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Letter to the Honorable Ron Wyden 1 (April 2007)

handle is hein.congrec/cbo9311 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Peter R. Orszag, Director U.S. Congress Washington, DC 20515 April 10, 2007 Honorable Ron Wyden United States Senate Washington, DC 20510 Dear Senator: You asked a number of questions relating to the Medicare drug benefit and options for allowing the Secretary of Health and Human Services (HHS) to negotiate over the prices paid for drugs under that benefit. The Medicare Modernization Act contained a provision that prohibits the Secretary both from interfering in the negotiations between drug manufacturers and the prescription drug plans (PDPs) that deliver the Medicare benefit, and from requiring a particular formulary or instituting a price structure for the reimbursement of covered drugs. Responses to the questions you raised are below. Could negotiating by the Secretary over drug prices obtain savings for the Medicare program if those negotiations were limited to selective instances? As the Congressional Budget Office (CBO) indicated in a previous letter, negotiations limited to a few selected drugs or types of drugs could potentially generate cost savings.' For example, negotiations could be focused on drugs with no close substitutes or those with relatively high prices under Medicare. In such cases, CBO assumes that the effect of the Secretary's actions-if he or she took advantage of the new authority-would primarily reflect the use of the bully pulpit to pressure drug manufacturers into reducing prices. Although cost savings might be possible in selective instances, the impact on Medicare's overall drug spending would likely be limited. Bully pulpit strategies would probably be effective only if they were constrained to a small number of drugs; otherwise, the pressure of the spotlight would be dissipated. Consequently, spending on the small number of affected drugs would likely account for only a small fraction of expenditures under the Medicare drug benefit. Furthermore, even if the Secretary focused on a select number of drugs, the effect might be limited because pressure from PDPs and public relations concerns already affect pricing-so the incremental effect of giving HHS additional options for exerting pressure would generally be small. Finally, drug manufacturers could seek to limit the impact of the Secretary's actions by setting higher initial prices for their drugs, to offset any potential price concessions from negotiations with the Secretary. As a result, CBO expects that the overall impact on federal spending from ISee Congressional Budget Office, Letter to the Honorable Ron Wyden regarding the authority to negotiate prices for single-source drugs for Medicare beneficiaries (March 3, 2004). www.cbo.gov

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