One tool federal policymakers have used to lower drug prices is the imposition of inflation rebates, which require drug companies to pay rebates when the list price of a product increases faster than the rate of inflation. Under current law, inflation rebates apply in many market segments, but not to units of a drug sold to patients with commercial insurance. This piece explores how state policymakers could fill this gap—in ways that are insulated from manufacturer challenges under the Commerce Clause of the Constitution and from federal restrictions that limit when states can raise revenue from health care providers.

Inflation Rebate Requirements as a Tool to Lower Drug Prices

To combat the high price of prescription drugs, federal law includes a number of policies that require drug manufacturers to make payments to the federal government when the price of their medications increase faster than the rate of inflation. Since the early 1990s, manufacturers of prescription drugs have been required to pay inflation-based rebates to state Medicaid agencies and to provide larger discounts under the 340B program when the list price of covered drugs increases faster than inflation. In 2022, Congress extended a more narrowly targeted inflation rebate to Medicare, requiring inflation rebate payments to the federal government for single source drugs without generic competition where per-patient costs are greater than $100 per year.

When Congress enacted the 2022 expansion, it initially attempted to apply the new inflation rebate outside of Medicare as well, to drugs sold to patients with commercial insurance (like health insurance through a job or in the individual market). However, the Senate parliamentarian concluded that the expansion to commercial insurance was subject to challenge under the rules of budget reconciliation, so the provision was removed from the bill. Therefore, today, when a brand-name drug company raises prices faster than inflation, it must make additional payments in Medicare, Medicaid, and 340B that effectively claw back any price increase higher than the rate of inflation. However, for commercially insured patients not served by a 340B provider, the drug manufacturer can retain the extra price increase without penalty.1

Read the full article about state inflation rebates by Christen Linke Young at Brookings.