Elephant or Specialist?

May 01, 2005

State Waiver programs
The Medicare Modernization Act (MMA) of 2003 is about much more than providing a new drug benefit to the elderly. The Bush Administration has put in place the groundwork for new market forces that will forever change how pharmaceuticals are commercialized. Although the long-term impact of this change is not known, unprepared companies are at a serious disadvantage.

The industry is already vividly aware of the impact Medicare drug formularies might have. The 34 formularies will be reviewed and monitored by the Centers for Medicare & Medicaid Services (CMS). They must use clinical evidence to justify drug use, provide step therapy starting with lower-priced medications, guarantee access to generics and other low-price medications, and not be discriminatory.

The formularies will change the drug business, because:

  • Each patient group must have equal access to low-price medications, which will make it difficult for drug companies to obtain a preferential position.
  • High-price therapies without clear clinical differentiation may have the same reimbursement as lower-priced medications.
  • Medicare drug choices may spill over to impact all business segments, because 98 percent of all physicians treat Medicare patients.
  • Some drug benefit mangers may manage both Medicare and Medicaid populations, possibly resulting in consolidation of public sector drug purchases.

Most important, the act allows CMS to veto any formulary approach that does not provide enrollees appropriate access to low-cost drug therapies.

But these formularies are not the end of the process—they're just the beginning. To truly bring market forces to bear on pharmaceuticals, whether in the context of Medicare or in the wider healthcare marketplace, more changes are necessary. The Bush Administration recognizes that real change requires transparency about pricing, incentives for healthcare providers and patients to go with lower-cost alternatives, and outcomes data to support decision making.

Medicare is pursuing all these ideas and more in a series of demonstration programs—some complete, some in process, and others just beginning. Pharma has not yet paid much attention to these programs, but they promise to yield massive changes to the industry. Some will help set the rules and procedures for the country's emerging public sector in healthcare. This sector already makes up 28 percent of the US population, and in some chronic-care market segments, accounts for more than 50 percent of drug use.

Some of these new rules will be written into law. Others will spill over from Medicare and affect the ways payers deal with drug utilization. And with a projected Medicare bankruptcy date of 2020, we have not seen the end of these initiatives— additional and tougher Medicare (and Medicaid) legislation is probably on the horizon.

Already, the demonstration projects contain a detailed sketch of how Medicare intends to change the very nature of pharmaceutical marketing over the next decade. For companies willing to look ahead, some key survival strategies are already clear.

Transparency, Incentives, and Data Medicare sponsored many demonstration projects over the last decade, and the 2003 MMA legislation created more of them. These programs fall into four broad categories:

E-prescribing The e-prescribing demonstration project will start to be implemented by 2007-2008. The system will link all payers, providers, and pharmacists by an electronic system. It will render all drug choices and prices transparent—and make it tough for products without a clinical advantage to command a price premium.

E-prescribing offers real benefits to some pharma players, especially those with a specialty business. Today, physicians are not fully aware of the prices of all drugs with a similar therapeutic profile. That gives a distinct advantage to drugs with larger marketing budgets, regardless of their reimbursement cost. E-prescribing will give greater physician access to less-expensive products—possibly without large commercial expense.

Financial incentives Several demonstration projects use financial incentives or capitated payments to healthcare providers to encourage the use of inexpensive drugs. These projects will be completed between 2006 and 2008, and they are "budget neutral," meaning physicians are compensated only if they reduce overall Medicare costs.

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