alternatives. More likely, there are no alternative pharmaceuticals for single-source therapies (genetic or otherwise) to treat very rare diseases. And of course, a 10% increase in a treatment that already costs $75,000 per year amounts to far more than a 10% hike for one that costs $1,500.

The high price of specialty pharmaceuticals and the fact that these drugs now account for more than 50% of the total pharmaceutical spend are the main factors driving the call for more competition, and biosimilars, in particular. If the impetus to goose revenues annually was not prevalent, this type of legislation and the scrutiny on drug price increases would not be needed.

For the most part, we in the United States do not consider pharmaceutical products a public good, for better or worse. Produced by corporations driven by the capitalistic impulses of any for-profit venture, this is perhaps the foundational problem. The balancing act that the Biden Administration and the Inflation Reduction Act tries to achieve in not stifling innovation and competition and addressing extremely high drug prices in the US will be a delicate undertaking. I believe that it is not so delicate that it should be delayed by inaction. From this financial perspective, the marketplace and cost-sharing patients can bear only so much.

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