Health Reform to Transform Coverage, Costs

Published on: 
Pharmaceutical Technology, Pharmaceutical Technology-05-02-2010, Volume 34, Issue 5

Manufacturers will pay new fees but anticipate expanded drug use and safeguards for innovation.

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.

Jill Wechsler

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.

In Washington this month

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?"].

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.

Paying up

In addition to tapping the pharmaceutical industry to close the doughnut hole, Congress imposes hefty fees and rebates on the sector. The final tally of $105 billion is higher than the $80 billion industry contribution negotiated earlier by the Pharmaceutical Research and Manufacturers of America (PhRMA), Senate Finance Committee Chairman Max Baucus (D-MT), and the White House. But most companies consider it an acceptable cost for expanding sales and for avoiding more onerous government regulation.

Drug manufacturers will pay fees amounting to $28 billion over 10 years, starting at $2.5 billion in 2011. Total collections will rise to $3 billion in 2014, to $4 billion in 2017, and then drop to $2.8 billion in 2019 and every year thereafter. The fees will be apportioned by the Treasury Department based on a company's relative share of branded prescription drug sales the previous year to Medicare, Medicaid, the Veterans Administration, and Department of Defense healthcare programs. Manufacturers with sales of less than $5 million get a pass, while companies with sales of more than $400 million a year will pay a full share.

Pharmaceutical companies also will ante up another $38 billion in higher Medicaid rebates, according to the Congressional Budget Office (CBO). The rebate jumps about 50% from 15% to 23.1% of the average manufacturer price for brand drugs, and from 11% to 13% for generic drugs, retroactive to January 2010. The rebate is extended to new formulations of oral solid dosage forms and can be collected by Medicaid managed-care organizations, a change that may encourage health plans and community health centers to press for additional company discounts.

Encouraging innovation

Manufacturers are not complaining too loudly about the added fees and rebates because they gain a pathway for the US Food and Drug Administration to authorize follow-on biologics (FOBs), which many consider the "crown jewel" in the bill for drug and biotechnology companies. After years of debate on this issue, innovator firms won an unprecedented 12-year data-exclusivity period for all reference biotechnology products, with the possibility of a six-month extension for sponsors who conduct pediatric studies. The Biotechnology Industry Organization (BIO) focused its lobbying efforts on this "historic provision," which was steered through Congress by Rep. Anna Eshoo (D-CA) despite strong opposition from powerful legislators and the White House.

CBO analysts say the program will save the government $7 billion over 10 years and reduce industry revenue by that amount. BIO President James C. Greenwood praised the measure for providing "incentives necessary to attract the massive investment required to speed the discovery and development of the next generation of breakthrough therapies." But Kathleen Jaeger, president of the Generic Pharmaceutical Association, complained that the bill "locks down indefinite brand product monopolies at a deep cost to patients and taxpayers." Timely access to biopharmaceuticals, claims Jaeger, could have produced savings well over $50 billion during the next 10 years.

All manufacturers, however, stand to benefit from clearer policies on developing and regulating "biosimilars" and "biobetters." That task now falls to FDA, which will issue guidance on what analytical assays and clinical studies will be needed to document FOB safety, purity, and potency, and what criteria could support product interchangeability, a critical issue for marketing and reimbursement. The law requires sponsors to pay FDA user fees and initiates a process for innovators to challenge patent infringement. In addition, Medicare Part B will pay for biosimilars at the average sales price plus 6%—an amount considered high enough to encourage physicians to prescribe less costly FOBs, explains Avalere Health Director Margaret Nowak.

BIO also championed a relatively small provision in the legislation that provides tax credits to small biotechnology companies (i.e., those with less than 250 employees) to cover a portion of research and development expenditures. The bill establishes a two-year program that offers as much as $1 billion in total tax credits to cover expenses related to research on certain critical therapies.

Another plus for industry is language clarifying how the government can use comparative effectiveness research (CER) resulting from a national outcomes study program. The bill establishes a new nonprofit, nongovernmental Patient-Centered Outcomes Research Institute to support comparative studies. Funding for the new entity starts small, but increases to $150 million in 2012 and subsequent years by tapping into the Medicare trust fund and collecting fees from insurance companies. The institute will form a governing board in September 2010 that includes at least one representative from a pharmaceutuical company. Industry will participate in additional advisory boards, including one that will issue CER methodology guidelines next year.

Of particular importance for manufacturers are specifics that distinguish this program from the United Kingdom's National Institute for Health and Clinical Excellence (NICE). The reform legislation rules out using quality-adjusted life years (QALY) as a threshold for establishing cost-effectiveness and limits the use of CER findings in determining coverage or reimbursement decisions by Medicare and other government health programs. Research has to recognize differences in patient populations, and all information has to be made public. The US Health and Human Services' (HHS) Agency for Healthcare Research and Quality will continue to play an important role in disseminating CER results and in distributing grants to research organizations.

More transparency and oversight

At the same time, the legislation includes several challenges for industry. New "Sunshine" provisions require national disclosure of payments and reimbursement by pharmaceutical marketers to physicians. Beginning in 2013, pharmaceutical, biotechnology, and medical-device firms will have to report payments to healthcare providers that exceed $10 or add up to $100 a year. In addition, manufacturers must provide data on drug-sample distribution, including the name of the drug and dosage form, the date of distribution, and the name and address of the receiving physician. The bill instructs HHS to establish a system for disclosing provider payment information to the public and imposes hefty fines for failure to comply. While the federal law pre-empts certain state disclosure rules, the law offers states some leeway on transparency requirements that go beyond federal requirements.

Another transparency provision applies to pharmacy benefit managers, which have to report to HHS on drug rebates and discounts as well as their generic-drug dispensing rates for Medicare drug plans. These reports will be kept confidential, but will be available to Medicare analysts and Congress to help shape payment policies.

As with most major legislation, Congress has ordered a long list of reports assessing the effect of its work. The HHS Inspector General, for example, will compare prescription drug prices under Medicare Part D to those under state Medicaid programs and will examine whether Part-D plan formularies exclude drugs commonly used by low-income dual eligibles. The US Government Accountability Office also will explore how well Part D provides access to vaccines for seniors and what further changes can improve the 340B drug discount program.

Looming on the horizon is a new Independent Medicare Advisory Board (IMAB), formed to propose ways to slow the growth in Medicare spending. PhRMA singled out the broad power of this entity as an area of concern, noting that the panel could institute "sweeping Medicare changes" affecting Part D reimbursement without legislative review. IMAB won't be up and running until 2014, which provides time for industry to press for modifications.

Policymakers may not kill the idea of the Board, however, because they are anxious to gain any and all savings from healthcare providers. The new law looks to "bend the cost curve" on the nation's healthcare system by cutting fraud and waste, establishing electronic medical records, identifying effective medical treatments and bolstering preventive care. These strategies may improve healthcare quality but won't make any real dent in federal expenditures. To pay for expanded coverage, Congress proposes cuts in Medicare provider fees, plus additional taxes on high-income consumers and healthcare companies. The Medicare cuts face an uncertain future. Tax hikes do little to curb healthcare spending overall and may boost outlays even more.

Jill Wechsler is Pharmaceutical Technology's Washington editor, 7715 Rocton Ave., Chevy Chase, MD 20815, tel. 301.656.4634,