CLOSE MENUBy 2031, West Health estimates that commercial market spillover from Medicare penalties on drug price increases above inflation would:
The Inflation Reduction Act of 2022 includes a penalty for drug price increases above the rate of inflation. This penalty is assessed on sales under the Medicare program, but the penalty calculated is based on the nationwide average price of the drug, including prices changed in both Medicare and commercial insurance markets. Because drug manufacturers sell drugs to pharmacies at the same price regardless of whether a prescription is dispensed to a Medicare beneficiary or a patient with commercial insurance, the penalty on Medicare sales will put downward pricing pressure on all drug sales. This is consistent with prior research demonstrating that an inflation penalty on a subset of a drug's sales reduces the price increases for all sales. The Congressional Budget Office (CBO) has estimated that this provision will generate $7 billion in greater payroll tax revenue. This increase in payroll tax revenue arises from reductions in commercial insurance premiums due to lower drug spending. However, CBO's analysis does not separately estimate the total impact on the commercial insurance market, including reductions in premiums and cost sharing.
Previously, West Health estimated the impact of inflation penalties in the commercial market on Federal payroll tax revenues, prospectively modeling the impact on employee cost-sharing, employee premiums, and employer premiums and then estimating the increase in payroll tax that CBO would score based on those cost reductions. That estimate relied upon an earlier approach to inflation penalties based on an index year of 2016 instead of the 2021 index year in the Inflation Reduction Act of 2022. For the current analysis, West Health used the earlier ratio of savings due to the inflation penalty across employee cost-sharing, employee premiums, and employer premiums and applied it to the total estimated reduction estimated by CBO. To estimate the reduction in insurance premiums, West Health applied the approach from the Health Savers Initiative used to estimate the relationship between commercial insurance and payroll tax revenues.
Table 1. Commercial market savings from penalties on drug price increases above inflation, 2023-2031.
Though primarily targeting Medicare, the Inflation Reduction Act of 2022 will yield cost savings for employers and employees. These cost savings will result in increased wages and lower insurance premiums, generating greater payroll tax revenues.
