Code Orange - Pharmaceutical Executive

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Code Orange


Pharmaceutical Executive




Media coverage of the new health reform bill has hardened perceptions among political insiders as well as the public that it represents a giveaway to Big Pharma. There is an underlying grain of truth to the assertion that "more care for more people" will likely stimulate additional sales. But overall margins are likely to suffer as a consequence of higher mandated rebates for the expanded government programs, as well as the new "voluntary contributions" companies have agreed to make in order to shrink the Medicare Part D prescription "donut hole."

An effective internal strategy for managing the downsides of reform is equally, if not more, important than being on the right side of voter sentiment. Reform is ultimately not about good public relations, but about preserving profitability in a much more dynamic commercial environment controlled increasingly by a few lead payers with vast purchasing power.


An Earlier Precedent: Healthcare Reform and the 2005 Deficit Reduction Act
Many Big Pharma companies are now booking charges against revenue in anticipation of the rebates fallout. In contrast to the expansion of insurance coverage—and the arrival of many new customers—these direct "revenue enhancers" aimed at pharma profits will roll out in the next few months. The impact varies among companies.

Nevertheless, the fundamental truth is that pharma is already in hock to a drug price regime that is highly audited, over legislated, and tied up in yards of red tape. This is because the federal government has a proven model for getting the best price for drugs via rebates, discounts, and other tools across multiple programs. The new law raises the bar yet again in terms of complexity, and showcases government's continuing willingness to change these complex rules mid-game. It overturns well-established aspects of drug pricing and government rebate compliance, while creating new zones of regulatory intervention such as the annual "government programs market share fee," a possibly open-ended contribution that could grow in scale over time, and which launches in 2011.

The signal to industry is clear: Flexibility and scalability of response in processes, data and systems is paramount now and in the future. Given that healthcare reform (HCR), in essence, is more about improving access to healthcare and less about cost containment, it is reasonable to expect even more cost-saving mandates in the future if the spiraling cost of care does not slow down.

HCR requires some 20 different and major programmatic changes in how companies approach different aspects of their sales to the Medicaid, Medicare, PHS, and in some cases even commercial markets.

Key pricing, revenue and compliance provisions of HCR:

Material increase in Medicaid drug rebate liability for branded, generics, and special categories of drugs resulting from higher required rebate percentage, expansion of rebate eligible programs, and narrowing of sales in the AMP definition

Expanded 340B discount program with provisions dealing with price integrity, retroactive adjustments, and refunds for overpricing to eligible hospitals or facilities. Penalties for intentional overcharges

New rule for transparency and public reporting of AMP and FUL "prices" for multiple-source drugs

Manufacturer discounts of 50 percent on brand name drugs for certain Medicare Part D enrollees in the coverage gap

An annual flat fee on pharmaceutical manufacturers beginning in 2011, to be allocated across the industry according to market share of utilization under Medicaid, Medicare Parts B and D, VA, and Tricare. The fee does not apply to companies with sales of branded pharmaceuticals of $5 million or less.


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