www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Peter R. Orszag, Director

U.S. Congress

Washington, DC 20515

April 16, 2007

Honorable Debbie Stabenow

United States Senate

Washington, DC 20510

Dear Senator:

This letter responds to your question about the effect that changes to Part D of the Medicare

program would have on drug pricing for other purchasers, including the Medicaid program, the

Department of Veterans Affairs (VA), and private purchasers. As a general rule, any effects on

non-Medicare purchasers of drugs would depend on the specific changes made to Part D and the

extent and nature of their impact on Medicare spending.

The Congressional Budget Office (CBO) anticipates that S. 3, the Medicare Prescription Drug

Price Negotiation Act of 2007 (as reported by the Finance Committee on April 13th), would not

have an effect on drug prices for other purchasers. That bill would repeal section 1860D–11(i) of

the Social Security Act, which is commonly known as the “noninterference provision” because it

prohibits the Secretary of Health and Human Services from interfering in the negotiations

between drug manufacturers, pharmacies, and sponsors of the prescription drug plans that deliver

the Part D benefit. CBO anticipates that simply removing that provision would have a negligible

effect on Medicare spending across a broad range of drugs and would not have an effect on drug

prices paid by other purchasers.

By contrast, Part D could be modified to include a “best price” system similar to the one used by

the VA and Medicaid. As I indicated during the Finance Committee’s deliberations, CBO would

expect such a change to generate significant cost reductions for drugs purchased under Part D.

Such an approach, however, would put upward pressure on prices paid by the VA, Medicaid, and

private purchasers. Medicaid and the VA are required by law to receive price discounts that at

least equal the largest private-sector discounts that drug manufacturers provide. Expanding that

requirement to the Medicare benefit, which accounts for a larger share of total drug spending,

would encourage drug manufacturers to reduce the private-sector discounts on which the VA’s

and Medicaid’s prices are partially based; that effect would probably offset a small share of the

expected savings for Medicare.

The expected effects of other proposals that result in cost savings for Part D would vary. The

more direct the connection is between pricing under Part D and prices paid by the VA and

Medicaid (or the private-sector prices on which discounts for the VA and Medicaid are based),

the more upward pressure would be placed on VA and Medicaid prices. Approaches that yielded

savings for Medicare but did not link Part D prices to the prices paid by other purchasers would

not be expected to have an effect on those other prices. S. 3 would not establish any such
Honorable Debbie Stabenow

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connection, and CBO estimates that it would not have an impact on prices paid by other

purchasers.

If you would like additional information on this subject, CBO would be happy to provide it. The

staff contact for this analysis is Philip Ellis.

Sincerely,

Peter R. Orszag

Director

cc: Honorable Max Baucus

Chairman

Committee on Finance

Honorable Charles E. Grassley

Ranking Member