Pharma Faces a Penalty Kick

  • by: Peter Pitts |
  • 07/24/2019
The US Senate is debating whether to implement a Consumer Price Index (CPI) penalty on drug price increases. In other words, if any given product price increase is greater than general inflation, a penalty will be assessed by the government with monies then returned to Uncle Sam in the  form of a rebate. (This mechanism already exists in Medicaid.)  Sound good? Not so fast.
Drug manufacturers are already subject to such penalties today in the  form of “price protection rebates” negotiated by Pharmacy Benefit Managers (PBMs) and insurers.  These rebates effectively establish a private sector ceiling or cap on the amount by which medication prices can increase. Almost 100% of contracted medicines already have price protection built into their contracts Now that the HHS rebate rule is dead, a better and more timely question is: how much of those rebates/fees collected by PBMs and insurers are going back to the government? Without complete supply chain transparency we will never know.

And there’s more than one CPI. Which is the right one? General inflation or medical inflation? Medical inflation rates are at least 1-2% above general inflation. According to the U.S. Bureau of Labor Statistics, prices for medical care were 88.70% higher in 2019 versus 2000 (a $887.03 difference in value). Details count.

Between 2000 and 2019: Medical care experienced an average inflation rate of 3.40% per year. This rate of change indicates significant inflation. In other words, medical care costing $1,000 in the year 2000 would cost $1,887.03 in 2019 for an equivalent purchase. Compared to the overall inflation rate of 2.08% during this same period, inflation for medical care was higher.

Another unaddressed detail is, which price will be used for the inflation penalty? Will it be the retail price increase or the net price increase after all of the systemic cross-trading rebates and fees have been accounted for? Per IQVIA:

Our national policy makers are laser-focused on drug costs. But what about hospitals or physician expenditures, shouldn’t they peg the inflation rate to where the real inflation is -- the growth in hospital and physician per capita spending? Per Axios:

As always, the devil is in the details but, as Admiral Hyman Rickover reminds us “so is salvation.”

Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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