Estimated Payments Under the Inflation Penalty in the Build Back Better Act

March 1, 2022
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Key Findings

  • The Build Back Better Act proposed a penalty payment for prescription drug price increases above the rate of inflation. If this penalty were in place in 2022, drug manufacturers would have been required to pay over $150 million in penalties in the first quarter of 2022.
  • These payments represent the penalties on only 25 high-spend drugs and do not include penalty payments for the commercial market, suggesting that actual payments would be much higher.

Estimated Payments Under the Inflation Penalty in the Build Back Better Act

Existing Problem

Drug list prices have consistently increased faster than the rate of inflation, fueling higher drug spending and contributing to ever-higher launch prices for new drugs. While drug manufacturers may rebate some portion of these increases to Pharmacy Benefit Managers (PBMs) or insurers, these rebates generally do not reduce patient costs at the pharmacy counter, which are typically calculated as a percentage of the list price. In the Medicare Part D program, even when drug list price increases are rebated to the plan, they still increase both beneficiary cost-sharing and the amount the federal government pays in catastrophic payments, as higher list prices mean that beneficiaries reach the catastrophic phase sooner, triggering federal payments.

In November of 2021, the House of Representatives passed the Build Back Better Act, which included a penalty payment for drug price increases above the rate of inflation. This penalty would be assessed on both sales to patients with commercial insurance as well as sales to Medicare beneficiaries, intending to slow drug price growth across all markets. While the inflation penalty in the Build Back Better Act would not apply to sales until 2023, the penalty is indexed to drug prices and inflation in 2021.

Methodology of Results

For this analysis, we estimated the payments that would have been required in the first quarter of 2022 had the inflation penalty provisions of the Build Back Better Act been in place, recognizing that the legislation itself does not assess these penalties until 2023. We identified 25 high-spend Medicare Part D drugs that took price increases above inflation in January of2022 based on data from Analysource (Table 1). We then calculated the inflation penalty as envisioned in the Build Back Better Act, comparing the Consumer Price Index – Urban (CPI-U) from October 2021 to the CPI-U from January 2022 and inflating the 2021 third-quarter price for each drug by this amount. We estimated total Medicare Part D sales units for each drug in 2022 based on a linear trend from Part D sales units from 2015-2019 (based on Part D dashboard data). Finally, we applied the inflation penalty to the estimated sales units for2022 and divided by four to obtain a quarterly estimated penalty payment.

For these 25 drugs, estimated inflation penalty rebate payments in the first quarter of 2022 would be $152M, a 4% reduction in estimated spending on these products. One drug, Humira Pen, accounts for over a third of this penalty, with $60M in payments (including both Humira CitrateFree and original Humira); another three drugs would owe over $10M in payments, including Stelara, with $35M in payments, Trulicity, with $24M in payments, and Invega Sustena, with $15M in payments. Notably, in 2019, only about 500,000Medicare Part D beneficiaries used these four drugs out of 38 million total beneficiaries, demonstrating the outsized influence that price increases on a handful of expensive drugs can have on Medicare costs. Given that these data only account for Medicare Part D utilization, total penalties inclusive of commercial sales would be even greater.

Considerations for Policymakers

As Congress considers revisiting portions of the Build Back Better Act, including penalties for prescription drug price increases greater than the rate of inflation, understanding the increased spending caused by price increases in January 2022 may contextualize the impact of a future inflation penalty. While some price increases may be rebated back to PBMs and payers, these rebates would not reduce Medicare beneficiary cost-sharing and would accelerate when beneficiaries reach the catastrophic phase of the Medicare Part D benefit, which triggers greater federal payments to Medicare plans. Inflation penalties that reduce these price increases will have direct effects on beneficiary payments at the pharmacy counter as well as federal reinsurance payments to plans.