By 2031, West Health estimates that a market-wide penalty on drug price increases above inflation would:
Penalties on drug price increases above the rate of inflation have been proposed in various forms, including penalties on both commercial and Medicare drug sales as well as just sales under the Medicare program. The Inflation Reduction Act of 2022 includes a penalty for drug price increases above the rate of inflation, but this penalty only applies to sales under the Medicare program. The Congressional Budget Office (CBO) has estimated that this inflation penalty will have a spillover effect onto the commercial market, lowering drug price increases and generating an additional $7 billion in payroll taxes due to lower insurance premiums stemming from lower drug prices. An earlier version of the legislation applied the inflation penalties to both Medicare and the commercial market, and CBO previously estimated that this approach would generate payroll tax revenues of over $38 billion. However, CBO's analysis does not separately estimate the total impact on the commercial insurance market, including reductions in premiums and cost sharing.
Previously, West Health estimated the impact of inflation penalties in the commercial market on Federal payroll tax revenues, prospectively modeling the impact on employee cost-sharing, employee premiums, and employer premiums and then estimating the increase in payroll tax that CBO would score based on those cost reductions. That estimate relied upon an earlier approach to inflation penalties based on an index year of 2016 instead of the 2021 index year in the Inflation Reduction Act of 2022. For the current analysis, West Health used the earlier ratio of savings due to the inflation penalty across employee cost-sharing, employee premiums, and employer premiums and applied it to the total estimated reduction in insurance premiums that would generate the $38 billion in greater payroll tax revenue estimated by CBO. To estimate the reduction in insurance premiums, West Health applied the approach from the Health Savers Initiative used to estimate the relationship between commercial insurance premium reductions and payroll tax revenues.
Table 1. Commercial market savings from penalties on drug price increases above inflation, 2023-2031.
An inflation penalty applied to both Medicare and the commercial market will yield significant cost savings for employers and employees. Previously, West Health estimated that an inflation penalty applied only to Medicare would generate $31 billion in savings for employers and workers. Extending the inflation penalty to sales in the commercial market would further reduce drug price increases, generating an additional $145 billion in lower costs and generating an additional $31 billion in payroll tax revenue.