In the midst of aggressive committee action, health reform discussions continue to accelerate. The particulars of health reform, however, are still very much in the air right when most pharmaceutical companies are engaged in intensive strategic planning. There is no single “Obama Plan” right now; there is wide variation between legislative proposals circulating the House and Senate. Despite this ambiguity, those of us invested in commercial strategy must work with the knowledge we have and piece together game plans for the most likely scenarios.
Thankfully, we know change is likely. President Obama and his staff have made it abundantly clear they want change and health reform. They care a lot less about the particulars of that change than actually getting a bill through Congress and onto the President’s desk. Even in the absence of major reform there are many certainties, including changes to the Medicare pharmaceutical benefit, increased government use of clinical effectiveness research, and tightened regulation of health plan operations.
We also know that two key objectives guide the specific reform proposals: expanding health insurance coverage and reducing healthcare costs. It’s important to keep these high-level priorities in mind and recognize that policymakers have several options for approaching them. To that end we must recognize that these core elements of reform are scalable, meaning they can be implemented to certain degrees, with varying levels of support, and still obtain the administration’s goal of reforming healthcare.
Understanding Where Support Ranges
Given the strong public resentment of insurance underwriting practices, reform of this business model is close to certain. Change will likely include banning certain industry practices such as having a maximum payment level on an annual basis. Aside from these widely supported components, there are more controversial elements that erode congressional support.
Providing insurance coverage to the uninsured is one example of a controversial proposal. Some media coverage has boiled this down to whether or not to create a public plan. In reality, it’s far more nuanced. This imperative is really about how to deliver insurance to the 45 million people who currently don’t have insurance.
Coverage expansion can be achieved through a public plan, but it can also be done through subsidizing the purchase of private insurance through an exchange or expanding Medicaid eligibility. These mechanisms would be far easier to implement than creating a new public plan. Going up to 200 percent of poverty for Medicaid eligibility covers more than 30 million of the currently uninsured, which would get the Obama administration a clear political victory on the road to universal coverage.
Strategic planning groups need to be gaming out these types of scenarios now to stay ahead of the curve.
Scenario Planning Pharmaceutical Market Reform
The first scenario to consider is something akin to the Senate Finance Bill, which includes Medicaid expansion, a new individual insurance mandate, and reductions in payment to both managed care and the pharmaceutical industry. This scenario appears most likely at this point in the Congressional debate, although the legislative situation remains fluid.
Avalere Health’s modeling proposes that expanding coverage won’t help the industry much. The benefits of insurance growth are that millions of new potential customers will be using more drugs. Many of these customers will be low-income—a group that traditionally uses fewer pharmaceuticals and draws heavily on pharmaceutical assistance programs. Offsetting these positive effects, however, is the fact that the benefits to be conveyed will, under present legislative proposals, be heavily managed. Much of the expansion will come through Medicaid, where rebates increase under the law. In addition, insurance provided through the health insurance exchange created under the law will undoubtedly be heavily managed with preference for generics and strict tiering. On balance, the increased volume from insuring some 30 million people will be almost completely offset by price reductions from shifts to more heavily managed forms of pharmaceutical benefits and other price concessions that are required under law.
To managed markets, this more moderate version of reform legislation brings fundamental change and increased demand for cost savings and evidence-based payments. It also brings taxes to employers in the form of more expensive health insurance. Modeling these scenarios requires creative thinking about the shape of insurance markets in the future, as insurance regulations will change risk pools and the incentives that face managed care. The law provides significant quality-based bonus payments for managed care without specifying the basis of such payments. Pharmaceutical company strategy demands plans for how to align with these incentives.
A second scenario would be a stripped-down bill with just an expansion for the poor and paid for by healthcare cost reductions. The model for this type of an approach is the Balanced Budget Act, which brought modest change for the pharmaceutical industry including an expansion in coverage for children. This approach could be bipartisan and offer the opportunity for the industry to offer a range of initiatives focused on adherence and compliance, serving as a key to future commercial success. Furthermore, there is broad bipartisan support for reform of insurance underwriting practice; this could include a ban on experience rating. While a limited reform scenario appears less likely at this point, it represents a fallback approach with a high probably of success if pursued.
A third scenario to consider is if no reform bill passes. This is a dream scenario for some in Congress who have staked much on seeing reform efforts fail. But the pharmaceutical industry should be wary of this outcome. Health reform failure might be damaging over the longer term. An absence of legislative change probably means more and more invasive industry regulation, which could be unpredictable in scope and effect. This range of unknown legislative efforts could turn into an industry pile-on. While the President has said failure is not an option, a long delay or galvanized political opposition during October and November could produce an outcome where nothing passes this year and the debate spills over into the 2010 election.
Preparing Now for the Most Likely Reform Outcomes
There are other scenarios, of course. Regardless of whether major reform happens, dynamics between manufacturers and their customers is going to be different in the near future. Now is the time for the industry to map out the most likely scenarios and determine how, exactly, varying levels of change will affect their customers and themselves.
Effective strategic planning processes focused on health reform will share a few common elements. First, they will associate reasonable probabilities to a range of feasible outcomes such as those outlined above. Second, they will incorporate the inevitable changes associated with evidence-based medicine and health IT that emanate from prior legislation and remain government priorities. Third, they will incorporate commercial changes in managed care that interact with reform in important ways, such as the recent re-shaping of Medicare Advantage markets and the inevitable changes in underwriting practices that will be adopted irrespective of the broader reform outcomes.
Strategy absolutely needs to be practical and context specific to the commercial priorities of the company pursuing the discussion. If injectables are a primary commercial focus, for example, strategic planning needs to focus heavily on those policy discussions because they differ from other drugs. Any strategy also needs to be simple, practical, and owned by key business leaders. This is perhaps the most important point and one that often prevents organizations from anticipating and responding to policy scenarios. If strategy around potential policy change can’t be reduced simply and effectively into the bonus plan of a corporate manager, it won’t drive behavior.