Healthcare Reform Expands Coverage, Promotes Innovation

Broader benefits and biosimilars will offset hefty fees and discounts while preserving R&D incentives.
May 01, 2010
Volume 23, Issue 5

Jill Wechsler
The massive healthcare reform legislation approved by Congress in March promises to significantly expand the number of Americans with some kind of healthcare coverage and pharmacy benefits, enlarging the market for prescription drugs. Manufacturers will pay fees and discounts adding up to $105 billion over 10 years, according to Avalere Health. But that appears a reasonable tradeoff for policies that support innovation critical for biotech companies.

The main selling point for the reform package is that it offers healthcare benefits to some 32 million uninsured. Individuals and small companies will be able to purchase coverage through new state-based insurance exchanges. Prescription drug coverage is included on the list of essential benefits required for all insurance plans offered through the exchanges, making reimbursement for orphan drugs and specialty products more likely. Moreover, insurance market reform, which prevents denial of coverage based on pre-existing conditions and curbs copays and annual and lifetime limits, promises to expand pharmacy benefits to patients with serious or chronic health conditions and thus in need of medicines. State Medicaid programs also will expand coverage to 11 million more lower-income adults and children, bolstering drug coverage in the process.


Multiple changes to Medicare will enhance drug usage by seniors. The legislation authorizes annual wellness visits that will produce immunization and medication recommendations. There's more outreach to low-income beneficiaries to encourage appropriate drug use, and improved complaint and appeals systems to help seniors obtain access to needed therapies. The bill codifies mandatory coverage of drugs in six protected drug classes, while leaving the door open to further modification.

The biggest change is to close up the controversial Medicare Part D donut hole over 10 years. Currently, Medicare beneficiaries who spend over $2,830 on drugs hit a coverage gap where they have to pay the full cost of medications; after drug outlays exceed $6,440, the government covers 95% of additional "catastrophic" costs. To provide some immediate relief, the government is giving a $250 rebate to beneficiaries who fall in the donut hole this year (2010). Beginning in January 2011, manufacturers will cover 50% of the negotiated rate for brand medicines filled by seniors in the gap. Medicare beneficiaries will pay the discounted price at the pharmacy counter, and manufacturers will reimburse pharmacies for the difference.

In 2013, Medicare will close the donut hole further by covering a portion of the remaining cost to beneficiaries, starting low but ramping up to pay 25% of donut hole outlays by 2020. Medicare also will increase coverage of generic drugs in the gap, beginning in 2011, until plans pay 75% of the cost in 2020. At that point, policy makers consider the donut hole essentially closed because the remaining 25% patient share will be in line with beneficiary copays on drugs before hitting the coverage gap.

Although eliminating the donut hole will cost manufacturers up to $32 billion over 10 years, the program removes a major source of confusion and hardship for elderly patients. The change also is expected to boost compliance with prescribed therapy and to reduce the growing number of seniors who halt medications or switch to generics when they hit the gap. The lower cost to beneficiaries, moreover, will move them more quickly to catastrophic coverage.

In addition to providing donut hole discounts, manufacturers will pay 28 billion over 10 years in new fees, starting at $2.5 billion in 2011. The fees will be apportioned by the Treasury Department based on a company's share of branded prescription drug sales the previous year to Medicare, Medicaid, the Veterans Administration, and Department of Defense healthcare programs. Manufacturers with government sales less than $5 million get a pass, while fees scale up proportionally until sales hit $400 million a year.

Pharmaceutical companies also will ante up another $38 billion in higher Medicaid rebates. The rebate jumps from 15 to 23.1% of average manufacturer price for brand drugs, and from 11 to 13% for generics, retroactive to the beginning of this year. The rebate also will apply to new formulations of oral solid dosage forms, and it will extend to Medicaid managed care organizations, a change that may encourage community health centers to press for additional discounts.

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