The pharmaceutical industry faces a clear trade-off in the current healthcare reform debate. On one hand, expanded coverage
for some 45 million Americans would greatly enlarge the pool of customers for drugs and medical products, and enhance compliance
with prescribed treatments. On the other hand, higher rebates and regulatory modifications could open the door to price controls
and erode revenues. Industry has offered up concessions to help pay the trillion-dollar cost of achieving universal coverage,
with an eye to staving off even harsher curbs on revenues that could jeopardize innovation.
While nothing comes easy in healthcare reform, devising ways to increase coverage is relatively uncomplicated. Congressional
leaders have proposed broadening access to care by expanding Medicaid, requiring all individuals to obtain coverage, mandating
that employers provide insurance or pay a penalty, reforming the insurance market to limit exclusions based on pre-existing
conditions, and forming an insurance exchange that offers coverage options to the uninsured, including some kind of government-supported
That last item, in particular, has been a lightening rod for opponents of government involvement in healthcare. Pharma companies
are alarmed over proposals authorizing government negotiation of prices for drugs covered by the public plan. While that's
not as threatening as a full-scale repeal of the non-interference clause (which prevents federal negotiation of drug prices
for Medicare Part D), it does open the door to a larger government role in pharma pricing. And even without a public plan,
Congress is likely to establish some kind of federal health authority to make difficult decisions on payments and benefits,
including medical product coverage, cost-effectiveness standards, and pricing decisions.
The Hunt for Savings
Devising a way to pay for the enormous cost of the program is even more difficult. The scope of that difficulty finally hit
home in June when the Congressional Budget Office (CBO) issued a much-higher-than-expected cost estimate for reform legislation
under development by the Senate Health, Education, Pensions and Labor (HELP) Committee. The draft proposal of that legislation
would cost $1 trillion over the next decade, and extend coverage to only 16 million people. The Senate Finance Committee,
facing an even higher $1.6 trillion CBO estimate for its proposal, went back to the drawing board to curb expenditures and
identify more savings.
Meanwhile, House leaders rolled out a reform bill developed jointly by three committees: Education and Labor, Energy and
Commerce, and Ways and Means. Democrats applauded its broad coverage and extensive benefits, and moved to pass the 1,000-plus-page
measure as quickly as possible; Republicans predicted skyrocketing budget deficits, higher taxes, and government rationing
of healthcare. Once again, CBO was the spoiler, testifying that little in the House legislation would curb federal spending
President Obama then went on the offensive, pressing hard for a reform bill with a $1 trillion, 10-year price tag that covers
at least 75 percent of the uninsured. That proposal has expanded the hunt for every possible source of savings and revenue,
putting pharma costs and coverage directly in the line of fire.
Last May, the Pharmaceutical Research and Manufacturers of America (PhRMA) joined a high-profile provider group that promised
collectively to decrease the annual growth in healthcare outlays by 1.5 percent—a move calculated to save $2 trillion over
10 years. The group offered a list of "soft" savings strategies, including reducing unnecessary hospitalizations, promoting
evidence-based best practices, managing chronic disease, and adopting health information technology.
Subsequently, PhRMA rolled out a plan to generate $80 billion in healthcare savings, starting with a striking proposal to
give 50 percent discounts on drugs prescribed to Medicare patients who fall into the notorious Part D "doughnut hole." That
proposal is attractive to reformers because it could save an estimated $25 billion off the cost of eliminating the coverage
gap altogether. The discount plan was thus incorporated into the House bill's provision for phasing out the doughnut hole
over 15 years. (Most biotech drugs are not affected because they are administered in hospitals or clinics, and thus covered
under Medicare Part B. But as more biologics shift to outpatient use and gain coverage through Part D, the gap would become
a greater hurdle.)
Drug companies are also slated to provide another $20 billion over 10 years by giving higher rebates on Medicaid drugs. Legislators
propose to increase the basic rebate from 15 percent to 22 percent, extend rebates to new formulations of existing therapies,
boost rebates on generic drugs, and require manufacturers to pay rebates to states for drugs provided to Medicare managed
Pharma companies had hoped the discount plan and higher rebates would defuse support for a proposal by House Energy & Commerce
chairman Henry Waxman (D-CA) to impose an additional rebate on Part D drugs prescribed to low-income beneficiaries. Waxman
is seeking to recoup the "windfall" gains manufacturers have enjoyed since Medicare shifted "dual eligible" seniors from Medicaid
drug benefits to Part D. The additional rebate in the House bill is intended, once again, to offset the high cost of closing
the doughnut hole.