CBO Analysis Doesn’t Tell Full Story on HHS’ Drug Pricing Reform

“How much is this going to cost me?” is always a fair question to ask. For changes to our health care system, an area that intimately touches the lives of so many Americans, answering this question is particularly important.

The Department of Health and Human Services is readying an important first step to address patients’ concerns with prescription drug prices. The proposal would rein in pharmacy benefit manager kickback practices that inflate the cost of drugs and lead to skyrocketing profits. The proposed regulations effectively require discounts to be passed on to consumers at the pharmacy counter.

As HHS Secretary Alex Azar has explained, “Any approach to drug pricing that does not tackle the issue of rebates, whether through our proposed approach or otherwise, will simply not get list prices down.” Not surprisingly, major consumer groups such as Consumer Reports, Consumer Federation of America, U.S. PIRG and Families USA have applauded these essential reforms, which could give patients access to the nearly $166 billion pool of annual manufacturer rebates.

Now the policy wonks at the Congressional Budget Office have weighed in with an estimate that this plan would cost $177 billion over 10 years. The number seems scary, but their analysis is inconsistent with marketplace realities and sound economics. In fact, it overlooks the profound benefits this proposal could have on the lives of individual patients and the overall prescription drug market. Making matters worse, it is possible — some might even say likely — that Congress will exploit CBO’s grossly inadequate cost estimate to generate “phantom savings” that they then will spend on other priorities.

Let me explain.

Under typical CBO practice, if Congress legislatively blocks a proposed rule, CBO credits 50 percent of the anticipated (though not yet realized) cost of the rule as “savings.” So, if Congress simply blocks implementation of the pending proposed rule, it could yield up to $90 billion to spend on other priorities.

But the problem is they will be leaving in place a broken system that disadvantages sick patients while helping to pad the pockets of PBMs. Moreover, the “savings” aren’t even real. They’re phantom savings because the rule has not even taken effect, and therefore, no spending on the rule has occurred. If Congress were to do this, it would be setting a very dangerous precedent while playing budget games at the expense of patients who could have been paying far less for their medicines.

Medicare Part D was conceived, designed and implemented with a competitive marketplace in mind. This market-based structure is the program’s key strength, keeping prices low for seniors through good faith negotiations that ensure the widest availability of treatments. The benefits of these dynamics are understandably hard to estimate because they are intrinsically tied to fluctuating economic and behavioral factors.

CBO’s challenges with modeling go back to the Medicare Part D program’s creation, with an initial estimate that premiums for seniors would reach nearly $60 per month by 2013. That didn’t come to fruition.

Instead, in 2013, Medicare Part D monthly premiums were nearly half that at $31 and since then have risen to $33 per month in 2019. Medicare Part D continues to beat expectations because the market is doing its job, despite these forces remaining woefully undervalued by scorekeepers.

Analysis of rebate reform from the president of the Foundation for Research on Equal Opportunity, Avik Roy, challenges CBO’s cost assumptions, estimating that the proposal would be “significant,” citing one study that found that the rule “could reduce federal spending on government programs by between $78 [billion] and $98 billion over the next ten years, and reduce out-of-pocket and premium costs to seniors in the Part D program by as much as 11 percent.” What sets these studies apart from CBO’s assumptions is that they account for the very real impact these new rules will have on the practices of PBMs and plans, behavior changes that will create savings for both patients and the program, while correcting many of the misaligned financial incentives of industry middlemen.

The course of action laid out by HHS remains the best option for patients. When the Medicare program is healthy, when the prescription drug market is working as it should, and when seniors are getting the quality care they deserve — we all win. Yes, it is important to look at how much proposals will cost the American taxpayer, but it is just as critical to adequately consider the broader benefits of these policies. Namely, how creating a fairer market will help create the savings patients have long called for.


David Balto is a former policy director of the Federal Trade Commission’s Bureau of Competition and a former antitrust lawyer at the U.S. Department of Justice, and he has since represented numerous consumer groups on health care competition issues, including Consumers Union, Consumer Federation of America and Consumer Action.

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