Big Changes Ahead for Biotech Manufacturers

To expand coverage amidst the economic crisis, Obama will be looking hard for ways to cut healthcare costs.
Dec 01, 2008
Volume 21, Issue 12

Jill Wechsler
Throughout the election campaign, President-elect Barack Obama pledged to reshape the nation's healthcare system and to provide health coverage to millions of uninsured Americans. His strategy is to expand federal and local government programs that provide care for individuals and children, and to require employers to "play or pay" to support insurance for workers. Although Obama stopped short of backing a mandate for universal coverage as advocated by many Democrats, his proposals raise the prospect of increased government involvement in the nation's healthcare system.

Although many voters cited healthcare as an important election issue, the need for a new economic stimulus package will take priority over health reform next year. Under pressure to address rising unemployment and low economic growth, Obama is expected to seek more limited changes to the healthcare system instead of pushing a comprehensive reform plan.


Consequently, early initiatives for the new administration will be to revoke federal curbs on funding for embryonic stem cell research and to expand the State Children's Health Insurance Program (SCHIP). There is broad support for a larger program, but partisan wrangling over just how generous to make SCHIP stymied legislative action over the last two years. President Bush vetoed SCHIP expansion bills in October 2007 and January 2008, and Congressional leaders decided in September to hold off on further action until a new, more agreeable leader was in the White House.

Expanding SCHIP and Medicaid would help achieve Obama's goal of providing coverage for another 25 million individuals, including all children. Another key reform element is to mandate that medium and large employers support insurance coverage for workers or pay a fee. Those individuals without employer-based coverage and small companies would be able to purchase private health insurance or enroll in a government-sponsored national plan through a National Insurance Exchange. And insurers would have to issue policies to all applicants without regard to pre-existing conditions.

Expanded coverage would be good news for biopharmaceutical manufacturers. Third-party payment for medical therapies has boosted use by shielding consumers from the full cost of expensive treatments. The Medicare Part D drug benefit brought the nation's elderly into the system, further increasing outlays for medicines. But the program also has turned the spotlight onto drug costs and value, prompting increased Congressional scrutiny of drug pricing, marketing, safety, and effectiveness.


Initiatives to expand coverage, moreover, would be expensive—between $1.2 trillion and $1.6 trillion over ten years (2010 to 2019), depending on various assumptions and models. Lower tax deductions for insurance premiums would offset some of the outlays, but Obama looks to a number of added initiatives to reduce federal spending for healthcare. He has jumped on the comparative effectiveness bandwagon, predicting that an institute producing research on the relative effectiveness of alternate treatments would save money by reducing unnecessary treatment. Analysis by the Lewin Group puts the savings at a modest $40 billion, based on low expectations that providers and patients will adhere to new medical guidelines. Expanded health information technology could net $100 billion over ten years, but little savings for the near term. And there could be more gains from expanding disease management programs, coordinated care models, and broader pay-for-performance programs.

Because of the uncertainty about achieving real savings from these cost-cutting efforts, the new administration will be looking hard to reduce outlays for prescription drugs. A prime candidate is eliminating the Medicare non-interference clause, a controversial policy that prevents the Secretary of Health and Human Services (HHS) from directly negotiating payments for drugs covered by Medicare Prescription Drug Plans (PDPs).

The Part D program relies on private insurers to hold down costs by negotiating drug prices with pharmaceutical companies. This has been successful, according to the Centers for Medicare and Medicaid Services (CMS), which recently announced that Medicare spent $44 billion for drugs in 2008, much less than the $74 billion originally predicted. However, PDPs do pay more for drugs than federal healthcare programs offered by the Veterans Administration and the Department of Defense, among others, that can use federal supply schedule rates. And state-administered Medicaid programs reduce outlays for drugs by collecting additional rebates from manufacturers.

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