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To expand coverage amidst the economic crisis, Obama will look for ways to cut healthcare costs.
President-elect Barack Obama promised to reshape the nation's healthcare system to provide coverage for millions of uninsured Americans. His strategy is to expand federal and local government programs that provide care for individuals and children and to require employers to "play or pay" to support insurance for workers. During the campaign, Obama stopped short of backing a mandate for universal coverage as advocated by many Democrats, but his proposals still raise the prospect of increased government involvement in the nation's healthcare system.
Expanded coverage fits the main goals of pharmaceutical manufacturers. Third-party payment for healthcare services and products, which shields consumers from the real cost of medicines, has boosted drug use during recent decades. With the establishment of the Medicare Part D drug benefit four years ago, millions of seniors who previously paid for medicines out of pocket gained coverage for a significant portion of drug expenditures. The Part D program has been a boon to the pharmaceutical industry, but it also has put the spotlight on drug costs and value and has justified increased Congressional scrutiny of drug pricing, marketing, safety, and effectiveness.
Although many voters cited healthcare as an important election issue, the need for a new economic stimulus package will take priority over healthcare reform. Under pressure to address rising unemployment and low economic growth, Obama is expected to look for limited changes in the healthcare arena for the time being.
In addition to revoking federal curbs on funding for embryonic stem cell research, one early initiative for the new administration and the Democratic-controlled Congress will be to expand the State Children's Health Insurance Program (SCHIP). There is broad support for a larger program, but partisan wrangling over just how generous to make SCHIP blocked legislative action during the last two years. Democrats want federal support for state programs that provide healthcare for children in families earning as much as 300% of the federal poverty level (about $60,000 per family), but the Bush administration insisted on a lower ceiling. After President Bush vetoed SCHIP expansion bills in October 2007 and January 2008, Congressional leaders decided to hold off on further action until a new, more agreeable leader was in the White House.
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Expanding SCHIP and Medicaid will help achieve the new president's goal of providing coverage to an additional 25 million individuals. Obama also proposes added incentives for purchasing insurance; individuals, the self-employed, and small companies would have access to private insurance options or a competing government-operated National Plan through a new National Insurance Exchange.
Medium and large employers, moreover, would face a mandate to support insurance coverage for workers or pay a fee, while a tax credit would help small employers offset insurance costs. Obama wants insurers to issue coverage to all applicants without regard to pre-existing conditions, a provision that industry says will drive up costs considerably, particularly for younger, healthier individuals. Whether the president-elect's plan can expand coverage economically without a universal coverage mandate remains to be seen.
These plans would cost between $1.2 and $1.6 trillion over 10 years (i.e., 2010 to 2019), depending on various assumptions and models; expanded coverage would only increase drug use and spending on health services and medicines, particularly for the newly insured. Half of the projected outlays would be needed to fund Medicaid and SCHIP expansion, and the rest would support insurance subsidies and tax credits.
Lower tax deductions for insurance premiums would offset some of the outlays, but Obama plans several initiatives to reduce federal healthcare spending. Expanded health information technology, including broader electronic prescribing, is projected to reduce healthcare outlays by about $100 billion over 10 years, but is unlikely to save money in the near term. And expanding disease-management programs, coordinated-care models, and pay-for-performance initiatives could result in savings.
Obama also has jumped on the comparative-effectiveness bandwagon, predicting that an institute producing research on the relative effectiveness of alternate treatments would save money by reducing unnecessary treatment. Analysis by the Lewin Group puts the savings at a modest $40 billion, based on low expectations that providers and patients will adhere to new medical guidelines.
Because of considerable uncertainty that cost cutting will achieve substantial savings, the new administration will be looking hard for strategies that reduce outlays for prescription drugs. A prime candidate for elimination is the Medicare "noninterference clause," a controversial policy that prevents the secretary of the US Department of Health and Human Services (HHS) from directly negotiating payments for drugs covered by Medicare Prescription Drug Plans (PDPs).
The Part D program relies on private insurers to hold down program costs by seeking low drug prices from pharmaceutical companies. The Centers for Medicare and Medicaid Services (CMS) announced that Medicare spending on drugs totaled $44 billion for fiscal year 2008, much less than the $74 billion originally predicted. However, PDPs pay more for drugs than federal healthcare programs provided by the Veterans Administration and the US Department of Defense, among others, which can use federal supply-schedule rates. And state-administered Medicaid programs reduce outlays for drugs by collecting additional rebates from manufacturers.
A first order of business for many Democrats is to simplify and centralize the Part D program. Pharmaceutical manufacturers strongly supported a decentralized structure for Part D to avoid creating a central Medicare formulary that would provide a coverage and cost model for the broader healthcare market. PDPs have crafted drug-coverage programs to fit federal standards as well as corporate business goals, and differences between PDP formulary preferences, copayments, and premiums have generated competition and cost variation. The program has kept down overall costs, but it also is confusing to seniors.
Eliminating the curb on direct HHS price negotiations could reduce manufacturer revenues by roughly $10 to $30 billion, according to the Boston Consulting Group, depending on the extent to which private insurers and pharmacy benefit managers demand the same low price set by Medicare. The actual effect of allowing government "interference" in price negotiations is unclear, though. It is difficult to negotiate lower prices for drugs if no therapeutic alternatives exist. It's also hard to negotiate discounts for products in classes for which Medicare requires coverage of all medicines. Manufacturers may be reluctant to accept a low price that they know will become the norm for the broader market. At the same time, it will be difficult for a pharmaceutical company to refuse to sell a product to the vast Medicare population.
Another strategy for curbing Medicare drug spending is to require manufacturers to pay rebates to CMS. Such a mandate could start with rebates on outlays for drugs provided to dual-eligible seniors (i.e., low-income individuals who previously obtained drug coverage from state Medicaid plans). Switching these patients to Medicare Part D reduced manufacturer Medicaid rebates considerably and boosted industry revenues. Some Congressional leaders are determined to reverse that trend.
Another way to reduce drug prices that wins support from both Democrats and Republicans is to make it easier to reimport medicines from other countries. Obama makes the usual proviso that the products coming in must be safe and effective. But taking steps to ensure drug quality inevitably eats into potential savings. Several state and local drug-import programs have been dropped because of high costs and low consumer interest, and establishing drug coverage for seniors has removed a major pool of customers for reimport programs.
Moreover, recent scandals about contaminated heparin from China and manufacturing-quality problems with generic drugs from India are making lawmakers more hesitant to open the gates too wide to less-regulated imports. Obama advisers have acknowledged that enthusiasm for reimporting has declined since the heparin incident.
Making generic drugs more readily available to patients and payers might be a more palatable measure for reformers. At the annual meeting of the Generic Pharmaceutical Association in September 2008, Obama's health-policy adviser Dora Hughes said that eliminating barriers to generic drug use should be central to health reform efforts. Hughes voiced support for curbing reverse-payment agreements and backed legislation that would allow the US Food and Drug Administration to approve generic versions of biosimilar products. A market-exclusivity period for brand-name biotechnology therapies, she noted, should be much shorter than the 14 years advocated by the biotechnology industry.
Although savings from many of these cost-cutting policies may be elusive, the reforms are likely to be championed by Congress and the new administration. Political leaders believe that tightening the rules will allow HHS to ratchet down outlays to Big Pharma and to curb waste and abuse. The prospect of gaining $60 billion in savings is much too attractive for anyone to pass up in these cash-strapped times.
Squeeze on Big Pharma
Changes in US drug-coverage policies only add to uncertainty about the economic outlook for drug manufacturers. Now that Democrats have extended their control in both houses of Congress, legislators are expected to push for measures that will squeeze pharmaceutical prices and profits even more. Industry anticipates bills to limit direct-to-consumer advertising and to require greater transparency in sales and marketing activities. A top Congressional priority is to enact legislation that expands FDA oversight of imported medical products and foods, and that measure would provide a vehicle for numerous provisions related to drug safety and marketing.
In hopes of fending off even sharper attacks on Capitol Hill and increasing the patient population eligible for drug coverage, industry has sought to mend fences with the majority party. Pharmaceutical companies greatly increased campaign contributions to Democrats this year in a big shift from a 70–30 split in favor of Republicans in past national elections. The Pharmaceutical Research and Manufacturers of America (PhRMA) actively supported SCHIP expansion and worked with local labor organizations and nonprofit groups to promote healthcare-coverage programs on the state level.
A hostile Congress, curbs on revenues from Medicare and private insurers, plus increased competition from foreign imports and generics only add to the gloom throughout the pharmaceutical industry. Leading drugmakers have been tightening their belts, closing down plants, whittling down sales forces, and laying off thousands of workers. In recent months, cost cutting has extended to research and development units as companies decided to concentrate on promising therapeutic areas and to drop development work in unsuccessful disease categories.
The worldwide financial crisis has added to these woes, as firms have seen their stock values plummet. Cash-poor biotechnology companies are caught in the credit squeeze as investors have become risk-averse and investment capital has dried up. The market for initial public offerings for biotechnology companies has disappeared, prompting many emerging firms to sell out to major manufacturers.
These developments prompted a fairly dour outlook from IMS Health for the global drug market. IMS predicted that US drug sales will rise only 1–2% in 2009 to around $300 billion, which is similar to this year's growth rate. Rising unemployment and economic uncertainty may curb patient visits to doctors. And a drop in the number of new drugs coming to market, along with patent expirations and delays by insurers in deciding to cover new products, further dimmed prospects for expanded drug use.
The outlook is slightly brighter in Europe and Japan, where drug sales may be pushed by aging populations and demand for more preventive care. But efforts to control costs through health-technology assessments, increased use of biosimilars, stronger formularies, and price controls are expected to offset much of the expansion in industrial countries.
If the global pharmaceutical market achieves 5% growth next year, as IMS predicts, it will come from double-digit expansion in key emerging nations such as China, Brazil, India, South Korea, Mexico, Turkey, and Russia. Pharmaceutical companies are consequently boosting sales efforts in these high-growth markets in hopes of spurring demand for innovative medicines. However, the US market accounts for a significant portion of worldwide pharmaceutical sales and an even larger proportion of industry profits. The Obama victory generated cheers around the world, but its impact on drug development and sales remains to be seen.
Jill Wechsler is Pharmaceutical Technology's Washington editor, 7715 Rocton Ave., Chevy Chase, MD 20815, tel. 301.656.4634, email@example.com
For more on this topic, see "How Will the 2008 Election Results Affect the Preemption Debate?".