The impact of major legislation in healthcare is observable only with the passage of time. Markets rarely follow the neat
contours of the law and there are repercussions often unseen in the heady confidence that accompanies the end of partisan
political debate. Eight years out from passage of the 2004 Medicare Modernization Act, which granted a new drug entitlement
(Part D) to seniors, what precedents might we apply from this experience to the more sweeping and complex provisions of the
Obama Administration's 2010 Affordable Care Act (ACA)? The question is important in defining the future of the pharma industry
business model, because this month marks the start of the law's most critical implementation phase, where the states and the
federal government begin offering a menu of plans for subsidized health coverage to millions of citizens left out or underinsured
in our current system of care.
Will pharmaceutical manufacturers obtain a fresh growth dividend from this promise of expanded access to the uninsured, in
much the way that Part D did after that law was fully implemented in 2006? Or is it likely to be a false promise, that paper
tiger I call "Not Much Ado...About Something"? Our simple answer: the precedent for a jump in revenues just isn't there; despite
its vast scope and frequently contradictory ambitions, the ACA will not amount to much more than "business as usual" for most
of big Pharma and its brands.
With the advent of the Part D drug benefit in 2006, the pharmaceutical industry saw a major increase in total branded sales,
with IMS Health reporting a doubling of revenue growth rates, from 4.1 percent in 2005 to 8.4 percent. Many brands benefited
from the improved revenue and boosted margins as well, when a large bolus of Medicaid patients who were "dually eligible,"
along with several million indigent patients receiving free product, were moved into Part D as Low Income Subsidy (LIS) patients.
However, these gains were followed by increased payer control and concessions to the largest managed care Part D plans, with
the result that these plans now extract much higher rebates from manufacturers than commercial plans. The changes are now
more or less permanently embedded in the relationship between the industry and payers, which appear to hold the upper hand
in pricing negotiations.
Nevertheless, many of our client companies have looked at the expansion of health coverage from ACA and wondered, or perhaps
hoped, that there might be a sequel to the 2006 blockbuster scenario in 2014. We believe the odds are stacked against that
happening again for the vast majority of pharmaceutical brands.
There are several reasons for this pessimism. For many drug-makers, the greatest impact of the ACA has already taken place.
That impact consists of a decline in net margins from manufacturers picking up 50 percent of the cost of drugs for Medicare
patients whose expenditures lead them to being placed within the coverage gap or "doughnut hole," where the burden of payment
falls back on to them as individual patients. For the average retail product, company margins have declined by eight to 10
percentage points for prescriptions filled by the standard eligible population in Part D. However, depending on the importance
of Standard Eligible patients (who can account for as little as 15 percent of a product's Part D volume, or, alternatively,
as much as 80 percent), as well as cost of care variations by geographic location, the impact of this subsidy can be many
times greater, or it can be negligible. For some specialty products the negative impact can be less still, and the 50 percent
subsidy to patients may actually have resulted in increased utilization of covered medicines.
So it goes for the idea of any upside from expanded health coverage under Obamacare. The impact of ACA in 2014 really depends
on where a brand ends up this year: with its formulary coverage, the therapeutic class it competes in, and where it has the
strongest position geographically in Medicaid and commercial plans.
There are three basic conclusions that we draw from this analysis.
» Volume increases will not be as immediate, nor as significant, as was the case for Part D.
» Growth and margin improvement are contingent and cannot be generalized. Impacts will vary significantly depending on the
product and whether it has generic alternatives, the time it has been on the market, and whether co-pay support (as in many
specialty products) has become critical to maintaining patient adherence to therapy.
» Any upside, where it does exist, will vary geographically—mostly in the Democratic-leaning "blue states" that have expanded
the level of Medicaid coverage in spirit with the Obama administration's approach.