CBO Updates Model for Assessing Policy Changes on Drug Innovation

The new model indicates a small initial impact on new drugs coming to the market, but an impact that grows over time.

A new model predicts that lower returns on the top-earning drugs would initially have a small impact on innovation. The model, issued Thursday by the Congressional Budget Office (CBO), estimated that a 15% to 25% reduction in expected returns for drugs in the top quintile of expected returns is associated with a 0.5% average annual reduction in the number of new drugs entering the market in the first decade. By the third decade, however, CBO would expect an 8% annual average reduction in new drugs entering the market.

“The analysis shows that any relationship between a policy change and the number of new drugs entering the market grows over time,” the authors wrote. “The change would be small for the first few years because key decisions for drugs entering in those years would have been made before the policy change. However, the size of that change would increase substantially as decisions in earlier phases of development affect later phases.”

This model is an update of a previous estimate done by the CBO to assess the impact of the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3), which passed in the House of Representatives in December 2019. If enacted, this would give Medicare the ability to negotiate directly drug companies. It also creates a new out-of-pocket limit of $2,000 for Medicare and stops companies from charges other countries less for the same drugs.

This is in line with President Biden’s effort to lower prescription drug costs. He released in mid-August his vision for lower costs. This followed President Biden’s executive order in July 2021 about promoting competition in the American economy, which included allowing for lower cost drugs to be imported from Canada.

The CBO found H.R. 3 would reduce federal spending by $456 billion. In addition, CBO found it would reduce global revenue for new drugs by 19%, leading to about 8 fewer drugs introduced to the U.S. market over the 2020 to 2029 period, a 3% reduction.

The CBO’s new estimate expects more new drugs to be introduced over the next decade under current laws, and it also included consideration for pharmaceutical company’s decision making during clinical trials, as well as expected costs and returns of each phase of development.

The CBO also indicated that in the future, it could use this new model to estimate whether and how various policies would affect the development of new drugs, but the model could be adjusted to account for how policies influence the process of new drug development.

The authors pointed out that the implications for the health of families in the United States were not clear. CBO did not estimate which types of drugs may be affected or how the reduction in the number of new drugs would affect health outcomes.