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Impact of H.R.3 on Federal Spending and Drug Manufacturer Revenues

Summary

New analysis from Avalere finds that HR3 could reduce federal spending by $737B and decrease manufacturer revenues by $1T for CY 2020–2029.

On September 19, Speaker Nancy Pelosi (D-CA) introduced H.R.3, the Lower Drug Costs Now Act. The bill would make significant changes to the drug pricing landscape and includes 3 main sections that influence federal spending and drug manufacturer revenues. Specifically, the bill includes:

  • Drug Price Negotiation: Direct the Secretary of the Department of Health and Human Services to negotiate prices with drug manufacturers for certain single-source products with high spending. The secretary would be required to negotiate a minimum of 25 drugs per year, in addition to all insulins. The price negotiated by the secretary for the selected drugs would be available to the Medicare program and to commercial payers.
  • Inflation-Based Rebates: Require manufacturers to pay a rebate to the federal government if a 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 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.

In order to understand how H.R.3 will impact federal spending and prescription drug manufacturer revenues over the next 10 years, Avalere estimated the potential effects of the 3 provisions listed above in the Medicare and commercial markets. Avalere’s analysis finds that H.R.3 would reduce federal spending by $737B and decrease manufacturer revenues by $1T for CYs 2020–2029 in the Medicare and commercial markets. While Avalere recognizes changes to foreign prices may result from of H.R.3, Avalere’s model did not assume any changes in foreign country prices relative to US prices given the uncertainties of those projections. In addition, Avalere did not include impacts to Medicaid, which would likely alter federal spending due to reductions in prices and reduced rebates.

Change in Federal Outlays Change in Manufacturer Net Revenues
Medicare Part D -$570B -$574B
Medicare Part B -$77B -$129B
Total Medicare -$647B -$703B
Commercial -$90B -$320B
Total Medicare and Commercial -$737B -$1.023T

The largest reduction in federal outlays is a result of a decrease of $647B in spending across Medicare Parts B and D. Similarly, the majority of the estimated decrease in manufacturer revenues, $703B, are projected to come from Medicare Parts B and D. Avalere assumed that the prices negotiated for the affected drugs would be set, on average, at 120% of their average international market price, the specified ceiling price.

Federal negotiation of prescription drugs will apply to the commercial market and is projected to reduce commercial premiums. Avalere estimates that this reduction will decrease federal employer tax exclusion liabilities and exchange market subsidies by $90B for CYs 2020–2029.1 Manufacturer revenues are projected to decrease in the commercial market by $320B over the 10-year period. This excludes impact on Medicaid, which would likely alter federal spending due to reductions in prices and reduced rebates.

Avalere assumed the secretary would negotiate the minimum number of drugs required by the legislation—i.e., 25 additional drugs each year and all insulins.2 If the secretary negotiated the minimum number of drugs each year, Avalere finds that drugs negotiated by year 5 would represent nearly half of Medicare Parts B and D spending.

Funding for this research was provided by the Pharmaceutical Research Manufacturers of America. Avalere retained full editorial control.

Methodology

Avalere estimated the federal budget and industry impacts of H.R.3 over the CYs 2020–2029 federal budget window, using the May 2019 baselines from the Congressional Budget Office (CBO). Estimates include impacts to federal costs 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.

Avalere used scoring assumptions generally consistent with CBO. Given the timeline available for this analysis and the complexity of different countries’ regulations, Avalere assumed manufacturers do not raise prices or reduce access in foreign countries. While not quantified here, Avalere recognizes changes to foreign country prices may result from H.R.3 and is currently assessing the extent to which such changes in global pricing strategies may occur or be possible based on laws and regulations in different countries.

Avalere estimated Medicare Part B effects due to Titles I and II using a combination of data sources, including the CMS Part B Drug Dashboard, the 2019 Medicare Trustees Report, and the May 2019 CBO baseline for Medicare. Avalere estimated the impact of Title I using information on international drug prices using a study published by the Committee on Ways and Means and a study published in Health Affairs.3,4,5 Avalere estimated Medicare Part D effects due to Titles I, II, and III using 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. Avalere estimated the effects of Title I on the commercial market using the May 2019 CBO baseline for federal subsidies for health insurance coverage for people under age 65, drug sales volumes from Bloomberg, and the National Health Expenditures projections, 2018–2027 data from CMS.

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.6 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. Avalere did not consider federal costs for other federal healthcare programs (including Medicaid, the Veterans Administration, or TRICARE).

Avalere used standard CBO assumptions regarding beneficiary response to lower cost sharing7 and the relationship between drug utilization and medical costs.8

Notes

1. Federal subsidies operate through tax exclusion for employer sponsored insurance and advanced premium tax credits for exchange coverage.

2. As written bill requires the secretary to negotiate 25 new drugs each year. Prices for drugs negotiated in previous years would increase by the rate of inflation for all subsequent years.

3. House Committee on Ways and Means, A Painful Pill to Swallow: U.S. vs. International Prescription Drug Prices. September 2019.

4. So-Yeon Kang, Michael J. DiStefano, Mariana P. Socal, and Gerard F. Anderson, “Using External Reference Pricing in Medicare Part D to Reduce Drug Price Differentials with Other Countries,” Health Affairs, May 2019.

5. Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Comparison of US and International Prices for Top Medicare Part B drugs by Total Expenditures, October 25, 2019.

6. Federal subsidies operate through tax exclusion for employer sponsored insurance and advanced premium tax credits for exchange coverage.

7. Congressional Budget Office, Behavioral Assumptions for Estimating the Effects of Health Care Proposals, November 1993.

8. Congressional Budget Office, Offsetting Effects of Prescription Drug Use of Medicare’s Spending for Medical Services, November 2012.

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