Big Changes Ahead for Biotech Manufacturers

Published on: 
BioPharm International, BioPharm International-12-01-2008, Volume 21, Issue 12
Pages: 40–45

To expand coverage amidst the economic crisis, Obama will be looking hard for ways to cut healthcare costs.

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.

Jill Wechsler

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.

A first order of business for many Democrats is to simplify and centralize the Part D program. Biopharmaceutical manufacturers strongly supported the decentralized approach to Part D to avoid establishing a Medicare formulary that would set a coverage and cost model for the broader healthcare market. PDPs consequently have crafted drug coverage programs to fit federal standards as well as corporate business goals. Noticeable differences among PDP formulary preferences, copayments, and premiums have generated competition and cost variation, but also have confused seniors. A particular sore point is rising coinsurance for high-cost biotech therapies that fall into the fourth tier of many formulary structures.

Allowing direct price negotiations by the HHS secretary could cut manufacturer revenues by some $10 billion to $30 billion, according to the Boston Consulting Group. The amount could be even more if private insurers and pharmacy benefit managers demand the same low price set by Medicare. The real impact of direct government price negotiations is unclear, though. There isn't much room to negotiate lower prices for drugs that have no therapeutic alternatives or for therapies in those classes where Medicare requires coverage of all medicines. Manufacturers may be reluctant to accept a very low price that could extend to the broader market, but it will be difficult to refuse to sell a product to the huge Medicare population.

Another strategy for curbing Medicare drug outlays is to require manufacturers to pay rebates to CMS. This could start with reimbursement for drugs provided to dual-eligible seniors in PDPs, those low-income individuals who previously obtained drug coverage from state Medicaid plans.


Another cost-cutting strategy backed by both Democrats and Republicans is to liberalize re-importation of drugs from other countries. Obama makes the usual proviso that the drugs coming in must be safe and effective. But taking steps to ensure product quality appears to limit potential savings. Several state and local drug import programs have been dropped because of high costs and low consumer interest.

Moreover, recent scandals about contaminated heparin from China and manufacturing quality problems with generic drugs from India are making lawmakers hesitate about opening the gates too wide to less regulated imports. Obama advisers have acknowledged that enthusiasm for reimportation has waned since the heparin incident.

What may be more palatable is to make generic drugs more readily available to patients and payers. At the annual meeting of the Generic Pharmaceutical Association in September, Obama health policy adviser Dora Hughes said that eliminating barriers to generic drug use should be central to health reform efforts. Hughes voiced support for curbing reverse payment agreements and backed legislation that would allow the FDA to approve generic versions of biotechnology drugs. A market exclusivity period for brand-name biotech therapies, she noted, should be much shorter than the 14 years advocated by the biotechnology industry.

Although savings may be elusive from many of these cost-cutting policies, the reforms are likely to gain approval by Congress and support from the new administration. Political leaders believe that tightening up the rules will allow HHS to ratchet down outlays and curb waste and abuse. And the prospect of some $60 billion in savings is much too attractive for anyone to pass up in these tight-money times.

Jill Wechsler is BioPharm International's Washington editor, Chevy Chase, MD, 301.656.4634,