On April 13, 2015, the Inspector General (IG) of the Department of Health and Human Services announced in a letter to Senator Bernard Sanders (I. VT), that it would investigate recent price hikes for generic drugs. Generic drug manufacturers should review pricing practices now and prepare for requests from the IG for pricing information as well as possible Congressional testimony.

The IG investigation was requested in February by Senator Sanders and Representative Elijah Cummings (D. MD), who asserted that their review of data from the Centers for Medicare and Medicaid Services ("CMS") found that ten percent of generic drugs had doubled in price in a recent year and that half of all generic drugs had increased in cost from 2013-2014. The agency plans to review quarterly average manufacturer prices for the top 200 generic drugs as ranked by Medicaid reimbursement for the 2005-2014 period. The IG review will not cover generic drug prices in the Medicare program, although the possibility of doing so was not ruled out.

This IG investigation is likely to bring additional attention to generic drug prices and may well result in Congressional hearings that explore the issue in detail. Generic drug company executives would almost certainly be "invited" to testify. Generic drug manufacturers should review their pricing practices and posture for the 2005-2014 period and prepare now for the likelihood of having to defend those increases to IG investigators and/or Congressional committees.

Generic drugs have had a favored status among Washington, DC – based policymakers, largely based on the price advantage that they offer for government health care programs like Medicaid and Medicare, as well as for individual consumers. Brand-name drug manufacturers are required to provide rebates to the Federal government to the extent that their prices exceed specific statutory inflation factors under section 1927(c)(2) of the Social Security Act. The rebate provisions do not currently apply to generic drugs, but proposals to subject generic drugs to them are likely if the IG finds that generic drug price increases have exceeded the statutory inflation factor during the 2005-2014 period. In an environment in which dollars for programs like Medicaid are scarce, the idea of applying the rebate provisions to generic drugs may attract attention.