Medical Savings in Retirement: Medicare Goes After Drug Companies for Price Gouging Above Inflation

Senior citizen female holding bottles of prescription medicine sitting in a wheelchair.
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Pharmaceutical companies will have to pay penalties to the federal government when certain prescription drug prices they charge to Medicare customers increase faster than the rate of inflation, the U.S. Department of Health & Human Services said last week.

In a Feb. 9 announcement, the HHS outlined how it will implement the new Medicare Prescription Drug Inflation Rebate Program, which was included in last year’s Inflation Reduction Act and aims to lower drug costs for millions of Americans. As part of the announcement, the Centers for Medicare & Medicaid Services released initial guidance detailing requirements and procedures for the program.

The rebate program marks the first time that drug companies will have to pay for hiking prescription drug prices faster than the rate of inflation, though the penalties will not kick in for another couple of years.

“There is no reason Americans should have to pay two to three times more than people in other countries for the same prescription drugs,” HHS Secretary Xavier Becerra said in a statement. “Now drug companies that increase their prices faster than the rate of inflation will have to pay rebates back to the Medicare Trust Fund.

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The HHS offered the following timeline of key dates for implementing the Medicare Prescription Drug Inflation Rebate Program:

  • October 1, 2022: Began the first 12-month period for which drug companies will be required to pay rebates to Medicare for raising prices that outpace inflation on certain Part D drugs.
  • January 1, 2023: Began the first quarterly period for which drug companies will be required to pay rebates for raising prices that outpace inflation on certain Part B drugs.
  • April 1, 2023: People with Traditional Medicare and Medicare Advantage may pay a lower coinsurance for certain Part B drugs with price increases higher than inflation.
  • 2025: CMS intends to send the first invoices to drug companies for the rebates.

The program will require that pharma companies pay rebates to the Medicare Trust Fund in cases where price increases exceed inflation. The CMS will pay special attention to brand-name drugs, which make up 80% of all prescription drug spending. Companies that refuse to pay the rebate will be assessed a penalty equal to 125% of the rebate amount, USA Today reported.

The rebate program does have precedent. As NPR reported last fall, Medicaid has long had the power to reverse any price increases that exceed the rate of inflation. This program, implemented more than 30 years ago, has been credited with helping significantly lower Medicaid’s spending.

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It is unclear how Medicare recipients will benefit directly, other than preventing drug companies from hiking prices more than they should. Medicare enrollees won’t get checks or other direct payments from the rebate program, USA Today reported, though recipients who get Part B drugs administered in a medical office might see “modest” benefits.

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In a separate announcement last week, the HHS Office of Inspector General issued a report flagging potential challenges for Medicare’s rebate program — including identifying which Part B drugs to select for rebates.

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