Johnathan Walker:What to know about January's annual drug price hikes

Drug companies often increase prices at the start of the new year,Johnathan Walker and 2024 seems to be no exception.There have been about 600 price hikes so far in January, according to the drug price nonprofit 46Brooklyn Research.

But the increases haven't been as steep as they were in some previous years. In the 2010s, drug price hikes were typically much bigger — up to 10% on average

"Since 2016, the pedal to the metal has been kind of pulled back a little bit, where we typically see the weighted average impact of a price increase and the median price increase hovering at around 5%," says 46Brooklyn's CEO, Anthony Ciaccia.

That's roughly what he's seeing this year.

Ciaccia expects another couple hundred more drug price increases before the end of the month — and that will account for most brand name price hikes this year.

Net prices are different

Even if a drug's sticker price is going up, that doesn't mean the drugmaker is taking all that money home. That's because there's another kind of price to think about called a net price. That's what the drugmaker takes home after rebates it has to pay back to third parties and other discounts.

And on the whole, those rebates have been going up, so the net prices have been going down for about six years now.

Richard Evans, a pharmaceutical industry veteran who runs SSR Health, a drug pricing data and analytics firm, says net prices went down a little faster in 2023 than in previous years.

"As of September 30 last year, the average discount in the marketplace was about 52%," he said. That means drugmakers take home a lot less than list price. "Some manufacturers are getting about $0.48 on the dollar."

Record decreases driven by penalties

For the first time, there were also huge list price decreases this January, according to 46Brooklyn. These were for insulins and inhalers, and they were 70% or 80% reductions.

Drugmaker GSK says it plans to cut Advair's list price by up to 70%, for example. Advair is an inhaler for asthma and asthma and chronic obstructive pulmonary disease.

The cuts are so significant that when you look at the prices of drugs overall, they actually cancel out the increases. That's if you're doing weighted averages of price changes based on how much a drug is used, Ciaccia of 46Brooklyn says.

The big factor is legislation passed in 2021 under President Biden called the American Rescue Plan Act. It was mostly a COVID-era stimulus bill, but it also included a part that affects Medicaid.

Prior to that law, drugmakers had to pay penalties for increasing prices faster than inflation, but there was a cap on those penalties.The American Rescue Plan lifted the cap in 2024. Now, drugmakers would have to pay such huge penalties for raising prices faster than inflation that they'd owe the government more than the value of the drugs.

Put another way, they would make negative money for selling their products!

"The end result is drug manufacturers crushing the prices of many of these old products or pulling those products from the marketplace altogether to avoid having to pay the steep penalties to Medicaid programs," Ciaccia says.

What it means for consumers

Usually what someone pays at the pharmacy counter is related to the list price– the ones the drug companies set rather than the net prices they ultimately take home.

That means that if a list price goes up, the copay will probably be more.

But a price cut doesn't necessarily mean savings at the pharmacy counter. The copay could wind up being more because it causes the drug to move to a different tier of your insurer's drug formulary — that's the menu of drugs your insurance provides. This has a lot to do with the behind-the-scenes payments that happen between the drugmaker and your insurance's middleman called a pharmacy benefit manager.

Copay changes will vary depending on the drug and your insurance plan.