Pharma Girds for Healthcare Reform

Published on: 
Pharmaceutical Technology, Pharmaceutical Technology-08-02-2009, Volume 33, Issue 8

Pressure to reduce healthcare spending has put drug rebates, price cuts, and tax hikes on the table.

With healthcare-reform legislation moving quickly down the track, pharmaceutical companies are keeping a sharp eye on policy proposals likely to affect drug development and coverage. Manufacturers generally support initiatives to make the nation's costly healthcare system more efficient and effective; expanding coverage to some 45 million Americans would greatly enlarge the pool of customers for drugs and medical products and enhance compliance with prescribed treatments.

Jill Wechsler

That said, pharmaceutical companies are leery of cost controls and regulatory changes designed to pay a chunk of the trillion-dollar cost of achieving universal coverage. Even though prescription drugs account for only 12% of the nation's healthcare expenditures, administration officials and Congressional leaders are looking hard for curbs on drug expenditures that can help pay the coverage bill. Peter Orszag, head of the White House Office of Management and Budget, has insisted that any healthcare reform package will be deficit-neutral over 10 years. "We need to address the moral imperative of covering the uninsured," Orszag stated at a conference at the Brookings Institution in May 2009, "and pay for it."


The relatively easy part of healthcare reform is devising ways to increase coverage. Policymakers propose to expand Medicaid and other local health programs; require all individuals to obtain coverage; mandate that employers play (i.e., provide insurance to workers) or pay a penalty; reform the insurance market to limit exclusions based on pre-existing conditions; and form insurance exchanges offering coverage options to the uninsured, possibly including a government-supported public plan.

In Washington this month

Many large employers, including Wal-Mart, support a reasonable play-or-pay program linked to real controls on rising costs, but not the 8%-of-payroll penalty proposed by House Democrats. The public-plan option has been a lightning rod for opponents of greater government involvement in healthcare. Insurers and employers predict that a public plan would end private insurance, and providers fear extensive government price-setting.

A proposal authorizing government negotiation of drug prices for therapies covered by the public plan has heightened the pharmaceutical industry's opposition. Public-plan price negotiations are not as onerous for manufacturers as full repeal of the noninterference clause, which prevents government negotiation of drug prices for Medicare Part D, but they open the door to more federal involvement in pharmaceutical pricing. Even without a public plan, Congress is likely to establish some kind of federal health board with authority to make many of the difficult decisions on payments and benefits, including drug coverage, cost-effectiveness standards, and actual pricing decisions.

Despite controversy about how to expand coverage, devising ways to pay for enormous program costs is much more difficult and painful. A dose of reality was administered in June 2009 when the Congressional Budget Office (CBO) issued a much higher-than-expected cost estimate for reform legislation that the Senate Health, Education, Pensions, and Labor (HELP) Committee was developing. CBO analysts calculated that the massive HELP bill would cost $1 trillion over the next decade, but extend coverage to only 16 million people. The Senate Finance Committee, facing an even higher $1.6-trillion CBO estimate its draft legislation, went back to the drawing board to curb expenditures and identify more savings and revenues.

In July, House leaders proposed a final, 1000-page reform bill developed jointly by the three committees with jurisdiction over healthcare: Education and Labor, Energy and Commerce, and Ways and Means. Democrats applauded its broad coverage and extensive benefits, while Republicans predicted skyrocketing budget deficits, higher taxes, and government rationing of healthcare.


As the legislative timetable tightened, President Obama pressed hard for a bill this year. He signaled that he would sign legislation that cost $1 trillion over 10 years and covered at least 75% of the uninsured. Many of the details of the reform legislation will be hammered out on Capitol Hill this fall by a committee formed to reconcile differences between House and Senate bills. Considerable horse trading will occur, as will maneuvering over health exchanges, public versus private plans, tax reforms, and price controls, with everyone keeping a sharp eye on costs and coverage.

Doughnut-hole discount

Throughout the debate, pharmaceutical manufacturers have offered proposals for expanding access to medicines, with an eye to fending off threats to innovation and marketing. The Pharmaceutical Research and Manufacturers of America (PhRMA) linked up with consumer groups earlier this year to press for expansion of the State Children's Health Insurance Program and joined numerous coalitions crafting reform proposals.

Most visible was the promise in May 2009 by a group representing physicians, hospitals, the pharmaceutical industry, and other providers to decrease the annual growth in healthcare outlays by 1.5%—a move calculated to save $2 trillion over 10 years. The initial savings list cited many soft strategies such as reducing unnecessary hospitalizations, promoting evidence-based best practices, managing chronic disease, and adopting health information technology. PhRMA also predicted savings from medication-therapy management and pointed to the potential for biomarkers to lower research and development costs.

More significant was a June 2009 PhRMA proposal to reduce the out-of-pocket (OOP) costs for seniors who fall into the coverage gap of the Medicare Part D program. The organization announced that manufacturers would provide 50% discounts to Medicare patients in the notorious "doughnut hole," and President Obama cheered the move for offering "significant relief" from the "crushing out-of-pocket expenses" incurred for drugs not covered in the gap. The American Association of Retired Persons praised it as a good start in shrinking the doughnut hole, while Finance Committee Chairman Max Baucus (D-MT) promised to include the program in reform legislation.

Medicare Part D currently requires drug plans to cover beneficiaries' initial $2700 in pharmacy expenditures. Seniors then have to pay the full cost of drugs until catastrophic coverage kicks in when OOP spending reaches $4350 for the year (about $6100 in total benefit costs). Roughly 25% of Part D enrollees fall into the doughnut hole at some time during the year, but only 4% make it through the gap to become eligible for catastrophic coverage.

Under the new program, seniors would receive a 50% discount at the pharmacy through a seamless process that requires no new paperwork or eligibility assessment. An independent third party would administer the program, calculating payments owed to pharmacies by manufacturers and crediting beneficiaries' OOP spending to count toward the catastrophic limit. A key provision of the program is that the full cost of a drug set by the beneficiary's Part D plan would count toward the individual's true OOP costs, which are calculated by Medicare for each enrollee. High-income seniors might be excluded from the discount, as would low-income beneficiaries who qualified for subsidies and already received full gap coverage.

The discount plan may well be worth its $30-billion price tag for pharmaceutical companies. At a minimum, it would encourage more patients to continue treatment through the coverage gap and reduce shifts to generic drugs; several Part D plans provide doughnut-hole coverage for generics, but not for brands. Just as important, the plan allows manufacturers to claim credit for scaling back a discredited policy that hits the sickest seniors the hardest.

Most biotechnology drugs are not affected because they are administered in hospitals or clinics and thus covered under Medicare Part B. But as more biologics shift to outpatient use and gain coverage through Part D, the doughnut hole will be a greater concern for these often costly therapies. The Biotechnology Industry Organization has raised concerns, though, that smaller biotechnology companies may find it difficult to absorb hefty discounts on therapies used primarily by elderly patients.

The program offers important savings to the government by reducing the high cost of eliminating the doughnut hole altogether. The House reform bill uses the gap discount in a provision that aims to do just that over 15 years.

Raising rebates

PhRMA's $30-billion gap discount program was offered as part of a broader industry initiative to cut healthcare spending by $80 billion. The other major cost-cutter is to offer higher rebates on Medicaid drugs and possibly for Medicare Part D. Policymakers propose to boost the basic rebate for single-source drugs from the current 15.1% to 22.1% as part of a Medicaid-rebate reform package calculated to generate $20 billion in savings over 10 years. Other proposals would extend rebates for new formulations of existing drugs, boost rebates on generic drugs, and require manufacturers to pay rebates to states for drugs provided to Medicare managed-care plans.

Manufacturers had hoped that increasing Medicaid rebates would defuse support for the proposal advanced by Energy and Commerce Committee Chairman Henry Waxman (D-CA) to impose rebates on Part D drugs for certain low-income seniors. However, Waxman included such a rebate provision in the House reform bill to help pay the cost of closing the doughnut hole and also recoup the "windfall" gains that manufacturers have enjoyed since Medicare shifted "dual-eligible" seniors from Medicaid drug benefits to Medicare Part D. "We're simply going to ask the pharmaceutical companies to pay us back the money," Waxman said at a June 2009 news conference to unveil the House healthcare-reform plan. Manufacturers fear that rebates on dual-eligible drugs will be complicated to administer and will open the door to rebates on all Part D coverage.

Reform legislation also promises to save money by establishing a legal pathway for US Food and Drug Administration approval of follow-on biologics (FOBs). CBO has calculated that an FOB program with a moderate exclusivity period (e.g., seven years) would generate about $7–10 billion over 10 years. That relatively low amount excludes potential savings from generic forms of insulin because that product is regulated as a drug, not a biologic. Savings would be less with the 12-year exclusivity provision approved by the Senate HELP Committee last month. But even fairly modest savings are enough to spur negotiations to get a FOB measure into the reform legislation.

The hunt for billions in added revenues has opened the door to all kinds of additional fees and taxes. Democrats dropped proposals to curb the corporate tax deduction allowed for drug advertising. But House leaders propose to raise billions through a new surtax on wealthy individuals, as well as hefty fees on individuals and employers that fail to meet coverage mandates.

The most substantial tax-reform proposal involves limiting the tax exclusion for employer-provided health benefits. Under current law, health benefits that about 175 million Americans receive from employers are not taxed as income, a so-called loophole that costs the government roughly $200 billion a year. Reformers claim that the policy encourages the purchase of high-cost coverage and is highly inequitable, but employers and organized labor oppose any change. As a compromise, policymakers are looking to reduce the exclusion for high-income workers or cap the exclusion for benefits that exceed a certain level. Even such limited changes may not fly because they are likely to scale back employer-sponsored insurance, thus curbing drug benefits and drug utilization in the process.

New rules

In addition to policies designed to generate healthcare savings, the massive reform package emerging on Capitol Hill will include a host of policy changes likely to affect manufacturers' operations. The House bill, for example, includes "sunshine" provisions requiring pharmaceutical companies to disclose virtually all payments to physicians and healthcare providers, which then would be made public. Industry has supported federal sunshine legislation, provided it comes with national standards and common reporting requirements that preempt a growing number of state disclosure policies. That may not occur because Waxman opposes federal preemption language; the House bill proposes to permit states to continue disclosure policies that exceed Congressional requirements.

A final bill is likely to include policies designed to increase generic-drug use such as a ban on payments by brand-name firms to generic-drug companies to delay generic-drug competition. In a June 2009 speech to the Center for American Progress, Federal Trade Commission Chairman Jon Leibowitz said that barring pay-for-delay settlements would save the federal government $12 billion over 10 years and yield even greater savings to consumers and states. Leibowitz also supports curbs on authorized generics, but evidence that these products may lower drug prices could keep such curbs out of healthcare-reform legislation, even if authorized products discourage patent challenges and ultimately reduce the number of generic drugs that are marketed.

Drug reimportation is another controversial issue. In July 2009, the Senate approved language in a budget bill that permits the purchase of drugs from Canada over the Internet. Still to come is a measure sponsored by Sen. Byron Dorgan (D-ND) that would allow the import of prescription drugs from Australia, Canada, and other developed countries. These provisions may not survive in final reform legislation, but could get a boost from a more formal FDA examination of the factors invovled in ensuring the safety of drug imports.

Reform legislation is slated to provide support for comparative-effectiveness research (CER) to improve medical treatment and ensure the appropriate use of medical products. But just how payers and insurers will use the resulting information has been a hot-button issue on Capitol Hill. Heated debate has centered on the structure of a CER governing body and its authority, and also on whether Congress should prohibit the use of CER reports to make coverage decisions.

Democrats prefer to keep language on the use of CER fairly vague. Republicans warn that healthcare rationing and government interference in medical decisions would occur without explicit restrictions on the use of CER data to determine treatment and reimbursement. The recent Institute of Medicine report on CER priorities includes several topics that seek evidence comparing the effectiveness and costs of prescription drugs to other treatments, thus providing ammunition to those who consider cost effectiveness a valid CER subject. CER is a reform priority, but the scope of the program awaits fine-tuning.

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