CBO’s Model of Drug Price Negotiations Under the Elijah E. Cummings Lower Drug Costs Now Act: Working Paper 2021-01

By Christopher Adams and Evan Herrnstadt (both of CBO)

One of the inputs that the Congressional Budget Office used to estimate the budgetary effects of the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3) is a simulation model of price negotiations. CBO modeled those negotiations using a Nash bargaining framework, which was based on the gains to each party—the government and the manufacturer—from a successful negotiation. The gain to the government was estimated to be the avoided cost of purchasing the next-best alternative treatment, plus the incremental clinical value of using the drug of interest instead of the alternative (measured in dollars), minus the agreed-upon price of the drug. The manufacturer’s gain was estimated to be the revenue from selling the drug in the United States. This working paper describes the simulation model in detail, including its data sources and parameter values, and the sensitivity of the results.

In CBO’s analysis, the average resulting drug price would be close to the specified upper bound of 120 percent of the index of international drug prices. Negotiations would reduce prices by 57 percent to 75 percent, relative to current prices, depending on the data and parameters that were used in the calculations. H.R. 3 specified upper and lower bounds on the prices resulting from the negotiations; in CBO’s estimation, changes to the upper bound would significantly affect the prices of the drugs the agency examined.