Drug pricing has immense impact on families and government spending.
On a personal level, a friend of mine, a diabetic double amputee, was found dead in his home with no insulin in the refrigerator. The cost of insulin has increased 600% in the last 20 years even though it was discovered a century ago and the inventor didn’t patent it for humanitarian reasons. My friend was a very proud but disorganized lawyer. Ever since his death I have wondered if he couldn’t afford to buy his insulin but was too proud to call me.
Switching from Micro to Macroeconomics…
In 2021, overall pharmaceutical expenditures in the US grew 7.7% compared to 2020, for a total of $576.9 billion.
The Centers for Medicare and Medicaid Services reported prescription drug expenditure in the United States came to some 378 billion U.S. dollars in 2021. This amount includes only retail drug spending, excluding nonretail.
Drug spending is heavily driven by a relatively small number of high-cost products. The cost of specialty drugs has continued to grow, totaling $301 billion in 2021, an increase of 43% since 2016. Specialty drugs represented 50% of total drug spending in 2021. (See references below.)
Congress passed the Inflation Reduction Act (IRA) in August 2022. The IRA has several clauses that impact the cost of prescription drugs.
Medicare recipients will only have to pay $35 per month for insulin. This will be a relief for millions of families. The IRA will cap out-of-pocket spending for Medicare Part D enrollees beginning in 2024 – immensely important for cancer patients who have high out-of-pocket drug expenses.
The Inflation Reduction Act requires manufacturers who raise their drugs’ prices faster than the rate of inflation to pay rebates to the federal government. The rebate rule, which applies to drugs administered to beneficiaries under either the Medicare Part B or Medicare Part D program, requires the companies to pay the rebates directly to the Medicare trust fund.
Because doctors who administer Part B drugs pay for them upfront and are later reimbursed by Medicare, the rebate program appears to potentially affect them as well, particularly because Medicare’s reimbursement is calculated based on the drug’s average sales price (ASP) plus a 6% administration fee.
This article describes a confusing situation with drug prescribing and rebates. Honestly, my head spun when I read it. Can you imagine thousands of busy doctor’s offices trying to puzzle out how to get reimbursed with the new system? Medicare wrote, “You must charge patients the correct amount of coinsurance, which may change quarterly.” How are patients supposed to figure out if they are being billed correctly?
Sooner or later, this will all be figured out (though it might be riddled with errors for a while).
As investors, we need to be aware the the objective of the IRA is to reduce the profit growth of the pharmaceutical companies. It’s one small step toward enabling Medicare to negotiate all drug prices (like every other country) against the fierce opposition of Big Pharma’s lobbying and political donations.
Wendy