Moody's Sees Drug Price Increases Slowing

Despite the slowing rate, rising drug costs and potential changes to Medicare 340B payments for outpatient drugs would further reduce hospitals' margins.

Inpatient drug costs will continue to rise for not-for-profit hospitals, but the pace will slow under growing scrutiny of drug makers' pricing practices, Moody's Investors Service said in a new report.

Drug costs have outpaced hospital revenue growth in recent years. Moody's said the median growth rate for supply costs, which include drugs, slowed between 2015 and 2016. But the gap between how fast supply costs grew versus revenues grew widened.

"Price increases in recent years were extraordinarily high for certain branded hospital inpatient drugs, but drug manufacturers are pulling back on these increases," said Diana Lee, a Moody's Vice President. "On the generic drug side, we expect that some of the pressure will ease as the U.S. Food and Drug Administration approves more generic drugs for the first time."

The proposed reduction of Medicare Part B outpatient drug reimbursement to 340B hospitals by roughly 30% would represent another headwind for hospitals already facing pressure.

"Hospitals and health systems of varying size and across the rating spectrum have noted anecdotally that they have benefited from cost savings from this discount drug program," Lee said.

"In some instances, the savings and income gained from this program can be meaningful relative to total operating cash flow,” she said. “While about half of hospitals in the nation are 340B providers, those that have limited financial flexibility would be most exposed to possible changes to the 340B program."