Tuesday, November 09, 2010

Healthcare Reform and Drug Prices

The Congressional Budget Office (CBO) just released a new analysis of the impact of the Patient Protection and Affordable Care Act (PPACA) on pharmaceutical pricing. Click here to download this dense but thought-provoking analysis.

The memo does two things well. One, the CBO succinctly explains key provisions of the law that could affect drug prices. Two, the CBO describes how the PPACA could influence manufacturers' pricing strategies and the net prices paid by pharmacies or payers.

The memo reminds me of a favorite quote attributed to Laurence J. Peter: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.” Many of the conclusions are highly speculative, but it’s impossible to challenge the quantitative forecasts because the CBO does not describe any methodology.

So, ask me in 10 years (or in the year 3000?) whether the CBO’s predictions came true. I’ll be able to explain the answer no matter what happens.

Here are few predictions that caught my attention. See the memo for the scanty details behind these prognostications.

Higher prices for Part D drugs: “Overall, CBO expected that net prices of drugs (as defined above, the prices paid by pharmacies less any rebates paid by manufacturers) under Part D would increase by about 1 percent, on average, as a result of the manufacturers’ response to the discount program.”

Higher prices for to-be-launched drugs: “CBO expected that manufacturers would offset some of the higher rebates they will pay by charging higher launch prices for new drugs—particularly breakthrough drugs that use new mechanisms to treat illnesses.”

Slower price increases for existing drugs: “Manufacturers’ ability to raise prices on drugs that are already on the market is constrained, however, by the additional rebate required for drugs whose prices grow faster than inflation.”

Higher list prices: “Overall, CBO expected that the combination of the higher required Medicaid rebate and the new required Medicare discount would lead manufacturers to increase the average price paid by retail pharmacies for new drugs by about 4 percent.”

Medicaid will pay less for drugs: “The combined effect of the increase in prices and new rebates is that Medicaid would pay less for drugs, on average, than it would in the absence of those provisions.”

Minimal impact from biosimilars: “CBO estimated that the average reduction in prices across all drugs resulting from the abbreviated approval pathway for follow-on biologics would be about 2 percent in 2019.”

Larger rebates to commercial payers: “However, for people covered by employment-based health plans, CBO expected that net prices would probably not increase because those plans would be able to negotiate larger rebates that roughly offset the higher prices paid by pharmacies.”

P.S. Welcome back, Conan!

Note to email subscribers: Sorry if you received a duplicate or non-functional email this morning. Our email provider had some technical difficulties today.


  1. Great summary. Glad to see the government is assessing the impact of their actions AFTER they're in place...

  2. I know it is fashionable to bash the government these days, but given the political bloodbath that occurred leading up to the passage of this legislation, how could anyone (government included) have analyzed the impact it would have without knowing which bill would pass? It changed everyday. For all the speculation involved in this type of analysis, seven months to get a full report seems pretty efficient to me.

  3. Great summary. Glad to see the government is assessing the impact of their actions AFTER they're in place...