Note: This insight was originally published on December 12, 2019. It was substantially updated on June 19, 2020, to represent the bill as passed in the House. In March 2021, further results from the analysis were included in an addendum.

H.R.3, the Lower Drug Costs Now Act, was introduced in the US House of Representatives on September 19, 2019, and passed in the House on December 12. To understand how the House-passed H.R.3 could impact federal spending and prescription drug manufacturer revenues over the next 10 years, The Pharmaceutical Research Manufacturers of America (PhRMA) commissioned Avalere to update an earlier analysis of H.R.3 (as introduced on September 19, 2019) that models a range of policy scenarios, illustrating differing degrees of impact based on the number of drugs the Secretary would negotiate each year and the prices negotiated for those drugs.

Similar to the prior analysis that was based on H.R.3 bill text as introduced in September 2019, this Insight focuses on the effects of Titles I and II, as well as section 301 of Title III of H.R.3, as passed in the House on December 12. The House-passed version of H.R.3 includes amendments from the Committee on Energy & Commerce, the Committee on Education & Labor, and the Committee on Ways & Means.  The bill includes 3 main sections that would influence federal spending and drug manufacturer revenues. Specifically, the bill includes:

• Drug Price Negotiation: Directs the Secretary of the Department of Health and Human Services 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 in 2023 and at least 50 drugs in 2024 and beyond, in addition to all insulins and any newly introduced products with a wholesale acquisition cost (WAC) that is at least equal to the US median household income (as determine by the US Census Bureau). 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.¹ The maximum price would be 120% of the average international market price (AIM) across all 6 comparator countries. 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 plans.²
• Inflation-Based Rebates: Requires 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 (inflation-based rebates would be waived for drugs for which a MFP is being applied under the Fair Price Negotiation Program).
• Medicare Part D Benefit Restructuring: Restructures 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 estimates the potential effects of the 3 provisions listed above in the Medicare and commercial markets but does not include impacts to Medicaid. H.R.3 includes other new policies that would also impact federal outlays and manufacturer revenues but that are not included in this analysis. These policies include the expansion of Part D low-income subsidy (LIS) eligibility and the option for non-LIS beneficiaries who reach the OOP cap in the first fill to smooth costs over the course of the year.

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: Under Title I, the Secretary would negotiate prices for the minimum required number of drugs (i.e., 25 drugs in year 1, with 50 additional drugs being negotiated in each subsequent year plus all insulins and newly launched products with a WAC that is at least equal to the US median household income, as determined by the US Census Bureau). 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 50 additional drugs for each subsequent year, for a total of 325 drugs plus all insulins and all drugs with a WAC above the median household income subject to negotiation by 2029. 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 and all drugs with a WAC above the median household income in the first year and an additional 75 drugs in each subsequent year, for a total of 575 drugs plus all insulins and all drugs with a WAC above the median household income 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 and all drugs with a WAC above the median household income in the first year and an additional 75 additional drugs in each subsequent year, for a total of 700 drugs plus all insulins and all drugs with a WAC above the median household income negotiated by 2029. The MFP for the selected drugs is assumed to be the target price.

Under each of the scenarios, the market is likely to experience a range of stakeholder responses that would 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.

Impact on Federal Spending

Across both Medicare and the commercial markets, the analysis finds that the 3 scenarios would reduce federal spending by $850B to $1,060B. Most of this decrease in federal outlays results from reduced government spending across Medicare Part B and D ranging from $755B to $950B.

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 $95B to $110B for CY 2020–2029 due to lower federal employer tax exclusion liabilities and exchange market subsidies.³ 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 would represent approximately half of Medicare Part B and D drug spending.⁴ Although Scenarios 2 and 3 would increase the number of drugs negotiated, the drugs added in these scenarios would account for an additional 10% of Medicare spending.

* Plus all insulins and all drugs with WAC above median household income

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 $1,275B to $1,655B. The largest portion of the estimated reduction in manufacturer revenues results from Part D ($620B to $715B), followed by the commercial market ($420B to $530B).

* Plus all insulins and all drugs with WAC above median household income

March 2021 Addendum

Based on this modeling, Avalere estimates that revenues for brand drug manufacturers net of rebates to payers, mandatory discounts in Part D, and discounts in the supply chain would decline by 34% to 44%, depending on the scenario, over the 10-year period for the Medicare (Parts B and D) and commercial markets.

Funding for this research was provided by PhRMA. Avalere retained full editorial control.

Methodology

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 passed by the House on December 12, 2019. Estimates include impacts to federal spending and industry revenues from the Medicare program (including Part B drug spending under fee-for-service and Medicare Advantage as well as Part D) and the commercial insurance market. As policymakers consider H.R.3 and similar drug pricing bills, options that increase the minimum number of drugs negotiated or the size of price reductions would likely lead to lower federal outlays and net manufacturer revenues.

The analysis combined the 2017 Part D and Part B CMS’s Drug Dashboards at the product level and sorted products based on combined Medicare drug spending. Single-source medications were identified using an indicator from the Medi-Span database as of August 2019. In some instances, however, 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 sharing⁵ and the relationship between drug utilization and medical costs.⁶ 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 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. Avalere assumed that provisions targeting drugs with a WAC above the median household income would affect existing and pipeline cell and gene therapies and that these therapies will be covered by Medicare Part B. To estimate baseline costs and utilization of these products, Avalere used data from Quinn et al. (June 2019) and WAC data for existing cell and gene therapies from the Medi-Span database.⁷

Medicare Part D effects due to Titles I and II, as well as section 301 of Title 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-sponsored health insurance.⁸ 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).

Footnotes

1. 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 for the drug.
2. Once the price for each drug is negotiated, the annual growth for the drug price would be capped at the rate of inflation.
3. Federal subsidies operate through tax exclusion for employer-sponsored insurance and advanced premium tax credits for exchange coverage.
4. 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.
5. CBO, Behavioral Assumptions for Estimating the Effects of Health Care Proposals, November 1993, available at https://www.cbo.gov/publication/41278.
6. CBO, Offsetting Effects of Prescription Drug Use of Medicare’s Spending for Medical Services, November 2012, available at https://www.cbo.gov/publication/43741.
7. Quinn et al. “Estimating the Clinical Pipeline of Cell and Gene Therapies and Their Potential Economic Impact on the US Healthcare System, Value in Health,” 22.6, May 2019, available at https://doi.org/10.1016/j.jval.2019.03.014
8. Federal subsidies operate through tax exclusion for employer sponsored insurance and advanced premium tax credits for exchange coverage.

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