Claire Dawson
The issue of high drug prices has been a pressing concern for hospitals and health systems for many years, with rising drug prices and drug shortages impacting patient care and outcomes. While the federal government has implemented mechanisms such as Medicaid's rebate program and the Federal Supply Schedule (FSS) to contain prescription drug costs, the effect on hospitals and their ability to provide care is significant. Hospitals eligible for federally mandated discounts have been found to charge insurers significantly more for infusion drugs than they pay for them, and the problem of drug companies introducing new drugs at record-high prices further exacerbates the issue. With hospitals facing challenges in financing their operations and patients struggling to afford their prescribed medications, it is evident that the impact of federal limits on hospital drug prices is a critical area of focus.
| Characteristics | Values |
|---|---|
| Impact of high drug prices on patients | Nearly 30% of Americans have not taken their medication as prescribed due to high drug prices. It is estimated that over 1.1 million Medicare patients could die over the next decade because they cannot afford their prescribed medications. |
| Impact of high drug prices on hospitals | Hospitals have fewer resources available to finance other parts of their operations, such as paying staff and purchasing other supplies needed for patient care. |
| Drug shortages | In 2023, there was an average of 301 drugs in shortage per quarter, a 13% increase from 2022. More than 99% of hospital and health system pharmacists reported experiencing drug shortages in 2023, with 85% describing the severity as critical or moderately impactful. |
| Federal government's role in containing prescription drug costs | The Federal Supply Schedule (FSS), administered by the Department of Veterans Affairs, includes pharmaceutical prices. The Medicaid rebate program, established in 1990, has helped contain government spending on outpatient prescription drugs. |
| Medicare's role in containing prescription drug costs | Medicare reimburses providers based on a formula set at 106% of the Average Sales Price (ASP). The Inflation Reduction Act requires drug manufacturers to pay a rebate to the federal government if prices for certain drugs covered under Medicare increase faster than the rate of inflation. |
| Challenges and limitations | The Part D "noninterference" clause in the law limits the federal government's ability to negotiate lower prices, particularly for high-priced drugs. The problem of high drug prices and shortages is becoming unsustainable, and the impact on patient outcomes is direct. |
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What You'll Learn
Impact of federal limits on hospital drug prices
The federal government employs several mechanisms to limit drug prices, including the Medicaid rebate program and the Federal Supply Schedule (FSS) of prices. The Medicaid rebate program, established by the Omnibus Budget Reconciliation Act of 1990, requires drug manufacturers to provide refunds if prices grow faster than inflation. The Federal Supply Schedule (FSS), administered by the Department of Veterans Affairs, is a catalogue of prices, including pharmaceutical prices.
The Inflation Reduction Act is another example of federal legislation aimed at reducing drug prices. It requires drug manufacturers to pay a rebate to the federal government if prices for specific drugs covered under Medicare increase faster than the rate of inflation. Additionally, the Act establishes an upper limit for the negotiated price, known as the "maximum fair price," for a given drug. This limit is determined by considering factors such as the manufacturer's research and development costs and the current unit costs of production and distribution.
While these federal measures aim to contain drug prices, hospitals continue to face challenges due to rising drug prices and shortages. Hospitals are major purchasers of drugs for patient care, and the high prices of medications strain their resources. As a result, hospitals have less money to allocate to other critical areas, such as staff salaries and the acquisition of other supplies essential for patient care. Moreover, drug shortages force hospitals to expend additional resources, including staff time and alternative drug procurement, further impacting their operations and patient outcomes.
The impact of federal limits on hospital drug prices is complex. While federal interventions, such as the Inflation Reduction Act, aim to curb price increases, hospitals still struggle with the financial burden of high drug prices. This discrepancy can be attributed to various factors, including the structure of state regulations, industry consolidation, and the complex dynamics between hospitals, insurers, and drug manufacturers.
Overall, federal limits on drug prices can have both direct and indirect effects on hospitals. While the intention is to alleviate the financial strain on healthcare institutions, the effectiveness of these measures depends on various market factors and policy implementations.
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Drug price increases and patient outcomes
The impact of drug price increases on patient outcomes is a complex issue that has been a matter of public concern and policy debate for decades. Lawmakers and healthcare professionals have recognized the challenge of ensuring access to essential medications without imposing undue financial burdens on patients. This challenge has only grown more acute as drug prices have continued to rise, outpacing inflation rates and straining the financial resources of both patients and healthcare providers.
One of the most direct ways in which drug price increases affect patient outcomes is by reducing patients' ability to access and adhere to necessary treatments. When prescription drug prices rise, patients may be forced to make difficult choices, such as skipping doses, splitting pills, or even abandoning treatment altogether due to financial constraints. This issue is particularly prevalent among certain demographic groups, including young adults, racial minorities, individuals with low incomes, and those taking multiple prescription medications.
The consequences of these choices can be dire. For example, a patient may experience worsening health outcomes or even life-threatening complications if they cannot afford to take their medications as prescribed. In some cases, patients may resort to over-the-counter alternatives or seek emergency care due to untreated symptoms, leading to additional healthcare costs and potentially poorer health outcomes.
The impact of drug price increases on patient outcomes is not limited to individual patients but also extends to hospitals and healthcare systems. As drug prices rise, hospitals face increasing financial pressures, limiting their ability to provide a full range of services to their communities. Hospitals, as major purchasers of drugs, must allocate a growing share of their resources to acquiring costly medications, leaving less funding available for other critical areas such as staffing, medical supplies, and administrative needs.
Additionally, drug shortages further exacerbate the challenges faced by hospitals. When critical drugs are in short supply, hospitals must devote significant time and resources to finding, procuring, and administering alternative treatments, disrupting the continuity of patient care and potentially leading to suboptimal outcomes. This issue is particularly pertinent for drugs with limited generic alternatives, as brand-name medications tend to be more expensive and subject to supply chain disruptions.
To address these challenges, policymakers have proposed and implemented various interventions. The Inflation Reduction Act (IRA), passed in 2022, represents a significant piece of legislation aimed at lowering prescription drug prices and improving patient access. The IRA includes provisions such as allowing the federal government to negotiate drug prices for Medicare beneficiaries, implementing rebates for drug manufacturers that increase prices faster than inflation, and capping out-of-pocket expenses for prescription drugs. While these measures are a step towards addressing the issue, ongoing monitoring and evaluation are necessary to ensure their effectiveness in improving patient outcomes and alleviating the financial strain on patients, hospitals, and healthcare systems.
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Hospitals' strategies to protect themselves
Hospitals, insurers, and drug manufacturers have developed strategies to protect themselves from rising drug prices. However, these strategies often put patients at risk of financial insolvency or adverse health impacts if they cannot afford their treatments. Here are some strategies hospitals can employ to protect themselves from the impact of high drug prices:
- Mergers and acquisitions: Hospitals have been merging with competitors to gain more negotiating power with drug manufacturers and raise prices. This strategy allows hospitals to increase drug volumes and prices, as well as strengthen their market position.
- Price markups: Hospitals eligible for federally mandated discounts have been found to charge insurers up to 300% more for infusion drugs than they pay for them. Hospitals ineligible for federal discounts imposed an average markup of 240%. These markups allow hospitals to retain a large share of insurer drug spending.
- Alternative suppliers and therapies: When facing drug shortages or unavailable suppliers, hospitals may need to find alternative suppliers, renegotiate contracts, undergo additional training for medication safety using alternative therapies, and incur other time-consuming and costly processes. However, this often results in higher prices for alternative drugs, further increasing hospitals' drug expenses.
- Cost-cutting in other areas: Rising drug prices leave hospitals with fewer resources to finance other operations, such as paying staff and purchasing supplies needed for patient care. Hospitals may need to cut costs in these areas to protect themselves from the impact of high drug prices.
- Advocating for policy changes: Hospitals can work with policymakers to address the issue of high drug prices and their impact on patient access to care. For example, the Inflation Reduction Act includes provisions that limit out-of-pocket drug spending growth for Medicare beneficiaries and discourage drug companies from increasing prices faster than inflation.
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Federal rebate programs for drug price containment
Federal rebate programs have been introduced to curb the rising costs of prescription drugs, which have been impacting hospitals and patients alike. The Inflation Reduction Act, for instance, requires drug manufacturers to pay rebates to Medicare when prices increase faster than the rate of inflation. This is expected to limit out-of-pocket drug spending growth for Medicare beneficiaries and put downward pressure on premiums. The Medicare Prescription Drug Inflation Rebate Program has resulted in savings for patients, with some beneficiaries saving up to $12,728 from January to March 2025.
The Medicaid Drug Rebate Program (MDRP) is another federal rebate initiative. This program involves the Centers for Medicare & Medicaid Services (CMS), state Medicaid agencies, and drug manufacturers, and it helps to offset the costs of outpatient prescription drugs for Medicaid patients. The MDRP requires manufacturers to enter into a National Drug Rebate Agreement (NDRA) with the Secretary of Health and Human Services (HHS) in exchange for Medicaid coverage of their drugs. The rebate program has successfully reduced total Medicaid drug expenditures, with the federal government and states sharing in the savings.
The Federal Supply Schedule (FSS), administered by the Department of Veterans Affairs, is another mechanism to contain prescription drug costs. It offers a catalogue of prices, including pharmaceutical prices, and manufacturers have incentives to provide large price concessions. However, expanding access to FSS prices could cause those prices to rise, as seen during the period when the Medicaid program accessed FSS prices.
The ability of rebate programs to contain costs is limited by the fact that manufacturers can charge higher launch prices for new drugs, partially offsetting the rebates. Additionally, Medicare has had no authority to limit annual price increases for drugs covered under Part B or Part D, unlike Medicaid, which has a rebate system tied to inflation.
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Federal Supply Schedule (FSS) and pharmaceutical prices
The Federal Supply Schedule (FSS) is a catalogue of prices for pharmaceuticals and other products, administered by the Department of Veterans Affairs. It establishes prices available to all direct federal purchasers, including federal agencies that buy drugs directly from wholesalers or manufacturers and provide their own dispensing services. The FSS is one of the mechanisms employed by the federal government to contain prescription drug costs.
The FSS includes prices for non-prescription medicated cosmetics, drugs (including generics and over-the-counter), IV delivery systems, nutritional supplements, and soaps and dispensing equipment. The FSS is updated on or around the 2nd and 16th of each month.
The FSS is also used to support the healthcare acquisition requirements of the VA and other federal government agencies (OGA). Federal agencies, including those in remote and overseas locations, can use the VA Schedules program to simplify the acquisition and procurement process.
The federal ceiling price (FCP) is the minimum of the FSS price and the federal ceiling price, and it is available to the Big Four agencies, which are the four largest direct federal purchasers: the Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public Health Service, and the Coast Guard. The VA and DoD often pay lower prices than the other Big Four agencies because they use formularies (preapproved lists) of preferred drugs, they steer patients to lower-cost drugs, and they buy drugs in large volumes.
The federal ceiling price is equal to at least 24 percent off the average price that manufacturers charge non-federal purchasers. Manufacturers have certain incentives to give large price concessions on the FSS schedule, such as ensuring that new physicians learn about their prescription drugs.
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Frequently asked questions
Federal limits can help to contain prescription drug costs, but they do not always benefit patients. For example, the Federal Supply Schedule (FSS) is a catalogue of prices that includes pharmaceutical prices. While this can help contain costs, expanding access to FSS prices could cause them to rise.
Federal limits can help to reduce costs for patients with Medicare, but they do not always apply to those with private insurance or no insurance. This means that hospitals' drug prices can still be unaffordable for many patients, impacting their access to care.
Federal limits can help to reduce hospitals' drug costs, freeing up resources for other operations such as paying staff and purchasing supplies. However, drug price increases and shortages can still strain hospitals' limited resources.
Examples include the Inflation Reduction Act, which requires drug manufacturers to pay a rebate if prices increase faster than the rate of inflation, and Medicaid's rebate program, which has helped to contain government spending on outpatient prescription drugs. Other examples include the Part D non-interference clause and legislation that provides guidance to HHS.
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