May 28, 2020

Inflation Penalties

How it could work

Penalizing drug price increases above the rate of inflation proposes to lower drug spending by slowing drug price growth. While inflation penalties already exist in the Medicaid and Federal Supply Schedule programs, two new proposals to address price increases above the rate of inflation were introduced in 2019. For this assessment, experts were told to limit their analysis to the inflation penalty policies envisioned in the 2019 bill H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act and the 2019 bill S. 2543, the Prescription Drug Pricing Reduction Act of 2019. While the inflation penalties included under each of these bills differ slightly in terms of the pricing metrics used and the implementation, in general, they both attempt to constrain drug price growth by requiring drug manufacturers to pay a rebate to the Medicare program that offsets any price increases above the rate of inflation.

Both policies are limited to the Medicare program and do not address drug price increases in the private market, though both policies utilize pricing metrics derived from private market sales. By using indices of private market prices rather than just the price charged to the Medicare program, these policies may constrain private market price increases while only applying the penalty to Medicare sales. Inflation penalties under H.R. 3 are expected to reduce federal spending by $36 billion over 10 years, while those under S. 2543 were originally estimated to reduce federal spending by $50 billion over the same period (subsequent changes to S. 2543 may affect these estimate). The difference between these two savings estimates results from broader differences between the two bills (such as the Medicare negotiation provisions in H.R. 3) as well as the slight differences between the two inflation penalty proposals.

What the experts think

The expert panel generally agreed that inflation penalties would reduce drug spending, though experts were split over whether the effect would be moderate or significant (one expert opined that there would be no reduction in drug spending). Experts believed this policy would result in a moderate decrease in both list and net prices, though two experts believed list prices would moderately increase; this view may reflect the possibility that manufacturers could launch drugs at higher initial prices to avoid inflation penalties. Experts agreed that Medicare patients would see a moderate increase in access as a result of the policy, but access is unlikely to be affected for other patient groups.

Experts agreed that inflation penalties represent a significant advancement in drug spending policy. Experts unanimously agreed that its ability to be implemented would be a strength of the policy; other strengths include the precedent-setting value of the policy, the magnitude of the impact on drug spending, and the size of the affected patient population. Experts were split on whether the evidence base in support of the policy would be a strength or an unknown, with one expert opining that it would be a weakness.

How likely would this policy be to reduce drug spending?
Would Increase Drug Spending
Would Not Affect Drug Spending
Would Minimally Reduce Drug Spending
Would Moderately Reduce Drug Spending
Would Significantly Reduce Drug Spending
Would Substantially Reduce Drug Spending
How likely would this policy be to reduce drug prices?
Would Significantly Increase Drug Prices
Would Moderately Increase Drug Prices
Would Not Affect Drug Prices
Would Moderately Decrease Drug Prices
Would Significantly Decrease Drug Prices
List Prices
Net Prices
How likely would this policy be to increase patient drug access?
Would Significantly Reduce Drug Access
Would Moderately Reduce Drug Access
Would Not Affect Drug Access
Would Moderately Increase Drug Access
Would Significantly Increase Drug Access
Rare Disease
Large Patient Groups
How significant is this policy in the evolution of US drug spending policy?
Does Not Advance Drug Spending Policy
Minimally Advances Drug Spending Policy
Moderately Advances Drug Spending Policy
Significantly Advances Drug Spending Policy
Ground-Breaking Shift in Drug Spending Policy
What are strengths and weakness of this policy?
Size of Affected Population
Evidence Base in Support of Policy
Precedent-Setting Value
Magnitude of Drug Spending Impact
How important are the following in your analysis of the policy's impact?
Not Important
A Little Important
Somewhat Important
Very Important
Manufacturer ability to manipulate WAC or AMP to avoid inflation penalty
Inflation penalty not combined with launch price control
Potential changes in PBM behavior from lower list prices
Part D premium impact from lower PBM rebates
Changes in manufacturer launch price behavior
Possibility of cost-shifting to private market
Manufacturers may increase use of authorized generics
Exclusion of multi-source drugs

Considerations for policymakers

Experts highlighted several considerations for policymakers. The most important considerations include the proposed inflation penalties not being combined with launch price controls, drug manufacturers’ ability to manipulate pricing metrics to avoid the inflation penalty, and changes in manufacturers’ launch price behaviors. Other key considerations include potential changes in pharmacy benefit managers’ behavior in response to lower list prices, increases in Medicare Part D premiums from lower pharmacy benefit manager rebates, and the possibility of cost-shifting to the private market. Additional considerations include uncertainty regarding whether manufacturers may increase use of authorized generics and the exclusion of multi-source (generic) drugs from the inflation penalties.