As U.S. spending on pharmaceuticals continues to rise, reaching $373.9 billion in 2014, government scrutiny of drug pricing practices has increased in response.

Early last year, the U.S. Department of Health and Human Services Office of Inspector General (OIG) received a request from Rep. Elijah Cummings (D-Md.) and Sen. Bernie Sanders (I-Vt.) that the government agency investigate “the alarming rates” at which the prices of generic drugs increased from July 2013 to December 2014. In their April 13, 2015, letter the OIG responded that it planned to examine quarterly average manufacturer price (AMP) for the top 200 drugs from 2005 to 2014 to determine if the AMPs exceed the statutory inflation factor, and to determine the amount of additional rebates Medicaid would have received if the inflation factor applied to generic drugs. Although OIG agreed to follow up on a number of the lawmakers’ requests, the letter states that OIG does not currently have plans to “review the effect of generic drug price increases on the Medicare program.”

More recently, the Department of Justice (DOJ) and the U.S. Attorney’s Office for the Eastern District of Pennsylvania have sought information from two large pharmaceutical companies about how they calculate and report drug prices for the Medicaid rebate program. The DOJ also sent a separate request to another pharmaceutical company about its pricing and contracting with pharmacy-benefit managers and Medicare drug-benefit plans regarding one of its blockbuster drugs.

This recent increase in government inquiry is not limited to federal agencies. Legislative committees have also taken note of skyrocketing drug prices. The Senate Special Committee on Aging has started an investigation of steep drug price increases by several pharmaceutical companies while the House Committee on Oversight and Government Reform formed a task force to combat this very issue.

Not only have government officials taken notice of this issue, but at least one pharmacy benefit manager (PBM) has responded to public disappointment over one drug company’s decision to raise the price of a drug that has been on the market for over 60 years and is used to treat a condition that is potentially fatal in patients with compromised immune systems, such as patients with AIDS and cancer. The PBM announced late last year that it had made arrangements with a drug compounder to create a lower-priced alternative. The alternative will cost $1.00, while the drug manufacturer’s product was at one point raised to $750 a pill.

Given the heightened scrutiny of drug pricing, pharmaceutical companies should be on notice that their own pricing practices may be subject to inquiry, or even enforcement action, by government authorities. The following are key considerations for these companies regarding the pricing of their products:

  • Contract pricing terms – Companies should pay close attention to contract pricing provisions, specifically provisions regarding price increases, in their contracts with payors to ensure that any price increases are not in violation of these provisions.
  • Need for audits – Companies should conduct periodic audits of contracts and pricing mechanisms to ensure their adherence to pricing terms.
  • Justification for price increases – Companies should document in detail the need for any increases in drug prices. For example, an increase in cost for labor or drug ingredients may justify the need for price increases.
  • Inquiry responses – Companies should be prepared to respond to government and private payor questions regarding their pricing. Periodic auditing to ensure compliance with any contractual obligations should reduce the possibility of these inquiries. By having written documentation detailing the need for price increases, companies will better be able to justify pricing decisions to the government or private payor.