Healthcare Reform Expands Coverage, Promotes Innovation

Published on: 
BioPharm International, BioPharm International-05-01-2010, Volume 23, Issue 5
Pages: 40–45

Broader benefits and biosimilars will offset hefty fees and discounts while preserving R&D incentives.

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.

Jill Wechsler

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.


Manufacturers are not complaining too loudly about these costs because they gain a pathway for the US Food and Drug Administration to authorize follow-on biologics (FOBs), the crown jewel in the bill for drug and biotech companies. After years of debate on this issue, innovator firms won an unprecedented 12-year data exclusivity period for reference biotech products, with the possibility of a six-month extension for sponsors who conduct pediatric studies. The Biotechnology Industry Organization (BIO) focused its lobbying efforts on this historic provision, which was steered through Congress by Rep. Anna Eshoo (D-CA), despite strong opposition from powerful legislators and the White House.

The Congressional Budget Office projects that the program will save the government—and cost manufacturers—$7 billion over 10 years. BIO President Jim Greenwood cheered the measure for providing "incentives necessary to attract the massive investment required to speed the discovery and development of the next generation of breakthrough therapies." But Kathleen Jaeger, president of the Generic Pharmaceutical Association, complained that the bill "locks down indefinite brand product monopolies at a deep cost to patients and taxpayers." Timely access to biopharmaceuticals, claims Jaeger, could have produced 10 year savings well over $50 billion.

All manufacturers, however, stand to benefit from clearer policies on developing and regulating biosimilars and "biobetters." The FDA now has to issue guidance on what analytical assays and clinical studies will be needed to document FOB safety, purity and potency, and what criteria could support product interchangeability, a critical issue for marketing and reimbursement. Sponsors will pay the FDA user fees, there's a process for innovators to challenge patent infringement, and Medicare Part B will pay for biosimilars at average sales price plus 6%—an amount considered high enough to encourage physicians to administer less costly FOBs.

BIO also championed a relatively minor provision in the legislation that provides tax credits to small biotech companies (less than 250 employees) to cover a portion of R&D expenditures. The bill establishes a two-year program that offers a total of $1 billion in tax credits to cover expenses related to research on certain critical therapies.

Another plus for the industry is language clarifying that comparative effectiveness research resulting from an expanded national program will not be used to determine coverage or reimbursement decisions by Medicare and other government health programs. The new nonprofit, nongovernment Patient-Centered Outcomes Research Institute will set priorities and support comparative studies with a $150 million annual budget as of 2012. All research will recognize differences in patient populations and will be made public.

More troubling for manufacturers are new sunshine provisions that require broad, national disclosure of payments and reimbursement from pharmaceutical marketers to physicians. The industry also is concerned about a new Independent Medicare Advisory Board, formed to identify ways to slow the growth in Medicare spending. That could affect Medicare drug coverage, but the board won't be up and running until 2014, providing time for Congress to make it more accountable.

Policymakers may not do that, though, as they are anxious to gain any and all savings for the healthcare system. The new law does little to bend the cost curve on national healthcare spending. Instead, it pays for the program through cuts in Medicare provider fees, which could be rescinded, and by imposing additional taxes on high-income consumers and healthcare companies. Tax hikes, though, do little to curb overall healthcare spending, and may boost outlays even more.

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