SummaryScenario analysis of varying levels of negotiation under H.R.3 (as released on September 19) finds that the bill could reduce federal spending by $790B to $1,055B and decrease manufacturer revenues by $1,125B to $1,520B for CY 2020–2029.
The US House of Representatives continues to debate H.R.3, the Lower Drug Costs Now Act. The most recent version of the bill, released on December 6, includes several changes from the text originally introduced on September 19, including an increase in the number of drugs for which the Secretary would be required to negotiate prices.
To understand how H.R.3 as originally introduced could impact federal spending and prescription drug manufacturer revenues over the next 10 years, PhRMA commissioned Avalere to model a range of scenarios illustrating differing degrees of impact based on the number of drugs the Secretary would negotiate each year and the prices that are negotiated for those drugs. As the Congressional debate evolves, considering the impact of any of these iterations can inform the policy debate.
This Insight focuses on the effects of Titles I, II, and III of H.R.3 as released on September 19.1 That version of the bill includes 3 main sections that would influence federal spending and drug manufacturer revenues. Specifically, the version of H.R.3 released on September 19 includes:
- Drug Price Negotiation: Direct the Secretary of the Department of Health and Human Services (HHS) to negotiate prices with drug manufacturers for certain single-source products with high spending beginning in 2023. The Secretary would be required to negotiate a minimum of 25 drugs each year, in addition to all insulins.2 Manufacturers that do not comply would be subject to an excise tax ranging from 65% to 95% of gross sales of the drug. International prices from 6 comparator countries would determine the minimum and maximum prices for the negotiation process. The minimum price (target price) would be the lowest price of the drug in any of the 6 comparator countries. The maximum price would be 120% of the average international market price (AIM) across all 6 comparator countries.3 The price negotiated by the Secretary (known as the maximum fair price or MFP) for the selected drugs would be required in the Medicare program and would be available to commercial payers4
- Inflation-Based Rebates: Require manufacturers to pay a rebate to the federal government if a Part B or Part D drug’s price increases faster than the rate of inflation
- Medicare Part D Benefit Restructuring: Restructure the Part D benefit by establishing a $2,000 beneficiary out-of-pocket (OOP) spending cap and replacing the current manufacturer coverage gap discount program with a new discount program. Through this program, manufacturers would provide a 10% discount starting after the deductible and up to the catastrophic phase and a 30% discount in catastrophic for drugs not subject to negotiation
The analysis estimated the potential effects of the 3 provisions listed above in the Medicare and commercial markets. Recent versions of H.R.3 include new policies (e.g., expansion of Part D low-income subsidy eligibility) and revised policies (e.g., increasing the minimum number of drugs eligible for negotiation) that would also impact federal outlays and manufacturer revenues, but are not included in this analysis. As policymakers consider changes to H.R.3 from the version analyzed here, alternative policy options that raise the minimum number of drugs negotiated or increase the size of price reductions would likely lead to larger decreases in both federal outlays and net manufacturer revenues.
The scenarios modeled include:
- Scenario 1: Each year under Title I, the Secretary would negotiate prices for the minimum required number of drugs (i.e., 25 drugs each year, plus all insulins). Specifically, Avalere assumes the Secretary would negotiate prices for the 25 single-source drugs that have the highest combined Medicare Part B and D drug spending in year 1, with 25 additional drugs and all insulins being negotiated in each subsequent year until 2027, reaching a total of 125 drugs plus all insulins over the 10-year period.5 The MFP for the selected drugs is assumed to be equal to the ceiling price (120% of the AIM).
- Scenario 2: The Secretary would negotiate prices under Title I for the top 125 drugs, plus all insulins, in the first year and an additional 75 drugs in each subsequent year, for a total of 575 drugs plus all insulins negotiated by 2029. The MFP for the selected drugs is assumed to be equal to the midpoint of the ceiling price and the target price (the lowest price among the 6 comparator countries), reflecting that some drugs would fall between the target and the ceiling price.
- Scenario 3: The Secretary would negotiate prices for the top 250 drugs, plus all insulins, in the first year and an additional 75 additional drugs in each subsequent year, for a total of 700 drugs plus all insulins negotiated by 2029. The MFP for the selected drugs is assumed to be the target price.
The market is likely to experience a range of stakeholder responses under each of the scenarios listed above. These behaviors are likely to be manufacturer- and drug-specific. Given the uncertainty associated with these potential responses and complexity of comparator countries’ regulations, the analysis did not consider certain behavioral factors that could impact estimates, such as changes to foreign prices or reduced access to products in other countries. In addition, the results do not include impacts to Medicaid, which would likely alter federal spending estimates due to changes in prices and rebates.
Impact on Federal Spending
Across both the Medicare and the commercial markets, the analysis finds that the 3 scenarios would reduce federal spending by $790B to $1,055B. Most of this decrease in federal outlays results from reduced government spending across Medicare Part B and D ranging from $700B to $945B.
Federally negotiated prices for prescription drugs will also affect the commercial market and are projected to reduce commercial premiums. Under the 3 scenarios, this reduction would decrease government expenditures by $90B to $110B for CY 2020–2029 due to lower federal employer tax exclusion liabilities and exchange market subsidies.6 The modeling excludes impacts on Medicaid, which would likely further alter federal spending estimates due to changes in prices and rebates.
Under Scenario 1, the total number of drugs negotiated by year 5 (i.e., 125 drugs plus all insulins) would represent approximately half of Medicare Part B and D drug spending.7 Although Scenarios 2 and 3 would increase the number of drugs negotiated (i.e., by year 5, 425 drugs plus all insulins under Scenario 2 and 550 drugs plus all insulins under Scenario 3), the drugs added in these scenarios would account for just an additional 10% of Medicare spending.
|Scenario 1||Scenario 2||Scenario 3|
|Medicare Part D||-$585B||-$660B||-$705B|
|Medicare Part B||-$115B||-$195B||-$240B|
|Total Medicare and Commercial||-$790B||-$955B||-$1,055B|
Impact on Manufacturer Revenues
Under the 3 scenarios, manufacturer revenues over the CY 2020–2029 period across both Medicare and the commercial market will decrease by $1,125B to $1,520B. The largest portion of the estimated reduction in manufacturer revenues results from Part D ($590B to $715B), followed by the commercial market ($340B to $410B).
|Scenario 1||Scenario 2||Scenario 3|
|Medicare Part D||-$590B||-$665B||-$715B|
|Medicare Part B||-$195B||-$320B||-$395B|
|Total Medicare and Commercial||-$1,125B||-$1,365B||-$1,520B|
Funding for this research was provided by the Pharmaceutical Research Manufacturers of America. Avalere retained full editorial control.
The modeling estimated the federal budget and industry impacts of the H.R.3 scenarios requested by PhRMA over the CY 2020–2029 federal budget window, using the May 2019 baselines from the Congressional Budget Office (CBO) and based on the version of H.R.3 as released on September 19, 2019. Estimates include impacts to federal spending and industry revenues from the Medicare program (including Part B drug spending under FFS and Medicare Advantage as well as Part D) and the commercial insurance market. As policymakers consider changes to H.R.3 from the version analyzed here, alternative policy options that increase the minimum number of drugs negotiated or the size of price reductions would likely lead to larger decreases in both federal outlays and net manufacturer revenues.
The analysis combined the 2017 Part D and Part B CMS’ Drug Dashboards at the product level and sorted products based on combined Medicare drug sending. Single-source medications were identified using an indicator from the Medi-Span database as of August 2019. However, in some instances, Medi-Span’s single-source indicator may be unreliable for drugs with multiple formulations, which may impact determinations around generic availability.
The analysis used scoring assumptions generally consistent with CBO, such as baseline federal program spending and beneficiaries’ behavioral response to lower cost sharing8 and the relationship between drug utilization and medical costs.9 However, given the uncertainty of behavioral responses by manufacturers and the complexity of comparator countries’ regulations, Avalere did not consider any behavioral responses regarding changes to foreign prices and/or reduced access to products in other countries.
The modeling estimated Medicare Part B effects of Titles I and II using a combination of data sources, including 2017 IQVIA data, provided with permission from PhRMA, the CMS Part B Drug Dashboard, the 2019 Medicare Trustees Report, and the May 2019 CBO baseline for Medicare. Medicare Part D effects due to Titles I, II, and III were estimated using 2017 IQVIA data, provided with permission from PhRMA, and Avalere’s proprietary model of the Part D program, which incorporates data from the 2016 Medicare Current Beneficiary Survey, the 2019 Medicare Trustees Report, CBO, and the CMS Part D Drug Dashboard. The effects of Title I on the commercial market were estimated using the May 2019 CBO baseline for federal subsidies for health insurance coverage for people under age 65, drug sales volumes from Bloomberg, the National Health Expenditures (NHE) projections, and 2017 IQVIA data.
Because the federal government subsidizes commercial market insurance through preferential tax treatment, the estimated federal budget impact includes changes in federal tax exclusions for employer-covered health insurance.10 As the cost of commercial coverage declines, a lower share of employee compensation is excluded from taxable income and federal revenues increase. Similarly, lower premiums for exchange coverage reduce federal costs for premium tax credits. The modeling did not consider federal costs for other federal healthcare programs (including Medicaid, the Veterans Administration, or TRICARE).
1 Recent versions of H.R.3 include new policies (e.g., expansion of Part D low-income subsidy eligibility) and revised policies (e.g., increasing the minimum number of drugs eligible for negotiation) that would also impact federal outlays and manufacturer revenues, but are not included in this analysis.
2 As written, the bill requires the Secretary to negotiate a minimum of 25 new drugs each year, in addition to the 25 or more drugs that were negotiated in previous years.
3 The 6 comparative countries include Australia, Canada, France, Germany, Japan, and the UK. For drugs without an identified AIM, the price negotiated by the Secretary would not exceed 85% of the Average Manufacturer Price (AMP) for the drug.
4 Once the price for each drug is negotiated, the annual growth for the drug price would be capped at the rate of inflation.
5 As written, the bill requires the Secretary to negotiate 25 new drugs each year, plus insulins. Price increases for drugs negotiated in previous years would be limited to the rate of inflation for all subsequent years.
6 Federal subsidies operate through tax exclusion for employer sponsored insurance and advanced premium tax credits for exchange coverage.
7 Avalere assumes the Secretary would select the drugs that represent the highest portion of Medicare Part B and D spending for negotiation under each scenario.
10 Federal subsidies operate through tax exclusion for employer sponsored insurance and advanced premium tax credits for exchange coverage.
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