CBO on Drug/Medical Cost Interaction

Brand-name prescription drug prices in the United States are very high.  Manufacturers have tried to justify these prices in part by claiming that use of prescription drugs often keeps people in better health and using less of other medical services, particularly hospitalizations.  In the context of Part D of the Medicare program, which covers prescription drugs, the Congressional Budget Office has analyzed whether the decrease in cost-sharing for beneficiaries might increase prescription drug use and thereby decrease medical spending.   (CBO Report)   In its past analyses, for example when Part D was first added to Medicare, the CBO gave no credit for an offset, because it did not perceive that there was adequate research evidence to justify a finding that more drug use equaled less use of medical services.  But now, with decreased cost-sharing on the horizon, and debates about how much that will end up costing, CBO has revisited the issue.

CBO found that the relevant body of research has greatly increased in recent years and that a synthesis of that research suggests that there is a medical spending offset, albeit small.  Three kinds of studies were examined:  those looking at the impact of pharmaceutical benefit policies on the broad population outside of Medicare, estimates of the effect of prescription drug policies on beneficiaries before the passage of Part D and before and after comparisons of the effect of Part D on Medicare beneficiaries’ drug use and Medicare spending.  After analyzing that research, CBO concluded that for every one percent increase in drug use, there was about a one-fifth of a percent decrease in medical spending and vice-versa.  So for example, if copays were increased in a manner that saved $4 billion, but resulted in one percent less drug use, medical spending that otherwise was $250 billion would decrease by one-half billion.  In the context of the planned reduction of beneficiary cost-sharing, CBO estimates that the will increase spending by $86 billion over ten years, but will be offset by about a $35 billion medical spending reduction.