CBO Letter on Health Care Law and Drug Prices
Earlier this afternoon the Congressional Budget Office released a letter to Congressman Ryan analyzing the impact of the health care law on prescription drug spending. Among the conclusions:
- The expanded pharmaceutical price controls in the law will raise prices, because drugmakers will “have an incentive to raise those prices to offset the costs of providing the new discounts and rebates.” CBO estimated that the new discounts in the Medicare “doughnut hole” would raise prices by 1 percent, and expanded rebates in the Medicaid program would raise prices by about 4 percent.
- CBO and the Joint Committee on Taxation estimate that the new tax on drug companies will increase spending by government health programs by about 1 percent. (The tax is apportioned based on pharmaceutical companies’ sales to government programs, so CBO concluded the provisions “would not result in measurably higher costs for private purchasers.”)
- The legislation’s new approval process for follow-on biologics would reduce prices by “about 2 percent in 2019.”
- CBO did not estimate the macro-level effects of the new coverage expansions on drug prices—which some might argue minimizes the impact of the law in raising drug prices, since it fails to consider the impact of the increased demand generated by 30 million newly insured in sparking price inflation. For instance, the Medicare actuary in his analysis of the health care law concluded that “price reactions—that is, providers successfully negotiating higher fees in response to the greater demand—could result in higher total expenditures.”
Also of note in the letter: CBO estimated that the increase in prices due to the new Medicare discount program would be comparatively small because the number of seniors who will benefit from the 50 percent discount is itself relatively small: “CBO estimates that spending on brand-name drugs in the doughnut hole by beneficiaries…constituted about 10 percent of total Part D spending in 2007.” Most seniors do not reach the Medicare coverage gap—and many of those who do are low-income beneficiaries who receive federal subsidies in the “doughnut hole.” And pages 4 and 5 of the CBO letter confirmed that for these populations, the impact of the health care law will be slight.