New Democratic Party: Family doctor guarantee by 2030

The NDP says its plan will ensure every Canadian will be able to find a family doctor by 2030. Much like its rivals, the party is promising to implement a pan-Canadian licensure and increase residency spots for internationally trained physicians by an unspecified amount.

The party is also pledging to boost Canada Health Transfers by an additional 1% and working with territorial governments to provide housing for doctors and primary care teams in the territories.

The NDP platform also sets out a timeline for when they plan on expanding pharmacare. The party says within the first year of its mandate, it would get deals with every province to cover birth control and diabetes medication and expand it by the end of the first year to cover essential medicine. Full coverage would come by the end of four years.

As part of the party’s response to the U.S. tariffs, the New Democrats are also promising to ban American corporations from buying Canadian health facilities and say no to any trade deals that would impact healthcare coverage in Canada.

Other promises include introducing a public plan to cover psychotherapy and counselling, banning “cash-for-care” clinics in the Canada Health Act and reducing the administrative burden for doctors and other clinicians.

Bloc Québécois: Boosting Quebec’s health transfers

The Bloc’s platform says comparatively little when it comes to healthcare policy. The party supports increasing federal health transfers to cover 35% of Quebec’s public healthcare system.

The increase in health transfers will also be key to combatting the fentanyl crisis in order to fund more rehab centres, emergency care, social workers and supervised consumption sites, the party says.

In addition, the party says it will call on the federal government to transfer Quebec’s dental care programs to be administered by RAMQ (Quebec’s public health insurance board) rather than a private insurer.

Unlike the other parties, the Bloc has taken a less bullish position on reducing interprovincial trade barriers. The party says it would “categorically oppose any attempt to impose harmful policies on Quebec under the pretext of interprovincial free trade,” such as replacing Quebec’s own regulatory collages.

Green Party: Adding mental health to the Canada Health Act

The Green Party’s platform includes a commitment to pass a “Primary Care Health Act” that would guarantee access to primary care, in addition to hiring 7,500 new family doctors, nurses and nurse practitioners over the next five years.

The party is also proposing several amendments to the Canada Health Act, including one that would make mental health services fully covered under the act. The Greens also want the act to ban the expansion of for-profit clinics and user fees.

On the issue of medical assistance in dying (MAID), the Greens want to create an independent federal oversight body to regulate MAiD and mandate that no person be offered it before being provided access to housing, healthcare or other supports.

In addition, the Green Party platform contains several proposals related to climate and environmental health, such as mandating workplace protections for climate-related impacts and creating a national database for doctors and emergency rooms to track adverse effects of pesticides and chemicals. The party is also proposing adding disease prevention and climate risks to Health Canada’s mandate, along with training health professionals on climate-related health threats.

Trump’s win could accelerate the privatization of Medicare

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Former President Donald Trump’s pending return to the White House could alter the very nature of Medicare, the nearly 60-year-old federal program.

More than half of Medicare beneficiaries are already enrolled in plans, called Medicare Advantage, run by commercial insurers. Based on Trump’s campaign positions and previous policies, that proportion is now expected to grow – perhaps dramatically – for a number of reasons

Trump and many congressional Republicans have already taken steps to aggressively promote Medicare Advantage. And Project 2025, a political wish list produced by the conservative Heritage Foundation for the next presidency, calls for making insurer-run plans the default enrollment option for Medicare.

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Such a change would effectively privatize the program, because people tend to stick with the plans they’re initially enrolled in, health analysts say. Trump has repeatedly tried to distance himself from Project 2025, though the document’s authors include numerous people who worked in his first administration.

Conservatives say Medicare beneficiaries are better off in the popular Advantage plans, which offer more benefits than the traditional, government-run program. Critics say increasing insurers’ control of the program would trap consumers in health plans that are costlier to taxpayers and that can restrict their care, including by imposing onerous prior authorization requirements for some procedures.

“Traditional Medicare will wither on the vine,” said Robert Berenson in an October interview. He’s a former official in the Jimmy Carter and Bill Clinton administrations who’s now a senior fellow at the Urban Institute, a left-leaning research group.

Medicare, which covers about 66 million people, is funded largely by payroll taxes. At age 65, most Americans are automatically enrolled in Medicare coverage for hospitalization and doctor visits, known as Part A and Part B.

Consumers must sign up separately for other aspects of Medicare, specifically drug coverage (Part D) and supplemental plans from insurers that pay for costs that aren’t covered by traditional Medicare, such as extended stays in skilled nursing facilities and cost sharing.

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People on Medicare pay premiums, plus as much as 20% of the cost of their care.

Medicare Advantage plans typically combine coverage for hospital and outpatient care and prescription drugs, while eliminating the 20% coinsurance requirement and capping customers’ annual out-of-pocket costs. Many of the plans don’t charge an extra monthly premium, though some carry a deductible — an amount patients must pay each year before coverage kicks in.

Sometimes the plans throw in extras like coverage for eye exams and glasses or gym memberships.

However, they control costs by limiting patients to networks of approved doctors and hospitals, with whom the plans negotiate payment rates. Some hospitals and doctors refuse to do business with some or all Medicare Advantage plans, making those networks narrow or limited. Traditional Medicare, in comparison, is accepted by nearly every hospital and doctor.

Medicare’s popularity is one reason both Trump and Harris pledged to enhance it during their campaigns. Trump’s campaign said he would prioritize home care benefits and support unpaid family caregivers through tax credits and reduced red tape.

The Trump campaign also noted enhancements to Medicare Advantage plans during his first tenure as president, such as increasing access to telehealth and expanding supplemental benefits for seniors with chronic diseases.

But far less attention has been paid to whether to give even more control of Medicare to private insurers. Joe Albanese, a senior policy analyst at Paragon Health Institute, a right-leaning research group, said in October “a Trump administration and GOP Congress would be more friendly” to the idea.

The concept of letting private insurers run Medicare isn’t new. Former House Speaker Newt Gingrich, a Republican, asserted in 1995 that traditional Medicare would fade away if its beneficiaries could pick between the original program and private plans.

The shift to Medicare Advantage was accelerated by legislation in 2003 that created Medicare’s drug benefit and gave private health plans a far greater role in the program.

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Lawmakers thought private insurers could better contain costs. Instead, the plans have cost more. In 2023, Medicare Advantage plans cost the government and taxpayers about 6% — or $27 billion — more than original Medicare, though some research shows they provide better care.

The first Trump administration promoted Medicare Advantage in emails during the program’s open enrollment period each year, but support for the privately run plans has become bipartisan as they have grown.

“It helps inject needed competition into a government-run program and has proven to be more popular with those who switch,” said Roger Severino, in an interview before the election. He was lead architect of Project 2025’s section on the Department of Health and Human Services. He served as director of HHS’ civil rights office during the Trump administration.

But enrollees who want to switch back to traditional Medicare may not be able to. If they try to buy supplemental coverage for the 20% of costs Medicare doesn’t cover, they may find they have to pay an unaffordable premium. Unless they enroll in the plans close to the time they first become eligible for Medicare, usually at age 65, insurers selling those supplemental plans can deny coverage or charge higher premiums because of preexisting conditions.

“More members of Congress are hearing from constituents who are horrified and realize they are trapped in these plans,” said Andrea Ducas in October. She’s vice president of health policy at the Center for American Progress, a liberal public policy organization.

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF.

Ms. Harris wants to enshrine the protections of Roe v. Wade in federal law now that the Supreme Court has overturned it.

“When I am president of the United States, I will sign a law restoring and protecting reproductive freedom in every state,” she wrote in July. To do that, she would need not just Democratic majorities in Congress but also 50 senators willing to get rid of the filibuster, which requires 60 votes to pass most legislation. She confirmed in September that she supported eliminating the filibuster to pass an abortion rights bill.

Ms. Harris said last year that she and President Biden envisioned a law mirroring Roe. As modified by Planned Parenthood v. Casey, Roe broadly protected the right to abortion until a fetus could survive outside the womb but allowed bans after that point so long as they had exceptions for medical emergencies. “We’re not trying to do anything that did not exist before June of last year,” she told CBS News.

She told NBC News in October that she did not support “concessions” within an abortion-rights bill to win Republican support. “I don’t think we should be making concessions when we’re talking about a fundamental freedom to make decisions about your own body,” she said.

As a senator, she was a sponsor of a bill called the Women’s Health Protection Act that would have gone somewhat further than Roe by prohibiting some state-level restrictions, such as requiring doctors to perform specific tests or to have hospital admitting privileges in order to provide abortions. She reiterated her support for it in 2022.

She also argued, while running for president in 2019, that states with a history of restricting abortion rights in violation of Roe should be subject to “pre-clearance” for new abortion laws, meaning those laws would have to be federally approved before they could take effect. Her campaign did not respond to a request to confirm whether she would still support this if Congress codified Roe. (Without such codification, the proposal is moot.)

In the absence of congressional majorities capable of codifying Roe, Mr. Biden’s cabinet took administrative actions to try to limit the effects of state abortion bans, and Ms. Harris has indicated support for those actions.

The Department of Health and Human Services told hospitals in 2022 that a law pertaining to emergency rooms, the Emergency Medical Treatment and Labor Act, obligates doctors to perform an abortion if they believe it is needed to stabilize a patient. (That guidance is subject to legal challenges on which the Supreme Court has so far declined to rule.) In April, the same department announced a rule to shield many abortion patients’ medical records from investigators and prosecutors.

At a Glance In this report, the Congressional Budget Office discusses the factors underlying prescription drug prices and examines a set of policy approaches aimed at reducing those prices. The agency assesses how each approach, if implemented in 2025, would affect average drug prices for purchasers in the United States in 2031. Inclusion or exclusion of any approach does not imply an endorsement or a rejection by CBO. Some of the approaches that CBO examined aim to reduce prescription drug prices by capping them or limiting their growth; others would reduce prices by promoting price competition or affecting the flow of information. One examined approach would reduce prices by more than 5 percent—and possibly substantially more. That approach would set maximum allowed prices based on prices outside the United States. An approach that expanded the Medicare Drug Price Negotiation Program would lead to a small reduction (1 percent to 3 percent) or a very small reduction (less than 1 percent) in average prices. An approach requiring manufacturers to pay inflation rebates for sales in the commercial market would lead to a small price reduction. Four approaches would lead to a very small price reduction, no reduction, or a price increase. Those approaches would: Allow commercial importation of prescription drugs distributed outside the United States,

Eliminate or limit direct-to-consumer prescription drug advertising,

Facilitate earlier market entry for generics and biosimilar drugs (which are analogous to generic drugs but are made from living organisms), or

Increase transparency in brand-name drug prices. Reducing drug prices would save money for patients and payers, but reducing manufacturers’ expected revenue from drugs that are not yet on the market would make investments in pharmaceutical research and development less profitable, thus decreasing the number of new drugs developed and introduced. Larger reductions in expected revenue would have a greater effect than smaller reductions. Some approaches would have smaller effects on the prices of drugs launched after the approach was implemented than on those that were on the market beforehand. Additionally, some approaches would disrupt the availability of drugs in other countries, increase foreign drug prices, or both.

Notes About This Report This report focuses on prescription drugs purchased through retail channels, such as from local brick-and-mortar pharmacies and mail-order pharmacies. Because insurers use different payment mechanisms for prescription drugs that are administered by physicians or other health care professionals in outpatient settings or hospitals, prices for those drugs are not within the scope of this report. In the Medicare program, prescription drugs purchased in retail settings (and thus within the scope of this report) are covered under Part D, whereas drugs administered by physicians or other health professionals are covered under Part B. Unless otherwise specified, in this report, a “prescription drug price” refers to the net retail price of a single unit of a prescription drug dispensed to a patient. The prescription drug price includes the amount paid to the pharmacy at the point of sale, including any cost-sharing obligation paid by patients, plus any payments by insurers or pharmacy benefit managers and minus any subsequent rebates or other payments from manufacturers or pharmacies to the purchasers of the drug. The Congressional Budget Office examined how each policy approach in the report would affect the average net retail prices of prescription drugs in the United States—including prices for brand-name, generic, and biosimilar drugs—compared with prices under current policies in 2031. CBO characterized each approach as leading to a large, moderate, small, or very small reduction in the average prices of all retail prescription drugs or as causing no change or an increase in prices. An average estimated price reduction of more than 5 percent (whether substantially or slightly more than 5 percent) is referred to as large; a reduction of 3 percent to 5 percent is categorized as moderate; a reduction of 1 percent to 3 percent is small; and a reduction of 0.1 percent to 1 percent is very small. Any smaller price reduction or any price increase is described as no change or as an increase.

Summary In this report, the Congressional Budget Office discusses the economics of prescription drug prices and the global pharmaceutical market and evaluates a set of policy approaches aimed at reducing the average prices of prescription drugs distributed through the retail channels in the United States. CBO selected the approaches examined in the report because they have been included in proposed legislation, discussed in the academic public policy community, or used in high-income foreign countries. Inclusion or exclusion of any approach does not imply an endorsement or a rejection by CBO. This report focuses on the average prices that public and private purchasers pay for drugs in retail settings, net of postsale rebates and discounts. To the extent that approaches reduced manufacturers’ expected revenue or increased their investment costs, those approaches would reduce manufacturers’ incentives to engage in research and development (R&D) and would slow the pace of innovation in the pharmaceutical industry; those effects are discussed in the last section of this report. What Determines the Prices of Brand-Name Prescription Drugs? Several factors determine the prices of brand-name prescription drugs in the United States. One is the exclusive sales rights conferred under current law to manufacturers of newly approved brand-name drugs. In addition, prices in different market segments are influenced by regulations and other factors such as the prevalence and characteristics of health insurance coverage for prescription drugs. Competition from drugs with similar clinical effects can often reduce brand-name prices for all buyers. Exclusive sales rights are conferred through patents and through rules governing drug approvals by the Food and Drug Administration (FDA). The period of exclusive sales rights for new drugs can vary in length because of patent litigation and other factors. Among a sample of brand-name drugs examined in a recent study, exclusivity periods lasted less than 12 years for a quarter of the drugs, 12 to 17 years for half of the drugs, and longer than 17 years for the remaining quarter. Those exclusive sales rights give manufacturers leverage in negotiating brand-name drug prices with insurers and other purchasers of prescription drugs. Manufacturers earn most of their profits from a typical brand-name drug during the period of exclusivity, and the prices they charge are higher than they would be if consumers could obtain the same drugs from competing manufacturers. Insurance coverage, another factor affecting brand-name drug prices, insulates consumers from much of the cost of the drugs they use, making demand less sensitive to prices for insured patients. In some cases, federal law requires insurers to cover some or all drugs in a therapeutic class (a group of drugs that treat the same condition), which increases manufacturers’ leverage in negotiating prices with insurers. Manufacturers maximize their global revenue by charging different prices in different market segments, depending on the demand characteristics of those segments. Those demand characteristics reflect differences both in buyers’ willingness to pay and in the regulations affecting prices in various markets. Differences in drug prices paid in different countries in part reflect that market segmentation, as do differences in prices paid by various purchasers within the United States. The presence of multiple competing products in prescription drug markets puts downward pressure on prices faced by payers. For example, if a brand-name drug in its exclusivity period faces competition from at least one alternative brand-name product with similar clinical effects, its price will tend to be lower than it would be if the drug faced no such competition. At the end of that brand-name drug’s exclusivity period, the availability of a generic equivalent or a biosimilar creates even more competitive pressure; when several generic or biosimilar versions of the drug become available, consumers obtain them at significantly lower prices. How Would Different Policy Approaches Affect Prescription Drug Prices? In this report, CBO examines seven policy approaches to reduce the net prices of retail prescription drugs in the United States. Broadly, three of the approaches would operate by capping the prices of prescription drugs or limiting price growth: Setting maximum allowed prices based on prices outside the United States;

Expanding the Medicare Drug Price Negotiation Program, either to increase the number of drugs that undergo price negotiation each year or to make negotiated prices available in the commercial market; and

Requiring manufacturers to pay inflation rebates for sales in the commercial market. Four other approaches would operate by promoting price competition or by affecting the flow of information: Allowing commercial importation of prescription drugs distributed abroad;

Eliminating or limiting direct-to-consumer (DTC) advertising of prescription drugs;

Facilitating earlier market entry for generic and biosimilar drugs; and

Increasing transparency in brand-name drug prices. CBO assessed how each of the seven approaches included in the report would affect average retail drug prices in 2031, when the total retail prescription drug market is projected to surpass $690 billion. For each approach, the effects would depend on the specifics of the policy (see Table S-1). The estimated effects of the approaches on price are characterized by size: An average price reduction of more than 5 percent is considered large; a reduction of 3 percent to 5 percent is moderate; a reduction of 1 percent to 3 percent is small; a reduction of 0.1 percent to 1 percent is very small; and a reduction of less than 0.1 percent or a price increase is described as no change or as an increase. Table S-1. Approaches to Reducing Prescription Drug Prices Notes Data source: Congressional Budget Office. a. CBO examined several policies for its analysis of this approach. In the agency’s estimate, one policy would reduce average drug prices by less than 0.1 percent, and each of the others would reduce average drug prices by 0.1 percent to 1 percent. CBO found that most of the approaches examined would have small or very small effects on prices. One approach—setting maximum allowed prices based on prices outside the United States—would have a large effect. None of the approaches examined would have an effect falling within the moderate range. Because of the size of the retail prescription drug market, even very small price changes could reduce drug spending by billions of dollars. The amount of savings that would accrue to any particular payer or program would depend on the specifics of the policy. The effects of the approaches on average prices would change over time. For example, policies that exerted a greater effect on the prices of drugs already on the market than on future drugs would tend to have diminishing effects over time as more new drugs were launched and made up a greater share of the total market. Many of the approaches would affect one or more subsets of retail drug sales and leave other sales unaffected. For example, in CBO’s estimation, making negotiated prices available in the commercial market would lower the prices paid by commercial payers for drugs whose prices are subject to negotiation under current law by the Secretary of Health and Human Services (HHS), as well as the prices they pay for some other drugs that are therapeutic competitors of those selected for price negotiation. That same policy would also affect the prices of those sets of drugs in Medicare Part D and Medicaid. Prices of other drugs would be unaffected. The overall price effect of such a policy would be a weighted average of the resulting price changes for affected sales and a price change of zero for unaffected sales. That policy would have a diminishing effect on prices over time because the prices of new drugs would decrease by less than those of drugs already on the market. This report discusses other considerations relating to the approaches beyond their effects on average prices and on the development of new drugs. Some approaches could involve logistical or legal challenges that would need to be resolved before they could be implemented; others would affect the prices or availability of prescription drugs in foreign countries. CBO did not estimate the specific effects of the different approaches on the federal budget, though the report includes a general discussion of the budgetary effects of changes in prescription drug prices. How Would Different Policy Approaches Affect the Development of New Prescription Drugs? Policies concerning prescription drugs involve a tradeoff between lowering prices for brand-name prescription drugs and fostering development of new prescription drugs for the future. The effect an approach would have on manufacturers’ incentives to engage in research and development largely depends on how it would affect those manufacturers’ expectations of future revenue or their cost of financing investment capital. Manufacturers decide whether to invest in pharmaceutical R&D by weighing the expected revenue from new drugs against their expected development costs, which include financing costs. Manufacturers base their expected revenue on worldwide sales and not just those in the United States. But because the U.S. prescription drug market is larger than that of any other country, it plays an important role in manufacturers’ decisions about R&D investments. Policies that would lower the net prices paid to manufacturers for new prescription drugs would reduce manufacturers’ expectations of future revenue. Policies that would lower their current revenue from products already on the market would, in some cases, make it harder for them to finance R&D investments without borrowing, thereby increasing their investment costs. Either of those effects would discourage manufacturers from investing in pharmaceutical R&D, and policies that induced larger changes in expected revenue or capital costs would have more pronounced effects on drug development. Because revenue earned earlier in a drug’s product cycle has a greater present value than the same amount of revenue earned later, reductions in expected revenue that occurred earlier in a drug’s life cycle would tend to dampen incentives to develop new products more than reductions occurring later would. (A present value expresses the flows of current and future income or payments as a single number. That number, in turn, depends on the discount factor used to translate future cash flows into current dollars.)

Chapter 1: Factors That Determine Prescription Drug Prices Once a drug has been developed and approved for sale, drug manufacturers set the price to maximize their revenue. Resources that have already been expended on research and development (R&D) activities represent sunk costs and are not a relevant consideration for manufacturers in determining that price. Pharmaceutical firms considering an R&D project assess the project’s expected costs, along with the likelihood of success in developing a new marketable drug and—if it is approved for sale—the revenue it would earn. The prices that maximize manufacturers’ revenues from brand-name drugs depend on factors such as exclusive sales rights for newly approved brand-name products, the prevalence of health insurance coverage for prescription drugs, and buyers’ willingness to pay for brand-name drugs in various market segments. Regulations also often affect the prices of brand-name drugs, particularly in developed foreign countries. Brand-name drugs often face competition from other drugs with similar clinical effects, which can put downward pressure on prices. The exclusive sales rights conferred under current law to manufacturers of brand-name drugs are a key factor determining prescription drug prices in the United States. Exclusive sales rights enable those manufacturers to charge higher prices than they could if their drugs faced direct competition from generic or biosimilar versions, particularly when those brand-name drugs have no close therapeutic substitutes. They are less able to charge higher prices when other drugs on the market confer similar clinical benefits. Manufacturers make most of their total revenue from a brand-name drug during its period of exclusivity. After that period ends, other manufacturers are permitted to sell competing generic or biosimilar versions, and the resulting competition puts downward pressure on the prices consumers pay. Another factor influencing brand-name drug prices is insurance coverage for prescription drugs, which insulates consumers from some of the cost of drugs, dampening the incentive for patients or providers to economize. When a patient has reached an annual limit on out-of-pocket spending, all further drug costs are borne by the insurer, so the patient no longer has any incentive to economize. The combination of exclusive sales rights and insurance can give drug manufacturers considerable leverage in their price negotiations with purchasers, leading to higher prices. In many high-income foreign countries, drug manufacturers’ ability to set prices is limited by regulations or greater sensitivity to prices, even when those manufacturers have exclusive sales rights and patients are covered by insurance. As a result, the foreign price for a particular brand-name prescription drug is often less than half the corresponding price in the United States. For generic drugs, prices in the United States and other high-income countries are more comparable. Trends in Prescription Drug Prices Growth in average prices for brand-name drugs in the United States has outpaced inflation in recent years. In Medicare Part D, for example, the average price for a one-month supply of a brand-name drug, calculated in 2018 dollars net of rebates and discounts, rose from $149 in 2009 to $353 in 2018—an average annual increase of about 10 percent. In Medicaid, the average net price increased from $147 to $218 (in 2018 dollars) during the same period, an average annual increase of about 4 percent. Part of that rise reflects year-to-year growth in prices of existing drugs on the market. Another important part of that rise reflects increased utilization of newly launched brand-name drugs with initial launch prices that were higher than those for drugs introduced in earlier years. Greater use of generic drug products has restrained growth in total spending on prescription drugs, even as brand-name drug prices have risen. Generic drugs, which are usually priced much lower than their brand-name counterparts, accounted for 90 percent of all prescriptions in 2018, compared with 75 percent in 2009. Largely because of that greater share, average prescription costs have fallen, even though brand-name drugs have become more expensive. In Medicare Part D, for example, the average price of a prescription in 2018 dollars fell from $57 in 2009 to $50 in 2018; in Medicaid, the average price fell from $63 to $48 during that period. Exclusive Sales Rights Manufacturers of new brand-name prescription drugs are protected from direct competition with generic or biosimilar products during the period of exclusive sales rights granted under current law. The leverage that manufacturers possess during that period results in consumers’ paying higher prices than they would if the drug faced direct competition. Such leverage can be substantial if a drug is in high demand and confers unique therapeutic benefits. Some brand-name drugs—even those not subject to generic or biosimilar competition—face competition from other drugs that are partial substitutes with similar therapeutic effects. In such cases, manufacturers have less negotiating leverage with payers, placing downward pressure on prices. In the United States, exclusive sales rights are conferred through a combination of patent protection, which is also granted for many other types of innovations, and regulatory exclusivity granted by the Food and Drug Administration (FDA), which is specific to prescription drugs. The primary statute governing small-molecule drugs—that is, chemically synthesized drugs—is the Drug Price Competition and Patent Term Restoration Act of 1984 (known as the Hatch-Waxman Act). The effective period of exclusive sales rights for new small-molecule brand-name drugs varies, depending on factors such as the stage of development the drug was in when the manufacturer applied for a patent. The period of exclusivity tends to last for 12 to 17 years after approval for small-molecule products. For biologic drugs—those produced from living organisms—the primary statute is the Biologics Price Competition and Innovation Act of 2009 (BPCIA). On average, biologics have longer periods of exclusivity than small-molecule drugs. Market Segmentation Instead of charging one price everywhere, manufacturers maximize their total revenue by charging different prices in different market segments according to the particular demand characteristics of each segment—a practice known as price discrimination. Price differences among purchasers within the United States, as well as the different prices paid in different countries, are in part a reflection of that practice. If price discrimination (by country and within the United States) was not possible, manufacturers would charge a revenue-maximizing price reflecting the demand characteristics of the overall market. In such a hypothetical scenario, prices would be higher and the quantity of prescription drugs consumed would be lower than they currently are in some market segments (such as in foreign countries with lower income than the United States); in other segments, prices would be lower. Manufacturers’ global revenue and profits would be less, reducing their incentive to develop new products. Brand-Name Drug Prices in the United States Some of the many purchasers of prescription drugs in the United States include commercial insurers, participating Part D plans, Medicaid, direct federal purchasers such as the Department of Veterans Affairs, and people who have cost-sharing obligations or who purchase drugs without insurance. The different prices paid by those parties have different effects on the federal budget (see Box 1-1). When drug manufacturers sell to a private payer, they have broad discretion to set prices, though regulations exert some influence on those prices. When manufacturers sell to a public payer, statutory rules and regulations strongly influence prices. Box 1-1. How Would Lower Prescription Drug Prices Affect the Federal Budget? A general decline in prices for retail prescription drugs would reduce the federal budget deficit through a combination of different mechanisms. Four main mechanisms operate in different programs and segments of the market: A decline in prices would reduce federal outlays on prescription drug purchases, both for federal agencies and for state Medicaid agencies using federal matching funds.

Lower prescription drug prices would reduce federal payments that subsidize private health insurance plans that cover those drugs as a benefit.

Lower drug prices would reduce the share of employees’ compensation that is in the form of nontaxable benefits for employment-based health insurance, thereby increasing the tax base and revenues to the federal government.

Lower prices would reduce patients’ out-of-pocket costs, increasing their use of and spending on prescribed medications; their increased use of medications would reduce their use of other health care services, thereby lowering costs. Those four mechanisms would operate to different degrees in Medicare Part D, Medicaid, and the commercially insured segment of the market, as well as in other federal programs. Medicare Part D Medicare Part D is the largest federal program supporting access to prescription drugs in the retail market. The Part D benefit is administered through private insurance plans that receive subsidies from the federal government. Drug prices affect the total cost of the Part D program, which in turn affects the amount of federal subsidies and the premiums paid by enrollees. The overall federal subsidy to Part D plans has three components: First, the federal government covers a portion of total spending in the catastrophic phase of the Part D benefit, which is the last benefit phase. Enrollees enter that phase only after incurring thousands of dollars in drug costs in a calendar year. Second, the plans receive a direct federal subsidy that is based on the number and risk profile of the plans’ enrollees as well as the average amount that plans expect to spend for a Part D enrollee of average health. That average amount reflects both the prices that Part D plans expect to pay for prescription drugs and the amount of prescription drugs that plans expect enrollees to purchase. Third, a low-income subsidy covers most premiums and cost sharing for about a quarter of Part D enrollees who have low incomes and few assets. Together, those three components of the federal subsidy accounted for about two-thirds of all spending in Part D in 2022 at net prices, and the remainder is financed by enrollees’ cost-sharing payments and premiums. Lower average prices for prescription drugs would reduce federal spending for all three components of the federal subsidy. In particular, lower prices would reduce the amount that Part D plans expect to spend on enrollees, which would reduce the direct subsidy that the federal government pays. Lower prices would also reduce the out-of-pocket costs that Medicare beneficiaries have to pay, both through reduced cost sharing for prescriptions and through lower premiums. Lower cost sharing would increase the quantity of covered drugs that they use, partially offsetting the reduction in federal spending. At the same time, when Medicare beneficiaries use more prescription drugs, they use fewer hospital and other medical services, which lowers federal spending on Medicare Parts A and B. Medicaid Drug prices in Medicaid affect federal outlays both through states’ direct purchases of drugs and through payments to managed care organizations that provide prescription drug coverage. State Medicaid agencies sometimes elect to cover prescription drugs on a fee-for-service basis, paying pharmacies directly for drugs dispensed to beneficiaries. State Medicaid agencies may also contract with private managed care organizations that pay pharmacies for beneficiaries’ prescriptions in exchange for a fixed payment per beneficiary. For both types of arrangements, the federal government makes matching payments to the states, and lower average prescription drug prices would reduce federal outlays on those matching payments. Under fee-for-service and managed care arrangements, the price that Medicaid pays for prescription drugs is heavily influenced by statutory rebates that manufacturers are required to pay under the Medicaid Drug Rebate Program, as well as supplemental rebates that manufacturers negotiate with states and managed care organizations. The statutory rebate obligation for each drug is calculated as the sum of two components, known as the basic rebate and the inflation rebate. The formulas used to calculate both components of the statutory rebate rely on the price that a manufacturer receives for a drug that is distributed to retail pharmacies (the average manufacturer price, or AMP, which does not account for rebates or discounts after the point of sale). The formula for the basic rebate additionally relies on the lowest net price paid by a commercial purchaser (known as the “best price”). The rebate formula thereby links Medicaid’s prices to prices paid by commercial purchasers. Because of the formula for calculating the statutory rebate, a lower AMP for some drugs would increase prices in Medicaid, increasing federal spending in turn. That is because the drug’s AMP is used to calculate both components of Medicaid’s statutory drug rebate such that their sum (the total statutory rebate) can change by more than the change in AMP that precipitated it. If a manufacturer owes both a basic rebate and an inflation rebate for a particular drug and the AMP decreases by less than the size of the inflation rebate, then the inflation rebate will fall by the same amount as the reduction in the AMP. Under most circumstances, the amount of the basic rebate would also fall, meaning that the total statutory rebate would decrease by more than the reduction in the AMP, resulting in a higher net price in Medicaid. Commercial Insurance A reduction in average drug prices in the commercial market would put downward pressure on health insurance premiums, which would both increase tax revenues for enrollees with employment-based insurance and reduce federal subsidies for people with nongroup insurance. In 2022, an estimated 163 million people had employment-based coverage for which the premiums were excluded from income and payroll taxes. Changes in employees’ wages and taxable benefits tend to offset changes in premiums, so any reduction in premiums resulting from lower drug prices would tend to enlarge the tax base and increase tax revenues. Among the people with employment-based commercial coverage in 2022 were millions of federal employees, annuitants, and their dependents. In addition to those people’s premiums being excluded from taxable income, a portion of their premiums is paid by the federal government through the Federal Employees Health Benefits (FEHB) program. Lower drug prices would reduce those payments. Other Federal Programs Other federal programs purchase prescription drugs and dispense them to their beneficiaries. Some of the largest are administered by the Veterans Health Administration, the Department of Defense (TRICARE), and the Indian Health Service. Lower prescription drug prices would reduce the cost of delivering benefits under those programs but would directly reduce federal outlays only in programs that are financed by mandatory spending, meaning spending governed by statutory criteria rather than appropriation acts. For programs financed through appropriations, such as the Indian Health Service, a reduction in drug prices would not itself change the amount of federal spending on those programs, which would depend on future Congressional decisions about the programs’ funding. Similarly, in the FEHB program, the federal government’s share of the premiums for active federal employees and their dependents is financed through appropriations, but for annuitants, that spending is mandatory. Accordingly, lower prescription drug prices would directly reduce federal spending on annuitants but not on active employees or their families. In the commercial market, net prices for brand-name drugs are determined through negotiations between the drug manufacturers and insurers or their pharmacy benefit managers (PBMs). Manufacturers are often willing to offer rebates that reduce net prices in exchange for a greater volume of sales when insurers or PBMs can steer patients toward specific drugs. Insurers or PBMs have the greatest leverage to obtain such rebates when a brand-name drug faces competition from similar products within a therapeutic class. For example, they can use formularies—lists of covered drugs and their cost-sharing requirements—that place a preferred drug on a formulary tier with lower cost sharing. Insurers and PBMs can also steer patients to particular drugs through utilization management tools like required step therapy. Commercial purchasers who do that more effectively can obtain lower prices than purchasers who are less able to influence utilization choices. But cost-based utilization management may also increase the likelihood that a patient does not receive the most clinically appropriate therapy. In some circumstances, regulations influence the prices that emerge from negotiations between commercial insurers and brand-name drug manufacturers. For example, most insurance plans in the nongroup and small-group markets are required to cover at least one drug in every therapeutic class of drugs as an essential health benefit, which reduces insurers’ leverage in negotiating discounts. In Medicare Part D, which is delivered through private plans, the insurer or PBM negotiates prices with manufacturers under market conditions similar to those for other commercial insurers, but their leverage in negotiating prices for some drugs is limited by a statutory requirement that plans cover all available products in certain classes of drugs as well as at least two drugs in other classes. Since October 2022, manufacturers have been subject to an inflation rebate policy for their Part D sales. Under that policy, if a drug’s average manufacturer price (AMP) rises faster than the consumer price index for all urban consumers (CPI-U), then the manufacturer owes a rebate to Medicare. Beginning in 2026, under the Medicare Drug Price Negotiation Program, Part D plans will also be able to purchase certain drugs at prices determined in negotiations between manufacturers and the Secretary of Health and Human Services. Prices paid by other public insurers in the United States vary substantially, reflecting factors such as statutory pricing rules, regulations, and whether and how drug formularies are used. Some public payers, including Medicaid, receive rebates or other discounts that are specified by statute. In Medicaid, drug prices are lower than they are for many other payers. The Medicaid Drug Rebate Program specifies a minimum rebate amount that drug manufacturers must pay to state Medicaid agencies. The rebate has two components. The first is the basic rebate, which is the larger of either 23.1 percent of a brand-name drug’s AMP or the difference between the AMP and the lowest net price available to any private-sector purchaser (the “best price”). The second component is an inflation rebate similar to the one recently introduced in Medicare: A larger rebate is required if a drug’s AMP grows by more than the CPI-U. The design of the Medicaid rebate therefore links net prices in Medicaid to prices paid in other markets. Many state Medicaid programs or managed care organizations also negotiate supplemental rebates with manufacturers. The ways that prices are determined for different payers vary, but the flow of prescription drug products from manufacturers to patients is roughly similar for Medicare and Medicaid as well as for patients in commercial insurance plans. Prescription drug products and their payments flow between several different parties. Those parties include manufacturers, wholesalers, pharmacies, PBMs, public and private purchasers, and patients: Manufacturers of brand-name and generic drugs distribute their products to wholesalers or other distributors at a wholesale price.

Pharmacies obtain their drug products from wholesalers or distributors at another wholesale price.

PBMs make direct payments to pharmacies for prescriptions dispensed to patients. After the point of sale to a patient, the PBM receives a payment from the pharmacy that is based on contractual arrangements between those parties. For brand-name drugs, the PBM often also receives a rebate payment from the manufacturer that is based on negotiations between the PBM and the manufacturer; such rebates often reflect volume incentives (see Figure 1-1). Figure 1-1. Financial, Product, and Information Flows in the U.S. Prescription Drug Market Notes Data source: Congressional Budget Office. HHS = Department of Health and Human Services. a. The figure does not include direct federal purchasers such as the Department of Veterans Affairs, the Department of Defense, the Public Health Service, the Coast Guard, and the Bureau of Prisons. b. For Medicare Part D, “statutory rebate/discount” includes the Part D inflation rebate and statutory discounts. For Medicaid, it includes the statutory Medicaid rebate, consisting of the basic rebate plus the inflation rebate. (Manufacturers may also pay supplemental rebates.) c. The relationships between commercial insurers, pharmacy benefit managers (PBMs), and pharmacies are depicted here as contracted arrangements. PBMs are sometimes integrated with the insurer, the pharmacy, or both. d. Price concessions from pharmacies after the point of sale take the form of periodic payments from pharmacies to the plans or to PBMs. Brand-Name Drug Prices in High-Income Foreign Countries Direct regulation of the prices that drug manufacturers are paid plays a greater role in influencing prices in most high-income foreign countries than it does in the United States. In many foreign countries, the main purchaser is a national health insurance program that has substantial leverage in price negotiations with brand-name drug manufacturers. That leverage is even greater if the purchaser is willing to exclude a drug from coverage. Some countries set explicit limits on the prices that manufacturers receive for prescription drug products. Prices may be based in part on the prices paid for those same drugs in other countries—a practice known as international reference pricing. For example, regulation of brand-name drug prices in Canada is influenced by prices in several other countries. Under another reference pricing approach, known as therapeutic reference pricing, prices are based on the cheapest available brand-name or generic drug within a therapeutic class. In France, regulators determine whether a new drug product confers significant added health benefits compared with existing products and then set a maximum allowed price based in part on that assessment. In some countries, such as the United Kingdom, drug coverage and pricing decisions are influenced by cost-effectiveness analysis, in which the costs and clinical benefits of alternative approaches to treating a particular condition are evaluated together. Those analyses identify a specific criterion as a benchmark indicator of whether a particular drug is sufficiently cost-effective to be covered. If the manufacturer charges a price that does not meet the cost-effectiveness criterion, the drug might not be covered by the health care system. In some countries, the regulatory approval process integrates price considerations with safety and efficacy. To have the cost of a drug reimbursed by a national health care system, the manufacturer must negotiate directly with a government agency, and that process often involves presenting cost-effectiveness data in addition to clinical evidence. In some cases, a drug that is not covered by a foreign country’s public insurer is available for purchase out of pocket. Generic and Biosimilar Competition The availability of competing products can often reduce brand-name prices for buyers. For example, if a brand-name drug in its exclusivity period faces competition from another brand-name product with similar clinical effects, its price will tend to be lower than it would be if the drug faced no such competition. At the end of that brand-name drug’s exclusive sales rights period, the availability of a generic equivalent or a biosimilar creates even more competitive pressure; when several generic or biosimilar versions of the drug become available, consumers obtain them at significantly lower prices. Generic Drugs In addition to establishing a period of exclusive sales rights for new brand-name drugs, the Hatch-Waxman Act created a regulatory pathway for makers of small-molecule generic drugs to bring their products to market. As part of that pathway, the manufacturer of a generic drug must demonstrate that the product is bioequivalent to its brand-name counterpart, meaning that it has the same active ingredients and produces the same clinical effect. Another part lays out a process for resolving patent disputes. Through that process, the generic drug manufacturer can challenge a brand-name drug’s patents by asserting that they are invalid or would not be infringed by generic competition. The first generic drug manufacturer to bring a successful challenge to a brand-name drug’s patent is granted 180 days of exclusive generic sales rights when its drug enters the market, which creates an incentive for generic drug manufacturers to undertake the patent challenge process. The process established through the Hatch-Waxman Act addresses the dual interests of encouraging new drug development (by conferring exclusive sales rights for brand-name drugs) and promoting competition between brand-name and generic drugs to lower drug prices after brand-name drugs lose sales exclusivity. At the end of its period of sales exclusivity, a small-molecule brand-name drug can face direct competition from one or more generic versions of the same compound, leading to a large loss of market share for the brand-name manufacturer and lower prices for consumers. In CBO’s estimation, generics accounted for roughly 85 percent of a drug’s total sales volume, on average, in Medicare Part D four years after a first generic product entered the market; in that same year, the average price in Part D for those generics was about 60 percent lower than the net price of the brand-name counterpart before generic competition began. Generic drugs currently account for roughly 90 percent of all prescriptions dispensed in pharmacies among all payers. Many private payers and PBMs encourage the use of available generic products, and pharmacists are permitted to automatically substitute a generic drug for its brand-name counterpart when filling prescriptions. Biosimilar Drugs The BPCIA created an abbreviated pathway for regulatory approval of biosimilar drugs like that for generic small-molecule drugs. Unlike generic drugs, biosimilar drugs have active ingredients that are not identical (but that are very similar) to the active ingredients in their reference biologic drugs. To market a biosimilar, the manufacturer must demonstrate that it has no clinically meaningful differences from the original biologic in its safety, purity, or potency. Biosimilars have not generated as much competition to date as generic small-molecule drugs have. Biosimilars are costlier to develop than generic drugs, and unlike small-molecule generics—most of which can be automatically substituted at the pharmacy if a patient is prescribed the brand-name version—they cannot be substituted for their reference biologics in such broad circumstances. Some policymakers have shown interest in making all biosimilars substitutable for their reference biologics. Biosimilar competition remains limited, but uptake of biosimilars appears to be increasing. According to one source, by the end of 2023 biosimilars represented 23 percent of the total volume of prescriptions among biologic drugs for which a biosimilar was available, compared with 14 percent in 2018. Biosimilars are more established in the physician-administered drug market than in the retail market: Since the enactment of the BPCIA in 2010, a total of 26 biosimilars have entered the retail market, of which 17 entered in 2021 or later. As a consequence, data are relatively scarce on how the effects of biosimilar competition over time compare with the effects of generic competition in the small-molecule market. The available evidence on physician-administered drugs indicates that biosimilar competition lowers prices for consumers in two ways. In some cases, cheaper biosimilars capture market share from the original product; in other cases, prices of the original biologic products fall, and adoption of biosimilars is more limited. By contrast, generic competition in the small-molecule market most often follows that first pattern: Market share shifts to cheaper generic versions and away from the original brand-name products.

Chapter 2: Policy Approaches That Would Cap Prescription Drug Prices or Limit Price Growth For this report, the Congressional Budget Office examined seven policy approaches that aim to reduce the prices of prescription drugs. This chapter focuses on three of those approaches that would cap drug prices or limit price growth. Those approaches, along with their projected outcomes, are as follows: Set maximum allowed prices based on prices outside the United States. In CBO’s assessment, a policy approach that used the prices of brand-name prescription drugs in high-income foreign countries to set maximum prices for those drugs would lower average prices in the United States by a large amount (more than 5 percent).

In CBO’s assessment, a policy approach that used the prices of brand-name prescription drugs in high-income foreign countries to set maximum prices for those drugs would lower average prices in the United States by a large amount (more than 5 percent). Expand the Medicare Drug Price Negotiation Program. CBO examined two policies: The first would increase the number of drugs whose prices get negotiated each year, leading to a very small (0.1 percent to 1 percent) or a small (1 percent to 3 percent) reduction in average drug prices in 2031. The second would make negotiated prices available to all commercial purchasers, lowering average prices by a small amount (1 percent to 3 percent).

CBO examined two policies: The first would increase the number of drugs whose prices get negotiated each year, leading to a very small (0.1 percent to 1 percent) or a small (1 percent to 3 percent) reduction in average drug prices in 2031. The second would make negotiated prices available to all commercial purchasers, lowering average prices by a small amount (1 percent to 3 percent). Require manufacturers to pay inflation rebates for sales in the commercial market. CBO estimates that extending the Medicare Part D inflation rebate to sales in the commercial market would result in a small reduction (1 percent to 3 percent) in average drug prices in 2031. See Box 2-1 for details about how CBO selected the approaches examined in this report and organized the discussion of each approach. Box 2-1. CBO’s Selection of Policy Approaches to Reducing Drug Prices To generate a list of policy approaches to analyze for this report, the Congressional Budget Office searched current and previous Congressional legislative proposals, major proposals from the policy community, and the academic literature on health policy and prescription drug markets. CBO also examined various prescription drug pricing policies that are used in other high-income countries. Together, the seven policy approaches included in this report reflect a range of alternatives in two broad categories: approaches that would reduce the prices that drug manufacturers charge by capping those prices or limiting their rate of growth (see Chapter 2), and approaches that would promote price competition or affect the flow of information (see Chapter 3). The report focuses on prescription drugs purchased in retail settings, such as local brick-and-mortar pharmacies and mail-order pharmacies. Prices for drugs that are administered by physicians or other health care professionals in outpatient settings or hospitals are not within the scope of this report. The discussion of each approach includes a description of the policy scenario, the effects of each approach on prescription drug prices, and other related considerations, such as anticipated effects on foreign drug markets. The effects of each approach on pharmaceutical research and development are discussed together in Chapter 4. (See Box 1-1 for a general discussion of the federal budgetary effects of changes in prescription drug prices.) Within each broad category, the approaches appear in descending order of their estimated effect on average drug prices. Those overall averages reflect net prices paid by all public and private purchasers for prescription drugs distributed to patients through retail channels. Approaches are described as having large effects if they would reduce average prices for the whole retail drug market in 2031 (projected to exceed $690 billion in that year) by more than 5 percent in CBO’s estimation. Average price reductions of 3 percent to 5 percent are categorized as moderate, reductions of 1 percent to 3 percent are small, and reductions of less than 1 percent are very small. Approaches with estimated effects falling in the same range are listed in alphabetical order. Set Maximum Allowed Prices Based on Prices Outside the United States In many high-income foreign countries, the price of a brand-name prescription drug is partly determined by international reference pricing. In Canada, for example, the Patented Medicines Prices Review Board examines the prices of brand-name prescription drugs sold in several other high-income countries; that comparison is used to evaluate manufacturers’ prices when they first enter the Canadian market and on an ongoing basis. International reference pricing is also common in health care systems in Europe and elsewhere, where countries’ pricing policies are based in part on observed prices in other countries or on the lowest prices observed. International reference pricing has also been the subject of proposals in the United States. The Elijah E. Cummings Lower Drug Costs Now Act of 2019 would have required the Secretary of Health and Human Services (HHS) to negotiate prices for selected drugs so that prices did not exceed 120 percent of the average in six foreign countries (Australia, Canada, France, Germany, Japan, and the United Kingdom). The Centers for Medicare & Medicaid Services also proposed a rule for Part B drugs under which payments for certain high-cost drugs would have been based on observed prices in certain foreign countries. Key considerations for such proposals include which drugs would be subject to reference pricing, which foreign countries would be used as references, and how the prices observed in foreign countries would be used to determine prices in the United States. Policy Approach CBO examined a policy scenario that would impose a maximum allowed price for single-source brand-name prescription drugs. It would be based on transaction prices in the reference countries of Australia, Austria, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom. Manufacturers would be required to report to the HHS Secretary foreign net prices for all such products that they sell both domestically and in at least one of the foreign reference countries. Drug prices charged by manufacturers in the United States would be capped at a level reflecting the observed net prices in the reference countries (see Figure 2-1). Figure 2-1. Set Maximum Allowed Prices Based on Prices Outside the United States Notes Data source: Congressional Budget Office. HHS = Department of Health and Human Services. Specifically, the maximum allowed price would be an average of the reference countries’ prices weighted to reflect each country’s respective gross domestic product per capita; prices in wealthier reference countries would therefore exert more influence on the maximum allowed U.S. price than prices in less wealthy countries would. For drugs not available in the reference countries, manufacturers would be able to set prices as they do under current law. Estimated Effect: A Large Reduction in Average Prices Setting a maximum price based on prices outside the United States would lead to a large reduction (more than 5 percent) in prescription drug prices in the United States. The price reduction would occur shortly after implementation but would probably diminish over time as manufacturers adjusted to the new policy by altering prices or distribution of drugs in other countries. Even after accounting for such strategic responses, the expected price reduction would exceed 5 percent in 2031. In estimating the possible effect of this policy approach, CBO considered a range of values representing international price differences for brand-name prescription drugs. Specifically, CBO based its analysis on an estimated ratio of foreign prices to U.S. prices ranging from 30 percent to 55 percent for brand-name drugs in the retail market. In other words, prices in foreign countries are estimated to be 45 percent to 70 percent lower than those in the United States. Because not all brand-name drugs are available in all countries, the prices of many drugs that are available in the United States cannot be compared with international prices. CBO’s estimate of the effects of this approach reflects an assessment that a reference-price comparison is currently available for drugs representing 50 percent to 70 percent of spending on brand-name drugs. In CBO’s estimation, if brand-name drug prices in the United States were linked to their corresponding prices in foreign countries, manufacturers would respond in ways that would reduce access to and availability of those drugs for patients in those foreign countries to mitigate the effect on prices in the United States. Manufacturers would probably delay brand-name product launches in foreign countries to delay the availability of a reference price, and they might withdraw from some markets they currently serve—particularly smaller countries—to avoid having a comparison price. Manufacturers could also prevent a comparison price from being available by altering the product distributed in other countries to make it less directly comparable to the U.S. version. The threat of market withdrawal would give manufacturers leverage to increase prices in the foreign reference countries, though explicit price regulations in some countries might limit manufacturers’ ability to do so. Any increase in foreign drug prices would reduce the price gap and thereby enable manufacturers to charge higher prices in the United States. They could also obscure transaction prices for prescription drugs in reference countries with rebates or other financial offsets that are hard to observe. As an example, donations from drug manufacturers to other sectors of a reference country’s health system, such as hospitals, might effectively reduce that drug’s cost to that health system without directly changing that drug’s observed price. Other Considerations Patients in the reference countries would probably have delayed access to newly approved prescription drugs under this policy approach, and they might lose access to some existing drugs. In CBO’s assessment, prices for prescription drugs would also be higher for some patients or payers in the reference countries because manufacturers would have greater leverage to raise prices in those countries, though some countries’ price regulations might limit manufacturers’ ability to do so. The possibility of reduced access and higher prices would be particularly great if the reference country or countries made up a relatively small prescription drug market—for example, if a reference pricing policy was based only on prices in Canada. Manufacturers would then have great leverage to increase prices there because of the credible threat that they would abandon the entire market rather than allow large price reductions in the much larger U.S. market. Expand the Medicare Drug Price Negotiation Program Under the Medicare Drug Price Negotiation Program, which was authorized by the 2022 reconciliation act (Public Law 117-169), certain drugs will be made available in Medicare Part B or Part D at prices negotiated between manufacturers and the HHS Secretary. Each year, the Secretary will select a number of drugs (up to 20 beginning with the fourth cohort) for price negotiation on the basis of total Medicare spending on the drugs and certain other criteria. Eligibility for price negotiation is limited to small-molecule drugs that have been on the market for at least 7 years and have no generic competitors, as well as to biologic drugs (those produced from living organisms) that have been on the market for at least 11 years and have no biosimilar competitors. Each drug’s negotiated price is subject to a ceiling amount that is based on its previous price, rebate amount, and length of time on the market. The first cohort of drugs to undergo price negotiation was announced in August 2023, their negotiated prices were announced in August 2024, and the negotiated prices will take effect in 2026. Beginning with the second cohort of drugs to undergo price negotiation (which will be selected in 2025), negotiated prices will take effect at the start of the second calendar year following selection. Part D plans will then be able to purchase the drug at its negotiated price, and enrollees’ cost sharing for the drug will be based on that price. Policy Approach CBO separately considered two policies that would each broaden the scope of the price negotiation program. The first would increase the number of drugs whose prices got negotiated each year. Under current law, 15 drugs will be selected for negotiation in 2025, with negotiated prices taking effect in 2027, and each subsequent negotiation cohort will include up to 20 drugs. Drugs are excluded from for price negotiation if they account for less than a specified minimum level of annual Medicare spending, which is $200 million for the first negotiation cohort and adjusted thereafter by the rate of increase in the consumer price index for all urban consumers (CPI-U). Under the first policy, that exclusion would be lifted, and the number of drugs in each cohort would be increased to 50, beginning with those selected in 2025 (see Figure 2-2, policy 1). Figure 2-2. Expand the Medicare Drug Price Negotiation Program Notes Data source: Congressional Budget Office. HHS = Department of Health and Human Services. The second policy would extend access to Medicare Part D’s negotiated prices to commercial insurers. Under that policy, any retail drug that had a negotiated Part D price in effect would have to be offered to commercial purchasers at the same price (see Figure 2-2, policy 2). Unlike Part D plans, commercial insurers would not be obligated to cover drugs with negotiated prices. Estimated Effect: A Small or Very Small Reduction in Average Prices In CBO’s estimation, increasing the number of drugs whose prices are negotiated each year would reduce average drug prices in 2031 by either a small amount (1 percent to 3 percent) or a very small amount (0.1 percent to 1 percent), and extending access to Medicare Part D’s negotiated prices to the commercial market would reduce average prices by a small amount. CBO expects that, in subsequent years, the effect of either policy would diminish because price negotiation would have less-pronounced effects on the prices of drugs launched in the future than on drugs currently on the market. Both policies would affect different market segments differently. Increasing the number of drugs negotiated annually would reduce the Part D and Medicaid prices of the additional drugs that got negotiated—along with the prices of their therapeutic competitors—and would not significantly affect prices in the commercial market. Extending negotiated prices to the commercial market would lower commercial prices for negotiated drugs and their therapeutic competitors, but, in CBO’s estimation, that policy would also increase average prices for those same drugs in Part D and Medicaid. Under either policy, the overall price effect would depend on the magnitude of the price changes in different market segments, as well as the total sales volume of affected drugs. The price effect would also depend on how manufacturers, insurers, and other market participants changed their behavior in response to the policy, which in turn would depend on how the details of the policy were specified. CBO estimates that negotiating prices for an additional set of drugs each year would reduce those drugs’ net prices in Part D by 25 percent to 40 percent in 2031. (In that year, Part D spending is projected to account for more than 40 percent of all retail prescription drug spending.) In its analysis of the 2022 reconciliation act, CBO estimated that the Medicare Drug Price Negotiation Program would reduce the net prices of negotiated drugs in Part D by roughly 50 percent in 2031 relative to the prices projected under current law at that time, but the negotiated prices that were announced in August 2024 are 22 percent below the average net prices for those drugs in 2023. Consequently, CBO is updating its estimate of the price reductions from the Medicare Drug Price Negotiation Program and now expects the net prices of negotiated drugs to be 25 percent to 50 percent lower in 2031 as a result of that program. The estimated price reduction (25 percent to 40 percent) for the drugs whose prices are newly negotiated under this policy is smaller because those additional drugs are subject to other policies under current law, such as the Part D inflation rebate policy, which is expected to slow price growth. CBO’s assessment that the policy would lead to either a small or a very small reduction in average prices in 2031 reflects that range of possible price reductions from negotiation. Enabling commercial purchasers to buy drugs at the prices negotiated by the HHS Secretary would lower the prices of those drugs in the commercial market, but it would also cause the negotiated prices to be higher than they would be under current law. The law imposes significant costs (in the forms of an excise tax and civil monetary penalties) on manufacturers whose drugs are selected for negotiation if those manufacturers do not agree to a negotiated price or if they do not make the drug available at the negotiated price they had previously agreed to. CBO’s modeling reflects the expectation that manufacturers will comply with the negotiation process because refusing to do so would be costlier than reaching a negotiated price for their Part D sales of a particular drug. If commercial sales were also subject to negotiated prices, that would increase the cost to the manufacturer of agreeing to a negotiated price relative to the cost of refusing. For that reason, the Secretary would have less leverage in the negotiations, and CBO expects that the resulting price reductions would be about 15 percent smaller, on average, than they would be under current law. Each of the two policies would also affect prices in Medicaid by changing the “best price” for some drugs. The best price is the lowest net price available to any private-sector purchaser for a drug and is used in the calculation of each drug’s statutory Medicaid rebate. For most brand-name drugs, the smallest Medicaid rebate that a manufacturer can owe is the greater of 23.1 percent of the drug’s average manufacturer price (AMP) or the difference between the AMP and the best price. Prices paid by Part D plans are not included in the calculation of the best price, except for drugs whose prices are negotiated with the HHS Secretary. Those negotiated prices will therefore affect Medicaid prices for the group of drugs whose negotiated price becomes the best price (because the negotiated price is lower than the lowest private-sector price) and is lower than 76.9 percent of the AMP. CBO expects that the two policies would have opposing effects on average prices in Medicaid in 2031: Increasing the number of drugs negotiated annually would introduce negotiated prices for some drugs that would not otherwise have them by 2031, thus lowering average Medicaid prices. Conversely, because extending negotiated prices to the commercial market would raise negotiated prices compared with current law, prices in Medicaid would also increase. The effects of either policy on overall average drug prices would be more modest than its effects on the prices of negotiated drugs in particular, mainly because the drugs whose prices changed would account for a minority of overall drug spending. (For the policy that extended negotiation to the commercial market, the decrease in commercial prices would also be partially offset by the price increases in Part D and Medicaid.) In CBO’s baseline projection, Part D and the commercial market each account for more than 40 percent of retail drug spending at net prices in 2031, and Medicaid accounts for about 10 percent. In that year, CBO estimates, drugs with negotiated Part D prices in effect would account for about 10 percent of spending in Part D (and about the same share of spending in the commercial market). The set of drugs whose prices would be negotiated if prices for 50 drugs were negotiated each year, but that would not be negotiated under current law, would make up an additional 5 percent of Part D spending. Beyond 2031, the effects of both policies would diminish. CBO expects that negotiation would not reduce the prices of drugs launched in the future as much as it would reduce prices of drugs already on the market at the policy’s outset because manufacturers of new drugs would be able to mitigate the policy’s effect on net prices by setting higher list prices at launch. They could do so without changing net prices by increasing the rebates they pay to insurers, and doing so could result in a higher negotiated price years later. That is because each drug’s negotiated price will be subject to a ceiling based in part on its average price in 2021 (not accounting for rebates or discounts after the point of sale) if it was on the market in that year or, if the drug was launched after 2021, its average price during its first year on the market. Other Considerations One source of uncertainty about the effects of these policies stems from ongoing litigation by manufacturers who are challenging the constitutionality of the Medicare Drug Price Negotiation Program. If that litigation results in changes to the program, the policies’ effects on drug prices could be significantly affected. Extending access to negotiated prices to commercial purchasers could alter the structure of the pharmacy benefits management industry. One function of pharmacy benefit managers (PBMs)—in addition to such activities as developing formularies and negotiating with pharmacies—is to negotiate net drug prices with drug manufacturers on behalf of commercial insurers. If the commercial insurers had access to the prices negotiated by the HHS Secretary, then part of the role played by PBMs would be supplanted as the number of drugs with negotiated prices increased over time. The timing of any resulting changes in the PBM industry is uncertain: In 2031, drugs with negotiated prices would make up only about 10 percent of commercial spending in CBO’s estimation, suggesting that the largest potential effects of this policy on the PBM industry would manifest in later years. Changes to the industry could occur earlier than 2031 if market participants anticipate more widespread negotiation. Extending the negotiation program to the commercial market—depending on how the policy was specified—could also increase net prices in Medicaid and the 340B Drug Pricing Program by changing the set of drug sales used to calculate the AMP. Such a price increase would be in addition to the increase in net Medicaid prices caused by an increase in the best price. Net prices in Medicaid and the 340B program depend in part on a drug’s AMP. Under the 2022 reconciliation act, sales of negotiated drugs in Part D at the negotiated price are not included in the calculation of the AMP. If, under the policy, neither Part D nor commercial sales were included in the AMP calculation for negotiated drugs, then for some drugs Medicaid and the 340B program themselves could account for the large majority of sales used to calculate the AMP. In that case, manufacturers could set the AMP at the level that maximized their revenue in Medicaid and the 340B program (increasing net prices in those programs) without affecting their revenue in other market segments. Require Manufacturers to Pay Inflation Rebates for Sales in the Commercial Market Manufacturers are required to grant discounts or pay rebates for their sales in certain segments of the market if their products’ average manufacturer prices increase faster than the CPI-U. In both Medicaid and Medicare Part D, the manufacturers are required to pay inflation rebates after the point of sale (at specified intervals that are based on recent sales). Inflation rebates were introduced in Medicaid in the early 1990s as part of the Medicaid Drug Rebate Program, and they were introduced in Part D in October 2022 as part of the 2022 reconciliation act. In both programs, each drug is assigned a benchmark price that is based on the drug’s AMP in an earlier period and adjusted by the rate of increase in the CPI-U after that benchmark period. If the drug’s AMP exceeds the benchmark, the manufacturer is required to pay a rebate—equal to the difference between the AMP and the benchmark—for each unit of the drug sold in the relevant program. The inflation rebate policy thus imposes a penalty on manufacturers when a drug’s AMP increases faster than economywide inflation. The AMP does not reflect manufacturers’ rebates to insurers or PBMs after the point of sale. Manufacturers who pay such rebates can increase net prices either by charging a higher price to the pharmacy or wholesaler or by paying smaller rebates to insurers and PBMs afterward, but only the first option would result in a higher AMP and potentially trigger a mandatory inflation rebate. So, when an inflation rebate policy is in effect, manufacturers who pay larger rebates have greater flexibility to increase net prices by reducing those rebates. For that reason, CBO expects manufacturers of new drugs that come to market after 2022 to respond to the Medicare inflation rebate policy introduced that year by setting higher list prices at launch—with correspondingly higher initial rebates to insurers and PBMs—than they otherwise would have. Manufacturers of drugs already on the market are expected to reduce the rebates they pay to plans in the coming years because of the Part D inflation rebate policy. Once the rebates paid to plans for a drug fall to zero, the manufacturer cannot increase its net price faster than inflation without increasing the AMP (triggering an inflation rebate obligation) and has to choose whether to constrain net price increases, which avoids the inflation rebate, or raise the AMP faster than inflation and pay the inflation rebate. Either option has a cost for the manufacturer: Limiting increases in the AMP means that commercial insurers can purchase the drug at lower prices, reducing the manufacturer’s profit. Alternatively, raising the AMP faster than inflation preserves the manufacturer’s profit in the commercial market but raises the drug’s price for Part D plans and uninsured patients (reducing total sales) without raising the manufacturer’s profits in Part D, since any additional revenue is captured by the inflation rebate. As a result, in CBO’s analysis, drugs whose sales are mostly concentrated in the commercial market are more likely to experience net price increases that are faster than inflation, and thus to incur inflation rebate obligations, than drugs that are mostly sold in Medicare and Medicaid. Policy Approach CBO analyzed an extension of the inflation rebate policy recently adopted in Medicare Part D to sales in the commercial market. Under the policy, the benchmarks and reference prices already used to calculate the Part D inflation rebates would still apply, but the manufacturer would be required to pay rebates for the sum of the Part D and commercial units sold, rather than for the Part D units alone. For any drugs sold in the commercial market that are not also sold in Part D, benchmarks and reference prices would be assigned following the same criteria already used in Part D (see Figure 2-3). Figure 2-3. Require Manufacturers to Pay Inflation Rebates for Sales in the Commercial Market Notes Data source: Congressional Budget Office. Estimated Effect: A Small Reduction in Average Prices Extending the Medicare Part D inflation rebate to sales in the commercial market would result in a small reduction (1 percent to 3 percent) in average drug prices in 2031. Average net prices in Part D and the commercial market would be lower in 2031 as a result of the policy. That reduction would be partially offset by higher net prices in Medicaid. The policy’s effect on average prices would diminish over time. Under the policy, manufacturers of most drugs would have to pay inflation rebates for nearly all domestic sales if their drugs’ AMP increased faster than inflation. CBO expects that, faced with that prospect, manufacturers would choose to avoid paying inflation rebates for nearly all drugs, even when that would mean limiting net prices. In particular, many manufacturers who would pay Medicare Part D’s inflation rebate under current law would begin limiting their net price increases to avoid owing larger rebate obligations under the policy. By inducing those manufacturers to constrain the prices of their drugs, the policy would reduce average drug prices in the Part D and commercial markets. A drug whose Part D and commercial prices would be most affected would have all of these characteristics: The drug was launched before 2022,

The price of the drug was not negotiated under the Medicare Drug Price Negotiation Program,

Its sales are concentrated in the commercial market, and

The manufacturer of the drug does not pay large rebates to insurers. The drugs with those characteristics would experience similar price declines in Part D and the commercial market under this approach. Because those drugs would account for a larger share of commercial spending than of Part D spending, the policy would have a larger effect on average commercial prices than on average Part D prices. CBO estimates that the average price across all prescription drugs in Part D would be 2 percent lower in 2031 under this approach and that the average commercial price would be 3 percent lower. CBO expects average net prices in Medicaid to be higher as a result of the policy—by less than 1 percent in 2031. For drugs launched before 2022, Medicaid would pay lower retail prices, on average, under this approach, but reductions in the average AMP would cause Medicaid rebates to fall by more than the corresponding reductions in retail prices. Medicaid would pay higher net prices for some drugs launched after 2022. In particular, the approach would lead some manufacturers to introduce their new drugs with higher list prices at launch and pay larger rebates to insurers and PBMs so they could minimize the policy’s effect on the drugs’ net prices. (Other drugs would be unaffected because their manufacturers would have already set launch prices to fully account for Part D’s inflation rebates.) Higher initial list prices, even when paired with larger rebates to insurers, would cause net Medicaid prices to rise, on average, because Medicaid rebates would increase by less than the increase in the AMP. (See Box 1-1 for further discussion of the relationship between the AMP and net prices in Medicaid.) The effects of this approach on overall average drug prices would attenuate over time because net price reductions would be concentrated among drugs launched before 2022. Manufacturers of new drugs can insulate their net prices from the effects of an inflation rebate policy by launching their products at a higher initial AMP and by paying correspondingly larger rebates to insurers and PBMs. CBO does not expect drugs launched after 2022 to have lower average prices in Part D or the commercial market under the approach, but some of those drugs would be launched with a higher initial AMP and would therefore have higher net prices in Medicaid. Other Considerations The policy would increase net federal costs for some drugs in Medicare Part D, even as the net prices of those drugs decreased. The manufacturers who lowered their drugs’ prices in response to the policy would, under current law, have paid inflation rebates to the federal government based on their Part D sales. By instead constraining net prices under the policy, those manufacturers would not have to pay those inflation rebates. Because the benefits of the price reductions are split between the federal government and Part D enrollees through lower premiums and cost sharing—but reduced inflation rebate payments affect only the government—the reduction in rebate payments to Medicare would exceed the federal government’s share of savings from the lower net price, resulting in a larger federal deficit.

Chapter 3: Policy Approaches That Would Promote Price Competition or Affect the Flow of Information Four of the seven policy approaches that the Congressional Budget Office analyzed aim to reduce prescription drug prices by introducing more market competition or affecting the flow of information in the market. Specifically, those approaches and their projected outcomes are as follows: Allow commercial importation of prescription drugs distributed outside the United States. This policy, which would require the Secretary of Health and Human Services (HHS) to allow the large-scale importation of prescription drug products from other countries, would lead to a very small reduction (0.1 percent to 1.0 percent) in average drug prices in the United States.

This policy, which would require the Secretary of Health and Human Services (HHS) to allow the large-scale importation of prescription drug products from other countries, would lead to a very small reduction (0.1 percent to 1.0 percent) in average drug prices in the United States. Eliminate or limit direct-to-consumer prescription drug advertising. CBO examined policies that would either eliminate direct-to-consumer prescription drug advertising or prohibit it for three years after a drug’s initial approval for sale; the result would be a very small reduction (0.1 percent to 1.0 percent) in average drug prices.

CBO examined policies that would either eliminate direct-to-consumer prescription drug advertising or prohibit it for three years after a drug’s initial approval for sale; the result would be a very small reduction (0.1 percent to 1.0 percent) in average drug prices. Facilitate earlier market entry for generic and biosimilar drugs. A diverse set of policies embodied in legislation recently introduced in the Congress and analyzed by CBO would accelerate market entry for generic and biosimilar drugs and reduce average drug prices by a very small amount (0.1 percent to 1.0 percent) or by less than 0.1 percent.

A diverse set of policies embodied in legislation recently introduced in the Congress and analyzed by CBO would accelerate market entry for generic and biosimilar drugs and reduce average drug prices by a very small amount (0.1 percent to 1.0 percent) or by less than 0.1 percent. Increase transparency in brand-name drug prices. CBO looked at two policies: The first, which would require manufacturers to publicly disclose rebates that they pay to insurers or pharmacy benefit managers (PBMs) in Medicare Part D and commercial insurance, would probably cause the net prices that those purchasers pay to rise slightly. The second policy, which would require PBMs to share their drug price information with health insurers, would lead to a very small reduction (0.1 percent to 1.0 percent) in average drug prices. See Box 2-1 for details about how CBO selected the approaches examined in this report and organized the discussion of each approach. Allow Commercial Importation of Prescription Drugs Distributed Outside the United States Purchasers of prescription drugs in foreign countries often pay substantially lower prices than purchasers in the United States, even when the product is the same. Some individual U.S. consumers save money by purchasing prescription drugs in another country, such as Canada or Mexico. Since the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the Department of Health and Human Services (HHS) has had the authority to permit prescription drugs to be imported from Canada if the Secretary of HHS certifies that doing so would pose no additional risk to public health and would result in significant savings to consumers. The Food and Drug Administration (FDA) has expressed concerns about the safety of imported products under such a scenario but has recently established a process by which states can submit proposals for importation programs to the FDA for review and authorization. The Congress has considered legislative proposals that would allow prescription drugs that were distributed in a foreign market (regardless of where they were manufactured) to be diverted and sold to consumers in the United States, a practice known as parallel trade. Such proposals would affect wholesalers or other intermediaries, pharmacies, and, potentially, patients. Some proposals include a wide set of developed countries as potential sources of products that could be redistributed in the United States, and others have been limited to Canada. The proposals also differ in the set of drugs that would become eligible for importation and distribution. Some proposals would make all brand-name drugs eligible or specify a subset of drugs to be made eligible; others would exclude drugs requiring special handling. Alternatively, a policy could confer eligibility on individual products or classes of drugs used to treat a particular condition. Most proposals are concerned with brand-name drugs because prices for generic drugs in the United States are more comparable to generic prices elsewhere. One important consideration in the design of any importation policy is whether it would compel the HHS Secretary to issue regulations permitting importation or simply extend existing authority under current law to permit importation from a broader set of countries than Canada alone. CBO’s cost estimates for legislative proposals that would allow parallel trade of prescription drugs that were distributed outside the United States have been based on an expectation that, without a concrete requirement, the Secretary would be unlikely to act; those policies would probably not affect the domestic market for prescription drugs. Another key consideration is whether the policy would prevent manufacturers from attempting to limit the volume of drugs imported for redistribution in the United States. For example, manufacturers could differentiate drug products sold outside the country so that they were not identical to their U.S. counterparts and therefore not approved for sale in the United States, they could limit shipments of drugs to a foreign country or countries, or they could make contracts with foreign purchasers that restrict resale of products. Policy Approach CBO examined a policy under which small-molecule prescription drugs that are distributed by manufacturers or their licensees in a specific set of countries could be redistributed by licensed wholesalers to purchasers in the United States. (Biologic drugs, which are produced from living organisms, or other drugs requiring special handling would not be eligible.) Those countries would include Canada, France, Germany, Italy, Sweden, Switzerland, and the United Kingdom. This policy would not prevent manufacturers from limiting the volume of drugs distributed in foreign markets in order to reduce the potential volume of drugs available for redistribution in the United States (see Figure 3-1). Figure 3-1. Allow Commercial Importation of Prescription Drugs Distributed Outside the United States Notes Data source: Congressional Budget Office. Estimated Effect: A Very Small Reduction in Average Prices Requiring the HHS Secretary to allow parallel trade in certain prescription drug products would lead to a very small reduction (0.1 percent to 1.0 percent) in average drug prices in the United States. CBO’s assessment of the potential price reductions under this approach is based on an estimate that prices for the set of drugs that could be subject to parallel trade are about 60 percent lower in the source countries than in the United States. The overall effect of this approach on average drug prices in the United States would be limited by several factors. CBO expects manufacturers to distribute only enough drug products to foreign countries to meet their needs. In the short run, intermediaries might be able to obtain significant volumes of prescription drugs for resale in the United States, but in the longer run the affected countries would probably intervene to prevent large amounts of drugs from being diverted. Another factor that would limit the effect on average prices is the share of any price difference that would be retained by intermediaries. It is possible that little or no savings would be passed on to consumers, though that is difficult to predict because such an importation policy has not been implemented on a large scale. In CBO’s estimation, at least half of the price difference would be retained by firms engaging in parallel trade. Other Considerations Allowing parallel trade could reduce the availability of prescription drugs in the source countries if substantial amounts of drugs distributed in those countries were diverted for sale in the United States. In particular, that could occur if manufacturers sought to limit imports by restricting overseas distribution. Placing limits on manufacturers’ ability to restrict overseas distribution would probably result in legal challenges, the outcomes of which would be uncertain. Patients’ access to drugs in the selected source countries could also be diminished if manufacturers raised prices in those countries. Eliminate or Limit Direct-to-Consumer Prescription Drug Advertising Manufacturers advertise brand-name prescription drugs to boost the quantity of drugs they sell, particularly during the period when they have exclusive sales rights and earn nearly all of their profits. They advertise through direct-to-physician marketing, which includes advertisements in medical journals, physician detailing (in which a sales representative shares information with a physician), and promoting their products to opinion leaders or at conferences and in other settings. Manufacturers also boost sales through direct-to- consumer (DTC) advertisements on television or in other media aimed at patients. The two types of advertising target different parts of the process by which patients and their medical providers make decisions about drug consumption. During that process, the patient must seek medical care, the provider must make a diagnosis and prescribe a drug, and the patient must fill the prescription and comply with treatment over time if required. Unlike drug advertising aimed at physicians, which has a long history in the United States, large-scale direct-to-consumer advertising emerged relatively recently, in the 1990s. Since then, spending on DTC advertising has risen substantially, though it remains far below the amount directed at medical providers. Among high- income countries, only the United States and New Zealand allow DTC advertising of prescription drugs. DTC advertising can prompt people to seek care that they would not have otherwise and can encourage them to adhere to prescribed therapy longer than they would have otherwise. As a result, it may improve the health of some people who would not have sought care or who would have been less adherent in the absence of DTC advertising. At the same time, DTC advertising might lead patients to request and receive a new, expensive drug when a less costly option could offer similar clinical benefits; in such cases, limiting or eliminating advertising activity could reduce spending without a loss of clinical benefits, improving the efficiency of health care spending. Because rare adverse outcomes from new drugs are sometimes not detected in safety and efficacy trials, faster take-up of a new drug resulting from DTC advertising may lead to a larger number of adverse outcomes. Policy Approach CBO analyzed two alternative policies. The first would prohibit all DTC advertising for individual brand-name prescription drugs in electronic (TV, radio, internet) and print (newspapers, magazines) media. The second would prohibit DTC advertising for a brand-name drug in the three years after its initial approval. The temporary ban would allow time for possible adverse effects of a new drug to be identified before it became more widely used. Under both policies, marketing efforts aimed at physicians would be permitted as they are now, and manufacturers could publish scientific information in other settings, as they do under current law (see Figure 3-2). Figure 3-2. Eliminate or Limit Direct-to-Consumer Prescription Drug Advertising Notes Data source: Congressional Budget Office. Estimated Effect: A Very Small Reduction in Average Prices Both of the alternative policies that CBO examined—eliminating DTC advertising and prohibiting it for three years after a drug’s initial approval for sale—would lead to a very small reduction (0.1 percent to 1.0 percent) in drug prices. That reduction would occur because prohibiting DTC advertising would reduce patients’ demand for drugs, which would lower the ability of manufacturers to negotiate higher prices with insurers. According to one estimate, manufacturers spent about $6 billion on DTC advertising of brand-name drugs in the United States in 2018. That spending tends to be highly concentrated on a small number of brand-name drugs; most drug products are not heavily advertised to consumers. CBO estimates that drugs with substantial DTC advertising accounted for roughly one-fifth of retail spending on prescription drugs that year. Manufacturers advertise products to increase their revenue, so reductions in advertising expenditures would be expected to reduce that revenue. Empirical analyses of the relationship between DTC advertising and spending on prescription drugs have found that a change of 10 percent in DTC advertising expenditures is associated with a change of 1.0 percent to 2.3 percent in prescription drug spending. The change in drug spending measured in relation to the change in advertising expenditures is called the elasticity of drug spending to spending on DTC advertising; thus, estimates of that elasticity range from 0.10 to 0.23. Those estimates reflect analyses of relatively small changes in DTC spending, and they may understate how a larger change—for example, eliminating all DTC advertisement—would affect drug spending. CBO’s calculations of the effects of this approach are therefore based on an elasticity of 0.23, which is at the high end of the range of published estimates, reflecting CBO’s expectation that a large change in DTC advertising would have a greater effect than that suggested in empirical studies that are based on analyses of relatively small changes. Those changes in spending would be driven primarily by changes in quantities of drugs consumed, not prices for those drugs, so existing empirical evidence provides only a partial guide for assessing how this approach would affect prices. In addition to increasing sales quantities and therefore manufacturers’ revenue, DTC advertising may enable manufacturers to charge higher prices by reducing consumers’ sensitivity to a drug’s price; if so, the absence of DTC advertising might mean that manufacturers would set prices that are lower than they otherwise would. However, the exact contributions of quantities versus prices to such spending changes are unclear. CBO’s estimates of the effects of this approach reflect an assessment that price changes would account for one-fifth or less of the reduction in drug spending that would result from it. Brand-name drugs often have exclusive sales periods of 12 to 17 years. In CBO’s estimation, prohibiting DTC advertising during the first three years after approval for sale would roughly correspond to reducing DTC expenditures by a quarter, resulting in a much smaller reduction in average prices than would occur with a prohibition of all DTC advertising. Other Considerations Disallowing direct-to-consumer advertising for three years after a product’s initial approval could allow the identification of adverse outcomes or long-term risks from new products while also permitting manufacturers to use advertising as a means of boosting revenue when additional follow-up data have been made available. Drug manufacturers would probably challenge a policy aimed at eliminating or limiting DTC advertising on constitutional grounds, and the outcome of such a legal challenge would be uncertain. An alternative approach to limiting DTC advertising directly would be to limit the tax deductibility of manufacturers’ expenses on that advertising activity. Facilitate Earlier Market Entry for Generic and Biosimilar Drugs When a brand-name drug faces competition from a newly launched generic or biosimilar version of that drug, its manufacturer often permanently loses a large share of the market and profits on that drug. Delaying the availability of an inexpensive generic or biosimilar alternative, even for a short time, can increase profits by allowing the manufacturer of the brand-name drug to retain market share without reducing prices. As a result, manufacturers have used various tactics to effectively prolong the period of exclusive sales rights. One method involves obtaining multiple additional patents—creating a “patent thicket”—in the later years of a drug’s market exclusivity, which can make it costlier and more difficult for a manufacturer of generic or biosimilar drugs to challenge the patents protecting the brand-name drug. Another method is “product hopping,” in which the brand-name manufacturer introduces a modified version of a drug (such as an extended-release version) that will remain under exclusivity protections after the original formulation is at risk of generic competition; the manufacturer then encourages or forces physicians and patients to switch to the new version, possibly by discontinuing production of the old version. Two other strategies that brand-name manufacturers have used to delay generic entry are settlement agreements with “pay-for-delay” provisions and efforts to obstruct the generic version’s regulatory approval process. In most cases, patent disputes between manufacturers of generic or biosimilar drugs and brand-name drug manufacturers involve litigation that has to be resolved before the generic or biosimilar can launch, and those disputes are often resolved through settlement agreements. “Pay-for-delay” refers to settlement agreements in which the brand-name manufacturer compensates the generic or biosimilar manufacturer in exchange for an agreement to delay generic or biosimilar entry. Manufacturers of brand-name drugs have also used parts of the regulatory approval process for generic drugs to delay that process, such as by submitting citizen petitions to the Federal Drug Administration, or FDA (which can delay regulatory approval of generic and biosimilar drugs) just before the generic drug’s expected approval date. Policy Approach Rather than examine a specific policy, CBO instead considered a diverse set of policies recently introduced in the Congress and analyzed by CBO that address a variety of practices used to delay generic or biosimilar entry. In recent years, the Congress has considered several bills aimed at accelerating the market entry of generic and biosimilar drugs. Those bills target different practices that delay generic and biosimilar entry, such as patent thickets, pay-for-delay arrangements, and citizen petitions. Another policy would address the delay in generic competition that can occur when a manufacturer holds the 180-day exclusive generic sales rights for a product but does not make it available for sale. CBO examined the spectrum of policies proposed in this area because they are so diverse that examining a specific policy would not adequately represent the breadth of policies proposed (see Figure 3-3). Figure 3-3. Facilitate Earlier Market Entry for Generic and Biosimilar Drugs Notes Data source: Congressional Budget Office. Estimated Effect: A Very Small Reduction in Average Prices for Most Policies In CBO’s estimation, recent proposals to accelerate generic and biosimilar entry that have been introduced in the Congress and analyzed by CBO would each reduce average drug prices in 2031 by a very small amount (0.1 percent to 1.0 percent) or by less than 0.1 percent. The extent of the overall price reduction would depend on the amount by which generic or biosimilar competition reduced the average price paid for any particular drug, the amount of time by which entry would be accelerated for the affected drugs, and the percentage of total spending that would be subject to earlier entry under the policy. Policies like the ones CBO considered would reduce the prices of affected drugs by hastening generic and biosimilar entry relative to current law. The affected drugs would have eventually faced such competition anyway, so the price reductions from the policy would be temporary relative to current law for the affected drugs. The expected price reduction for drugs affected by a particular policy would depend on whether they were small-molecule or biologic drugs. CBO estimates that the net prices of small-molecule drugs are about three-quarters lower, on average, in the fourth year following generic entry than in the year before generic entry. In CBO’s assessment, which is based on the limited data available in the biologics market, prices of biologics (including their biosimilars) fall by about one-third over the same period, on average. That difference results from sharper price reductions and more rapid uptake of generic drugs than of biosimilars. As a result, in CBO’s estimation, earlier generic entry reduces the prices of affected small-molecule drugs more than earlier biosimilar entry reduces the prices of affected biologic drugs. A policy’s effect on prices would also depend on how much earlier the competing generic or biosimilar entered the market. The temporary price reductions for affected drugs (compared with their prices under current law) would be larger and last longer if the policy hastened generic or biosimilar entry by a greater amount. When a price reduction persists for longer, a greater fraction of total drug spending at any time goes toward drugs with lower prices, so total spending is lower. In CBO’s estimation, recent legislative proposals in this area would hasten entry by between six months and two years for different sets of drugs. Policies that CBO examined would affect a very small percentage of overall drug spending for two reasons. First, brand-name drugs that become subject to generic or biosimilar competition in a given year account for only a limited share of total spending. For example, in CBO’s estimation, drugs experiencing first generic or biosimilar entry in 2031 would account for less than 5 percent of total drug spending in that year. Second, only a fraction of the drugs experiencing entry each year would be affected by any particular policy. Different barriers to entry prove binding for different drugs, so a policy that aims to addr