Biden’s Drug-Price Boomerang

Prices are rising faster since the IRA passed. Here’s why. 

WSJ editorial.

"President Biden keeps trying to persuade Americans his policies are helping them, but voters aren’t buying it. The latest example is the Inflation Reduction Act’s (IRA) Medicare drug rebates, which are raising the cost of medicines.

The White House on Thursday proclaimed that the IRA’s drug rebates are already saving seniors money: “President Biden’s prescription drug law cracks down on price gouging from Big Pharma.”

Under the IRA, drug makers must pay Medicare rebates if they raise list prices more than the rate of inflation. If a company increases the price of an immunotherapy by, say, 8% while inflation is increasing at 3%, it must pay Medicare the 5% difference. Co-insurance payments made by patients are then based on the inflation-adjusted price.

Rebates are deposited in the Medicare Supplementary Medical Insurance Fund, which is mainly financed by general tax revenue. In other words, politicians, not seniors, are the real beneficiary of the rebates.

According to the Administration, IRA drug rebates save seniors “as much as $618 per average dose on 47 prescription drugs” (our emphasis). This is deceptive marketing. It’s possible that Medicare co-insurance as a result of the IRA could be hundreds of dollars less on a cancer drug that costs tens of thousands of dollars per dose and whose list price increases by double digits. But most Medicare patients will see little benefit.

On the other hand, privately insured patients will likely pay much more for drugs owing to the rebates. Democrats tacitly conceded this when they drafted the law. They initially planned to apply the IRA inflation rebates to the private insurance market too. That’s because employers worried that drug makers would offset the cost of the Medicare rebates by raising prices for their workers.

This is what has happened in Medicare with hospital and physician fees. Because Medicare typically pays less than the cost of care, providers charge privately insured patients more to compensate. Private health plans paid hospitals 224% of Medicare rates in 2020, according to a Rand Corp. study. Between 2013 and 2018, prices paid to providers increased at double the rate for commercial insurers as for Medicare fee for service.

Medicaid’s mandatory rebates—23.1% for brand drugs and 13% for generics off the average manufacturer price—save Medicaid tens of billions of dollars a year. But drug makers have raised prices that privately insured and Medicare patients pay to offset those Medicaid rebates, especially for drugs used mostly by low-income patients. Medicaid rebates have also reduced the already slim margins for making generic drugs, contributing to the current shortages.

Senate budget rules blocked Democrats from extending inflation rebates to private markets. So drug makers will invariably raise prices for privately insured patients and launch new drugs at higher prices. This may already be happening. Prescription drug prices have increased at a faster rate since the IRA passed, even as overall inflation has moderated.

Prescription drug prices increased by 2% during the Trump Presidency owing to greater generic competition, yet they’ve increased 5.5% so far under Mr. Biden. In November they rose at an annual rate of nearly 6%. Has the White House considered that the reason Americans don’t believe that the President’s policies have helped them is because they haven’t?"