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Moody’s Expects Drug Costs Will Continue to Challenge Hospitals

Hospital inpatient drug costs have been rising and this will continue, but at a moderate pace due to public scrutiny of pharmaceutical companies’ drug pricing practices. Moody’s noted in a recent article that even at a slower rate of growth, “we expect rising drug costs will continue to challenge hospitals’ financial flexibility.” (“Not-for-profit and public healthcare, pharmaceuticals,” Weekly Credit Outlook, Moody’s Investors Service, September 28, 2017)


Federal proposals to lower Medicare 340B payments (a discount drug program) for outpatient drugs, such as for cancer treatment, if finalized, would further reduce hospitals’ margins, according to the article.


Some of the key points in the article include:


  • In recent years, pharmaceutical costs have outpaced hospital revenue growth, contributing to weaker operating margins. Significant price increases have been a key component of rising drug costs.


  • Hospitals will still be subject to margin pressure, albeit less so than in recent years.


  • The slowdown is due in part to a deliberate reduction in the pace and amount of price increases for branded drugs.


  • Additional generic competition will also reduce pricing for generic drugs.


  • Moody’s does not expect select extraordinary price increases witnessed over the past few years to be replicated.


  • On the outpatient side, a new federal proposal, if finalized, would reduce Medicare payments that participating hospitals receive from 340B, a discount drug program. CMS is proposing a 30 percent reduction.


  • On its own, this would not result in a meaningful change in credit quality for most 304B hospitals, but would present yet another headwind. However, some hospitals benefit from significant cost savings and income under the program, and a finalized proposal would present a material challenge.


  • The impact of proposed 340B changes on pharmaceutical manufacturers is relatively limited. The reimbursement reduction is to providers, not manufacturers.


(“Not-for-profit and public healthcare, pharmaceuticals,” Weekly Credit Outlook, Moody’s Investors Service, September 28, 2017)


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