Securing Savings

February 1, 2009
Jill Wechsler, Pharm Exec's Washington Correspondent

Jill Wechsler is Pharm Exec's Washington Corespondent

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-02-01-2009, Volume 0, Issue 0

A close look at the healthcare industry will separate real cost-cutting measures from money-saving myths.

Everyone wants to reform the nation's healthcare system. The main problem is that the US healthcare bill keeps rising faster than the economy, with little to show in terms of higher quality of care. Recent analyses by the Centers for Medicare and Medicaid Services (CMS) and the Congressional Budget Office (CBO) indicate just how difficult it is to make a dent in healthcare expenditures, even with a record slowdown in outlays for prescription drugs.

Jill Wechsler

Last year, CMS projected that the nation will spend $2.6 trillion for healthcare in 2009, which equals 17 percent of gross domestic product. Under current policies, that amount is projected to rise to 20 percent of GDP by 2017, and nearly 50 percent in 2082, according to the CBO reports, "Key Issues in Analyzing Major Health Insurance Proposals" and "Budget Options on Health Care" (available at www.cbo.gov). Annual healthcare spending will increase from $8,300 per person today to $13,000 by 2017, and federal outlays for Medicare and Medicaid will grow from $720 billion to about $1.4 trillion by 2019. The number of uninsured people is projected to rise from 45 million today to about 54 million in 10 years because health insurance premiums will increase much faster than income, making coverage more difficult to afford.

Drugs Declining

One bright spot on the healthcare horizon is a slowdown in expenditures for prescription drugs. In 2007, the growth rate for spending on drugs hit a 45-year low, according to the CMS Office of the Actuary. Outlays rose only 4.9 percent, to $227.5 billion—that's a little more than half the 8.6 percent rise in 2006, and the slowest rate of growth since 1963.

However, this development carries little good news for pharma companies as increased utilization of cheaper generic drugs drove the decline. Generics accounted for 67 percent of drugs dispensed in 2007 (up from 63 percent in 2006 and 60 percent in 2005) as more blockbuster drugs went off patent, six-month exclusivity periods expired, and formularies set higher copays for branded products.

Doughnut Hole: Too Big?

Wider use of generics and retailer discount programs have also curbed total drug prices, which rose a paltry 1.4 percent in 2007—even less than the 3.5 percent price increase in 2006. Brand name drug prices increased at a higher rate, but less than in previous years. CMS also noted that drug utilization declined in some therapeutic areas due to concerns about drug safety, as the proliferation of black-box warnings from FDA discouraged prescribing of certain medicines. Fewer blockbuster drugs coming to market further reduced the number of products able to command premium prices.

CMS statistician Micah Hartman noted that the slowdown in drug outlays was "one of the major factors driving down overall healthcare spending growth in 2007." Total expenditures for healthcare increased only 6.1 percent in 2007, to $2.2 trillion, the smallest increase since 1998.

The Push for Biosimilars

Analysts predict that savings from generics could be extended by promoting competition for biotech therapies. CBO calculations support such a move, projecting $9.2 billion in government savings over 10 years from an abbreviated pathway for FDA approval of follow-on biologics (FOBs). CBO assumes a 12-year exclusivity period for brand-name products and limited requirements for duplicating innovator clinical trails. Medicare would save the most, but other government health programs could also gain from access to less costly therapies.

The savings would be even greater—about $12 billion over ten years—if CMS also revised billing codes for biologics administered by physicians under Medicare Part B. Placing an FOB in the same billing code as a brand-name counterpart allows CMS to reimburse physicians based on a weighted average of the prices paid to all manufacturers in the group. Doctors who dispense less expensive FOBs thus can retain the difference between product cost and Medicare payment, while those who prescribe more expensive brand-name products would face a financial penalty.

Rebates Required

Another cost-cutting strategy is to require manufacturers to pay rebates on medicines purchased by Medicare Part D plans. House Energy and Commerce Committee chairman Henry Waxman (D-CA) has been pushing an initiative to reduce "windfall profits" to manufacturers due to reduced rebates to state Medicaid programs. CBO calculates that a mandatory 15 percent rebate of the average manufacturer price, beginning in 2011, would save the government $33 billion over five years and $110 billion over ten years. Manufacturers would pay rebates to retain coverage for their products by Medicaid, the Veterans Health Administration, and other government health programs, as well as Medicare Parts B and D. The policy builds on the Medicaid drug rebate program, but drops the "best price" provision to reduce the impact on price negotiations by private purchasers.

The downside is that over time manufacturers will likely try to offset rebates by raising prices for new medicines, and by introducing new strengths and dosages for existing drugs, thus commanding higher rates. But Sanford Bernstein financial analyst Timothy Anderson calculates that a 20 percent rebate on all Part D drugs "would be tolerated surprisingly well" by leading pharma companies, reducing earnings only 3 to 10 percent.

Savings Elusive

With many popular reform proposals, however, CBO sees little potential for reducing government outlays. Prevention and disease management programs may lessen some patients' need for expensive care, but such initiatives can be expensive, especially if provided for large populations. Anti-obesity and anti-smoking campaigns may extend lives, but over time will increase demand for elderly care. And modifying medical malpractice laws would have only a modest impact on healthcare expenses.

Many policymakers support wider adoption of health information technology to help lower healthcare costs and improve quality of care. But implementation will be costly up front—more than $50 billion a year to establish a national health IT system. CBO also continues to challenge the idea that comparative effectiveness research will generate savings. Budget analysts estimate that studies weighing the clinical effectiveness of medical products and procedures could lower total healthcare spending by about $8 billion over 10 years, but upfront costs would eat into most of those savings and yield limited financial gains.

CBO agrees with pharmacy benefit managers and manufacturers that permitting the federal government to negotiate lower Medicare drug prices with pharmaceutical companies is likely to produce "small if any savings." The Secretary of Health and Human Services (HHS) might persuade some companies to reduce prices for select single-source products, but would not have sufficient leverage to secure significant discounts.

These issues will be revisited in coming months under a number of initiatives. Congress has moved quickly to reauthorize the State Children's Health Insurance Program (SCHIP), and is working with the White House to craft a 2010 budget, tax changes, and additional economic stimulus proposals. Most significantly, the Medicare physician-pay solution looms ahead.

Many legislative experts believe there's not enough time to address broad health issues this year, but reform advocates insist that American industry cannot compete globally unless the nation develops a more efficient and cost-effective healthcare system.

Jill Wechsler is Pharmaceutical Executive's Washington correspondent. She can be reached at jwechsler@advanstar.com

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