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Will Federal Healthcare Reform Help Put New Jersey Drugmakers 'In the Money'?

Ed Silverman | November 13, 2013

More insured people buying more medicine: the math is deceptively simple, but drug companies say the numbers don't necessarily add up

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Discussions about the Affordable Care Act dominate the airwaves, as pundits and politicians weigh in on the continuing saga of the federal health insurance marketplace. But lost in all this chatter is the fact that Obamacare may have a profound -- though rarely discussed -- effect on New Jersey's economy by increasing the amount of prescription medication that's likely to be consumed.

The law is expected to expand the number of insured Americans by an estimated 32 million people and, consequently, play a key role in boosting pharmaceutical industry revenue by 33 percent by the end of the decade -- to $476 billion by 2020, up from $359 billion last year, according to GlobalData, a market research firm.

In other words, more people with health insurance can be expected to purchase more medicines, which presumably should ring registers for the pharmaceutical industry for the foreseeable future. Yet drugmakers say they are uncertain about the extent to which they will benefit from the larger pool of insured patients, or when that benefit will be realized.

There are other potential advantages for drugmakers. For one, the ACA will close the "donut hole" in the Medicare Part D prescription drug program by 2020. It's already shrinking, as drug companies discount the price of brand-name drugs for patients in the donut hole and Medicare picks up the cost of generic drugs. This is particularly significant, since the number of people on Medicare is climbing. GlobalData indicates that the elderly will make up 22 percent of the population by 2020, up from 19 percent today.

What's more, the ACA puts in place extended patent protection for expensive biologics (brand-name medication), which was granted in exchange for creating a system to approve so-called biosimilars (generic drugs).

Just the same, some executives are circumspect about the possibilities.

“Expanded access (to medicines) is double-edged sword,” Eli Lilly chief executive officer John Lechlieter said at a recent industry conference. “Greater access is inherently good for our industry, in general. The question, however, is ‘What is the upside to this access?’ I don’t think any of us have been able to say that this will lift all boats. It may be good for company A or company B, but the verdict is still out.”

There are several reasons why he hedges. One item is the grand bargain -- the estimated $100 billion in excise taxes and discounts on medications that the pharmaceutical industry agreed to pay over 10 years. Each drugmaker will pay an annual fee based upon its market share of the total amount spent on medicines by various government agencies, such as Medicaid and the Veteran’s Administration.

Another variable is the type of insurance coverage that consumers choose to purchase through health marketplaces (aka "exchanges") and the specific prescription drug benefits in the available plans. Across the country, marketplaces can offer different plans with different terms and, of course, this will determine the sales that drugmakers stand to realize.

“There are going to be changes in benefit design and this will have implications for the pharmaceutical industry,” says Dan Mendelson, chief executive officer of Avalere Health, a strategic consulting firm. “Coverage is not going to be what it was last year. (Manufacturers are) going to need to adapt to a world where patients are being asked to pay more, and insurance companies are experimenting” with different benefit packages.

“The ACA is related to the (healthcare) delivery system and one of the things about the delivery system right now is there’s a huge amount of consolidation,” he continues. “Buyers are changing. And in a world where things are integrating and buyers call more of the shots, pharmaceutical companies need to rethink how they sell the products and to whom. Their sales model has to evolve.”

This reflects an ongoing emphasis on cost. For instance, a recent survey found just 11 percent of oncology providers – primarily, large group practices and hospitals -- have advanced data-mining capabilities, but this is expected to jump to 40 percent in just two years. This rapid growth has implications for drugmakers, because providers can be expected to use that data to track medication costs and outcomes.

“It’s a pretty significant projected increase in data capabilities, because it means that the pharmaceutical industry will soon face much more scrutiny in the trenches,” says Rhonda Greenapple, who heads Reimbursement Intelligence, a market research and consulting firm that, along with the Cancer Business Center Summit, queried 50 oncology providers, including oncologists, hospital directors, and data administrators.

Indeed, the Affordable Care Act will hasten the trend toward assessing the economic value of medicines, a proposition that challenges drugmakers already grappling with heightened demand in other countries -- notably, Europe -- that want added evidence of cost effectiveness before reimbursement is granted. Now, the US is tilting ever faster in the same direction.

“The Holy Grail of the drug company mantra is (when) a drug truly does reduce the total cost of care and generate a savings. This will put it to the test,” says Randy Vogenberg, a principal at Bentelligence, a consulting firm that specializes in benefits design.“ But if you’re not a savings, then you’re a cost, especially if a drug is high-priced. Unless you can demonstrate the value proposition, what’s the point of using the drug? It’s a huge dilemma" for drug companies.

“The problem is that drugmakers have been in a kind of sheltered world where they produce a product and insurance will basically cover it," he continues. "What healthcare reform did in a structural way is upend everything that’s been done in this country for the past 35 or so years. This allows the purchasers to reform relationships (with drugmakers). So the ACA works for and against them, because most drugs can’t show those savings and don’t generate a major change in the healthcare status of an individual.”

Meanwhile, the brand-name pharmaceutical industry will continue to grapple with the now-familiar problems of increasing generic competition and costly struggles to replenish product portfolios. And this may mean still more restructurings that involve layoffs, plant closings and, most of all, shifting strategic priorities. Whether the Affordable Care Act exacerbates and buffers these trends is unclear.

“We don’t know which kinds of (health) plans consumers will buy,” says Lechleiter. “Hopefully, a lot of this will become clearer over the next couple of years." Stressing the uncertainty ahead, he adds, "It’s not the beginning of the end -- or the end of the beginning”

Ed Silverman is the founder and editor of the Pharmalot website, which tracks the pharmaceutical industry.

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