Federal Revenue Generated by Extending Drug Price Inflation Caps to the Commercial Market

November 3, 2021
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Key Findings

By 2030, West Health estimates inflation rebates applied to the commercial market would:

  • Generate between $152 billion to $163 billion in federal tax revenues
Federal Revenue Generated by Extending Drug Price Inflation Caps to the Commercial Market

Existing Problem

The burden of high and rising drug prices is a concern for employers and their workers. A West Health-Gallup survey found that 15.5 million adults (under 65) were unable to pay for at least one of their prescribed medications. To address this significant burden that Americans face, policymakers have made several policy proposals intended to lower costs. A recent policy framework announced by President Biden included little in the way of drug pricing provisions. The notable exclusion of drug pricing policy, including both Medicare negotiation and inflation rebates, is being regarded as leaving an opportunity for future policies, rather than passing a weakened version. The Elijah Cummings Lower Drug Costs Now Act (H.R. 3), which many Democrats were pushing to be included in the reconciliation bill, would reduce the burden of high costs for consumers and ensure that future price increases are limited.

In 2019, Democrats introduced the Elijah Cummings Lower Drug Costs Now Act, which addresses drug prices in two separate approaches. Title I, the “Lowering Prices Through Fair Drug Price Negotiation” provision, would empower the Secretary of Health and Human Services (HHS) to negotiate prices directly with drug manufacturers for up to 250 of the costliest single-source brand drugs on the market. Negotiations would begin in 2023 and then each year thereafter HHS would establish a list of eligible drugs for which manufacturers would be required to negotiate prices. Title II, the “Medicare Parts B and D Prescription Drug Inflation Rebates” provision, would require manufacturers to limit price increases to the rate of inflation by paying any greater price increase back as a rebate.

As drafted in 2019, inflation rebates under Title II were limited only to federal drug purchases, meaning that commercial market sales were not subject to any limit on price increases. In September 2021, the House Committee on Ways and Means revised H.R. 3 to calculate inflation penalty rebates on drugs paid for by both the federal government and commercial insurance plans. These changes would extend inflation protections to the commercial market. While the Congressional Budget Office (CBO) has estimated the impact of the original version of H.R. 3 on federal direct spending and revenues, CBO has yet to publicly estimate the effect of these revisions.

Methodology and Results

Building from an earlier analysis that estimated savings to the commercial market, the West Health Policy Center commissioned the actuarial firm Milliman to estimate the percentage reduction in commercial spending from the September 2021 revisions to H.R. 3. Milliman modeled the changes in commercial market claims, both medical and drug spending, for both Title I and Title II of H.R. 3 under two scenarios. Scenario A considers the September 2021 revised version of H.R. 3 that extends the inflation rebates to the commercial market. Scenario B, which was considered at the request of the West Health Policy Center, considers a policy where negotiated prices under Title I are not available to the commercial market but inflation rebates under Title II are. Milliman estimated that, between 2023-2029, net claims cost would decrease by 7.3% if both provisions were applied to the commercial market (Scenario A) and net claims cost would decrease by 6.8% if only inflation rebates were extended to the commercial market (Scenario B).

Separately, the West Health Policy Center estimated the effect of these savings on federal revenues. Because these savings would reduce insurance premiums and would result in greater payments to workers, these commercial savings would also generate federal revenues from increased payroll taxes. To estimate federal revenues from Milliman’s overall savings estimates, West Health Policy Center used the methodology from a previous analysis to estimate commercial savings as well as the approach from the Health Savers Initiative to estimate changes in federal revenues.

West Health Policy Center estimated that the original version of H.R. 3 would only generate $56 billion in increased federal revenues through greater payroll taxes. However, if these inflation protections are extended to the commercial market (Scenario A), federal revenues are estimated to increase to as much as $163 billion. Alternatively, under Scenario B, inflation penalties in the commercial market would increase federal revenues by$152 billion.

Considerations for Policymakers

As Congress continues to debate the best way to lower drug prices for patients, policymakers should be mindful of the significant savings that the inflation rebates would generate for the commercial health insurance market. These savings would increase workers’ take-home pay and therefore increase federal tax revenues.

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