Monday, March 22, 2010

Health Care Reform A Done Deal: Pharma Bets On The Right Horse

One of the surest signs that comprehensive health care reform was near death was the surprising resignation in February of Billy Tauzin as head of the Pharmaceutical Research & Manufacturers of America.

Tauzin, the classic political door-opener in Congress, along with a select group of pharma CEOs bet early and bet heavy on working with a Democratically controlled Congress and the Obama Administration to pass “universal” insurance coverage and comprehensive health care reform.

In essence, Tauzin, who himself switched parties during his time in Congress, switched PhRMA’s allegiance from the Republican Party to Democrats.

So when Tauzin resigned his position at PhRMA, it appeared to signal that the drug industry had bet incorrectly on health reform and it was time for a realignment.

Fast forward to March 21, and it’s clear that the drug industry’s risky wager on supporting Democrats and health care reform will pay off. The House voted 219-212 to pass the Senate health care legislation and 220-211 to pass a health care reconciliation bill aimed at fixing inconsistencies between the House and Senate bills (to read our analysis of the full Senate bill, click here to read The RPM Report).

Taking the big picture view, we’ve outlined three ways to think about the impact of health reform on the biopharma sector: the potential new market, how many scripts drug manufacturers need to add from the previously uninsured to make up its $80 bil. “front-end” contribution, and the impact of health reform on biopharma business development.

Under one slicing of the numbers, for example, the new legislation could directly result in $115 bil. in new business over 10 years (click here to read the story in The RPM Report). The figure is based on a percentage of business that was used to calculate the pharma industry fee in the Senate bill.

Using a separate analysis, biopharma would have to add roughly four extra monthly scripts (at an average price of $120) per newly insured individual over seven years to come out even in health reform. That doesn’t even take into consideration the large, already insured population. Elements like copay reform, elimination of lifetime caps, and enhanced coverage of preventative services could easily generate an even bigger boost in prescription utilization than will come from the newly insured (click here to read the story in The RPM Report).

From a business development perspective, comprehensive health care reform offers a number of opportunities such as favorable treatment for orphan drugs, better coverage of specialty products, and further incentive for Big Pharma to diversify in the US (click here to read the story in The RPM Report).

PhRMA issued a statement in support of the legislation after the House votes:

We continue to believe that comprehensive health care reform will benefit patients nd the future of America. That’s why we have been involved in this important public policy debate for more than a year and why we support action by the House to approve the Senate-passed bill along with the amendments found in the reconciliation legislation. The existing barriers to quality health care simply are not acceptable. Today’s important and historic vote in the House will help to expand health care coverage and services to tens of millions of Americans who are uninsured and often forced to forego needed medical treatments.”

The House passage of the Senate bill plus the sidecar reconciliation bill represents a best-case scenario for the pharmaceutical industry—even better than the Senate bill alone, which was viewed as a good bill for pharma.

Pharma/biotech manufacturers didn’t get something for nothing, but the industry stands to gain significantly more benefits over time relative to the immediate investment companies had to make to help fund health reform efforts.

Here’s what they gained:

Huge New Market: It’s easy to get wrapped up in a “devil is in the details” argument over what pharma’s new market will look like and just how valuable it will be over time. Avoid the trap. The bottom line is no strategic business decision, merger/acquisition, or single piece of legislation or even series of incremental bills could ever deliver 32 million brand new customers to a single industry in one fell swoop. Comprehensive health care reform did just that.

Major Anti-Industry Measures Left Out: Just as important to pharma as what’s in the bill is what’s out of the bill. The list is long: Medicare Part D dual-eligible rebates, government authority to negotiate prescription drug prices across the entire Part D program, drug discount extenders to special hospitals (see below), elimination of pay-for-delay brand-generic drug settlements, and drug reimportation just to name a few. There’s no guarantee these won’t come up again—in fact, one can guarantee that they will at some point in the future—but they didn’t make it into law this time around, and the result is a major victory for drug makers.

Biologics Protections: Arguably the most important piece of legislation housed within the larger bill. The 12 years of “bullet-proof” market exclusivity for innovator biotech drugs would be “legislation of the decade” for biopharmaceutical manufacturers on its own. After the drug industry failed to get 12 years of exclusivity into PDUFA IV/FDAAA in 2007, the chances of getting anything better than 10 years seemed close to zero with a Democratically controlled Congress and the possibility of a Democrat in the White House. Prior to the Massachusetts special election to fill the seat of the late Ted Kennedy, the White House was twisting arms in negotiations to ratchet down the period of exclusivity from 12 years to 4-6 years.

Therefore, if the comprehensive reform legislation had failed to pass, it was highly unlikely drug manufacturers would ever get another realistic chance at 12 years as a stand-alone bill or as part of the next prescription drug reauthorization cycle in 2012.

However, in the end, the drug industry was able to hold onto the crown jewel of health reform legislation because the House was never going to insert any controversial provisions onto the reconciliation “fix-it” bill for fear that it could halt its momentum.

340B and Inpatient Drug Discounts: Pharma companies will get important restrictions and limits on discounts to 340B hospitals and facilities. Under the Senate bill, manufacturers faced the potential of an extension of the steep 340B discounts to inpatients at all qualifying facilities. The expansion was dropped in the House reconciliation bill.

Pharma will also get limitations on the discounts: 1) the floor for the 340B price will be the average manufacturer’s price less the average Medicaid rebate on the product; and 2) the discounts will not apply to orphan drugs sold to children’s hospitals, cancer hospitals, sole community hospitals, critical access hospitals or rural referral centers.

House staffers and pharma lobbyists say 340B is a big program for them and too important. Therefore, the House was willing to stick the 340B limits in reconciliation in exchange for an uptick in industry fees over time.

Closing the Donut Hole: Closing the donut hole has been one of pharma’s top priorities from health care reform since the start of the legislative process. The coverage gap often can cause Medicare beneficiaries to discontinue their medications or switch from a brand to a generic. Manufacturers viewed it as a long-term negative for brand drugs.

This is the one area of the “Pharma Deal” where drug manufacturers had to truly give something up, and the contribution in the form of discounts and revenue raisers represents real upfront money.

There were a number of ways the House could have closed the donut hole. In the original bill passed in November, it was achieved through Medicaid-level rebates for Medicare Part D beneficiaries who are dually eligible for both programs.

By passing the Senate bill as is, Part D rebates were left out of the legislation. Through the House reconciliation bill, legislators chose an incremental increase in industry fees because it was better for pharma company budgeting and it scored better for House Democrats, according to those familiar with negotiations.

Here’s how the fees work: The applicable amount is $2.5 billion for calendar year 2011, $2.8 billion for calendar years 2012 and 2013, $3 billion for calendar years 2014 through 2016, $4 billion for calendar year 2017, $4.1 billion for calendar year 2018, and $2.8 billion for calendar year 2019 and thereafter. “The aggregate fee is apportioned among the covered entities each year based on such entity’s relative share of branded prescription drug sales taken into account during the previous calendar year,” according to the Joint Committee on Taxation. The Secretary of the Treasury will establish an annual payment date that will be no later than September 30 of each calendar year and the fees are credited to the Medicare Part B trust fund.

In the future, it may be easier for the industry to fight expansions of industry fees than to try to deconstruct an institutionalized rebate program.

Here’s how the donut hole gets closed over time. First, a one-time $250 payment for all seniors that hit the donut hole in 2010. Then a mandatory 50% discount from pharma for all brand name drugs beginning in 2011, and in perpetuity. Then, between 2011 and 2020, the donut hole slowly shrinks down to just 25% of what it would be under current law, with federal money filling in the difference between that amount and the pharma discount (including the full amount for generics).

In other words, by 2020, pharma pays 50%, plans pay 25%, and beneficiaries pay 25%.

Moreover, the House reconciliation bill reduces the growth rate of the out-of-pocket threshold between 2016-2019 to consumer price index plus 2% to provide “more help to seniors.”

While the end result may not have been exactly how they drew it up, the outcome for pharma couldn’t have been much better. It’s true, the Medicare Modernization Act of 2003 created a large new market currently growing significantly faster than the overall prescription drug sector without any upfront cost to the industry.

But health care reform is another level of magnitude greater than Medicare Part D and the drug industry was never going to get something for nothing.

Instead, the industry played their cards wisely, secured market expansions and intellectual property protections beyond what many thought possible while simultaneously resuscitating their public image as the insurance industry becomes the long-term target of the Obama Administration.

With the mid-term elections coming in November the possibility that both the House and Senate could switch party control, pharma/biotech, and its representative trade group, PhRMA, will have to decide whether a true realignment is in order or whether it’s time to proactively change course.

But it’s hard to argue that drug manufacturers failed to improve their position after health care reform compared to before.


Mike Wokasch said...

I would not celebrate quite yet. I have been writing about the impact of healthcare reform on the pharmaceutical industry since last July. The realities of healthcare reform will come with the challenges of affordability and sustainability. This will result in an incredibly intense pressure for controlling cost, including easy-to-control prescription drugs.

The majority of those 30 million new patients are more likely than not to get generic drugs which will be the workhorse for drug treatment with financial incentives (low or no co-pay) to encourage their use. Many of the big blockbuster products that we all relate to today will be available as generic drugs by the time healthcare reform really kicks in (2015). And don’t count out follow-on biologics. As long as biologics remain high priced there will be considerable pressure to reassess the 12 year exclusivity. Hatch-Waxman demonstrated Congress’s willingness to revise the law when there is a large enough financial incentive and public support.

To ensure availability (on plan formularies) and favorable reimbursement (low co-pays), new branded pharmaceuticals will need to demonstrate meaningful clinical and economic benefits over other therapeutic options available, including generic drugs.
Mike Wokasch

Cure Acne said...

Many of the big blockbuster products that we all relate to today will be available as generic drugs by the time health care reform really kicks in. And don’t count out follow-on biologists.