Health Reform to Transform Coverage, Costs

Manufacturers will pay new fees but anticipate expanded drug use and safeguards for innovation.
May 02, 2010
Volume 34, Issue 5

Jill Wechsler
After months of increasingly rancorous debate, the US Congress finally approved legislation in March that makes significant changes to the nation's healthcare system. Although Republicans and other critics of the lengthy measure have vowed to rescind or change the law legislatively or through the courts, the arduous task of implementing the complex policy has already begun.

In Washington this month
Of most importance to pharmaceutical companies, the reform bill promises to significantly increase the number of Americans with healthcare coverage and pharmacy benefits, thus enlarging the market for prescription drugs. One of the most high-profile provisions sets up a scheme to eliminate the contentious "doughnut hole" in the Medicare drug benefit program—a move that should encourage seniors to fill more high-cost prescriptions.

What's Missing...
Manufacturers have agreed to pay fees, rebates, and discounts to support these gains. The payments are slated to add up to $105 billion over 10 years, according to consulting firm Avalere Health. Industry considers that amount a reasonable tradeoff for provisions that encourage biomedical research and innovation, namely a pathway for developing and marketing follow-on versions of biotechnology therapies. Moreover, the new law omits several items that industry strongly opposed [see sidebar, "What's missing?"].

Broader drug coverage

The main selling point for the reform package is that it expands healthcare coverage to some 32 million uninsured Americans. Individuals and workers at small companies will be able to purchase coverage through new state-based insurance exchanges, and many will do so to meet the individual-coverage mandate. In addition, insurance market reform—which prevents the denial of coverage based on pre-existing conditions, limits copays, curbs annual and lifetime limits, and encourages preventive care—promises to expand pharmacy benefits to patients who have serious or chronic health conditions and are in need of medicines. Prescription-drug coverage is included on the list of essential benefits required for all insurance plans offered through the exchanges, thereby increasing the prospect for payer reimbursement of orphan drugs and specialty products.

State Medicaid programs will cover 11 million more lower-income adults and children, bolstering drug coverage in the process. Although most states reimburse for medicines to some extent, some Medicaid programs are fairly skimpy, but now will become more comprehensive. For example, Medicaid will support smoking-cessation programs, including pharmacotherapy, and will add coverage for barbiturates and benzodiazepines.

Multiple changes to Medicare will enhance the way seniors use drugs. The legislation authorizes annual wellness visits that will produce personalized prevention plans with recommendations for immunizations and prescribed medications. The law increases outreach to low-income beneficiaries to encourage appropriate drug use and improves complaint and appeals systems that help seniors obtain access to needed therapies. The bill codifies mandatory coverage of medicines in six protected drug classes by Part D drug-plan formularies, while leaving the door open to future modification of that policy.

The biggest change to Part D is closing the much-vilified doughnut hole that now imposes hefty out-of-pocket costs on seniors with high drug bills. Currently, Medicare beneficiaries who spend more than $2830 on medicines fall into a coverage gap that requires them to pay the full cost of prescriptions; after drug outlays exceed $6440, the government covers 95% of additional "catastrophic" costs. The new legislation lays out a system for filling the gap over the next 10 years, and most of the cost will be shouldered by pharmaceutical manufacturers.

To provide some immediate relief, the government is giving a $250 rebate to beneficiaries who fall in the doughnut hole this year. Beginning in January 2011, manufacturers will cover 50% of the cost of brand medicines purchased by seniors in the gap. The discount will be based on the price negotiated with the drug plan. Medicare beneficiaries will pay the reduced price at the pharmacy counter, and manufacturers will reimburse pharmacies for the difference. Discounts won't apply to low-income seniors who have minimal copays, to retirees in employer drug plans, or to high-income beneficiaries (i.e., individuals with income more than $85,000).

While brand manufacturers will continue to pay 50% of gap drug outlays every year, in 2013, Medicare will close the doughnut hole further by covering a portion of the remaining cost to beneficiaries, starting low, but then ramping up to pay 25% of gap expenditures by 2020. For generic drugs, Medicare will increase coverage of gap products in 2011 until plans pay 75% of the cost and beneficiaries pay 25% in 2020. At that point, policymakers will consider the doughnut hole essentially closed because the remaining 25% of copays will be consistent with beneficiary fees on drugs before reaching the coverage gap.

Closing the doughnut hole is projected to cost manufacturers $32 billion over 10 years, while the government will contribute $38 billion. The change eliminates a major source of confusion and hardship for elderly patients and is expected to boost compliance with prescribed therapy and to reduce the growing number of seniors that either stop taking drugs or switch to generic drugs when they reach the gap. The lower cost to beneficiaries, moreover, will move seniors through the doughnut hole more quickly to catastrophic coverage, where Medicare pays 95% of drug costs.

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