The “Other Side” of Healthcare: Pharmaceuticals

Big changes are happening in healthcare. As physicians most of you are are aware of the increasing emphasis on primary care and the ever tightening budget that is restructuring how doctor’s are paid [quality over quantity]. Change is also happening here on the pharmaceutical side of things. Here’s a summary:

 

TIMES ARE CHANGING

The Affordable Care Act sets forth the policy on the Branded Prescription Drug Fee Program that they are required to report drug sales information to Dept. of Treasury each year so that the fees can be accurately calculated. This is a big deal!

In the light of patent expirations, their subsequent drop in prices, and an overall decrease in research and development dollar spending this policy can implement undue financial pressure on innovator drug manufacturers; thereby affecting the rate at which novel pharmaceutical products reach the market and get into your hands.

Innovation is important to the United States. The whole world looks to us for new therapies and research and so as a result we’re considered leaders in that regard. Luckily the ACA won’t likely cut into the margins of these pharmaceutical manufacturers. We all know by now that it will only increase the number of insured by expanding coverage and this will encourage healthcare spending by at least 22% and is sure to bring large business to the pharmaceutical industry by making their drugs more accessible. The question is will this be enough to displace the loss of money for pharma as the government finds ways to ease the burden of cost on the consumer and drop profits.

 BALANCING ACT

This rise in revenue will be offset by an increase in mandatory discounts and exuberant fees imposed under ACA. Companies as a group will have to pay $2.5 billion to $4.1 billion dollars based on various factors. These fees will cut into their margins and encourage lesser spending which can have devastating effects in the long run on an industry which is very resource intensive.

WHAT’S THE PROBLEM?

Historically speaking Medicare enrollees have to reach a certain deductible before they start seeing the first dollar contribution from Medicare, which has only increased as of late. This essentially means the customers have to meet a higher out of pocket spend before Medicare starts to pitch in potentially leading to less sought after medical treatment.

A CLOSER LOOK

With the introduction of Medicare Part-D in 2006, people with Medicare have the option of paying a monthly premium for outpatient prescription drug coverage. The Basic Medicare Part-D coverage works like this:

  • You pay out of pocket for monthly Part-D premiums all year
  • You pay 100% of drug cost until you reach $310 deductible amount
  • After reaching this amount you pay 25% of the cost of drugs, while Part-D pays the rest until your total you reaches $2800.
  • Once you reach that limit, you hit the coverage gap referred to as the “Donut Hole” or Medigap. At this point, you are responsible for the full cost of the drug until the total that you have spent for your drug reaches the yearly out-of-pocket spending limit of $4550.
  • After this you are only responsible for a small amount of cost, about 5%

Needless to say for majority of the people with Medicare Part-D, the Donut Hole presents some serious financial challenges. Some people have had to choose between their rent, or groceries and their prescription drugs.

 HELP FOR CONSUMERS

With the advent of the new ACA, some relief has come to the consumer that reaches this donut hole:

  • A$250 rebate check to consumers
  • A 50% discount on brand-name drugs in the Donut Hole.
  • Paying less for their branded drugs under Part-D, while in the Donut Hole.

Pretty much anything to lessen the burden while in the donut hole, until reaching the promise land of minimal out of pocket expense.

SOME WIN WHILE OTHERS LOSE 

CMS has made it mandatory for any drug manufacturers of branded products working with specific government programs to give minimum of 50% discounts on their branded products to consumers while in a Donut Hole. Whole shifting of this cost burden from consumer to producer helps consumerism, but has a large financial impact on producers and innovators of novel therapies.

 TIME TO REEVALUATE

Drug makers need to assess this new landscape that they operate in to stay viable and bring R&D based products to the market. There are many reasons why the industry is going through tough times when it comes to investing in novel therapies.

  • Barriers to entry into the market
  • Globalization
  • Low reimbursements depending on where their products fall on the tiers of formularies

These are some of the reason why the sector seems to be lacking much needed innovation and progress.

 WHAT SHOULD WE BE ASKING?

Under the new Patient Protection & Affordable Care Act and the launch of new health insurance exchanges the drug maker will have to tackle the following challenges at the minimum to be able to make their therapies available to their consumers:

  • How many plans are participating in each exchange?
  • What kind of drug coverage is provided under each plan?
  • Where would their drugs fall on the preferred drug lists?
  • What type of cost-sharing requirements are structured?
  • The value of rebates or discounts that drug companies negotiate with each plan
  • The number of people enrolled in a given plan; their health status, drug utilization and step edit policies of that plan.
  • The company’s product portfolio i.e. what disease markets they cater to.

The current government’s efforts to make healthcare more accessible will result into more monetary gains for other sections of healthcare such has insurers and hospitals. According to an analysis conducted by HRI the branded pharmaceuticals stand to lose about $155 billion over 5 the next decade as a result of mandatory discounts and rebates that the companies have to pay to participate in Medicare Part-D programs especially when it comes to the “Donut Hole”. The enactment of industry wide fees and establishment of a bio-similars regulatory approval pathway will further put a dent into the dwindling ROI on R&D based therapies.

These huge losses incurred by the industry in the form of fees will be partially offset by $15 billion gains due to a modest increase in sales due to expanded insurance coverage although still creating a net loss.

 STATES CAN EXPAND COVERAGE

According to a ruling by Supreme Court states have the option to expand their Medicaid programs as well, based on several various factors. Twenty four states have indicated that they plan to expand Medicaid which would increase the market size yet again. Interestingly enough according to Oregon Medicaid Health Insurance Experiment when the previously uninsured gained Medicaid coverage their drug spending increased by 15%. The drug spending by the newly insured would likely remain below that of currently insured population partly due to demographic differences. What it does mean is that the drug manufacturer will have to pay higher fees and discounts to larger group of people with a modest gain in sales. Then there are the states that use managed care organizations to run their Medicaid programs and are allowed to collect rebates on prescription drugs. This is another population that the pharmaceutical companies will have to pay rebates.

SMALL BUSINESSES TOO

Employers with less than 100 employees under ACA can purchase coverage through Small Business Health Options Program (SHOP) exchange. There is a possibility the states might expand that program too. This is not expected to change the status quo much but what can have an impact are high deductible plans. According to surveys of major US companies, 44% of employers are considering offering these as the only benefits option to their employees in 2014. Already 17% employers offer high deductible plans as the only option in 2013, which is a 31% increase over 2012. What these trends suggest is that under the SHOP program it puts a higher cost-sharing burden on the patients, which are the largest consumers of pharmaceutical products, leading to a decrease in drug utilization.

THE FUTURE

In the near term the pharma companies will continue to operate the prescription assistance programs to make drugs more accessible to the needy. They may come up with more creative ways to structure deals with exchanges. But in the near future consumers will demand more rebates and coupons from pharmaceutical companies, which will go against the insurance companies that are trying to control drug spending.

INNOVATION MAY BE THE ANSWER

The pharmaceutical companies especially the innovators have long known the fact that their innovations can help reduce the overall cost of healthcare by improving outcomes in the form of reduced hospitalizations and quality of life years extended.

Pharma’s most important customer segment will be transformed as a result of the healthcare reform. And that transformation will cause ripple effects out to healthcare provider’s pharma and other stake holders in years to come.

Managed care organizations rely on the benefits provided by the drugs to their customers for the survival of their business models too.

  • Historically the health care companies operate by the processing claims and by managing risks. The healthcare reform changes the landscape by including the populous with preexisting conditions or customers with undesirable risk profiles and more over these high risk customers cannot be charged higher premiums.
  • The reform also restricts how health benefits are designed for individual markets making it difficult to transition to individualized medicine which is the future in healthcare.

FURTHER CUTS

To further cut into margins in March 2010 President Obama signed into law the Patient Protection and Affordable Care Act. This legislation imposes an annual fee on companies that manufacture and or are in the business of importing branded drugs.

Beginning of 2011, these companies will pay a non-tax deductible fee, based on a sliding scale of sales reported by them and the government organization that they contract with. These organizations will also provide data to the treasury based on NDC’s dispensed and billed. The scale is quite inclusive as it starts from companies with as low as $5 million dollars in sales all the way up to $400 million and above at which point the % of tax levied is on 100% of sales.

SO WHAT SHOULD WE DO?

In order to survive in this new landscape a more holistic approach is needed to offset the costs and share the costs. The pharmaceutical industry needs to constantly understand the stakeholders and their interdependencies. They being the payers now too will need to understand that part of the business as well to better mitigate the risks [a job historically only attributed to managed care organization and health insurance providers].

Some of the measures the pharmaceuticals should adopt with providers & payees.

  • Progression of Risk Factors To Chronic Conditions To Chronic
  • Cost / Benefit Ratios & Patient Outcomes:
  • Evidence Based Medicine:
  • Comparative Effectiveness Data:
  • Focus On Less Commoditized High Opportunity Condition:

While the new reform is all about accessible healthcare it has come at a higher out of pocket cost for both payer and payees. It remains to be seen what long-term effects will be, but companies and government organizations will have to constantly evolve and be creative to make “Affordable Care Act” more “Affordable”.

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