Health Care Reform: A Spur or Stitch in the Pharmaceutical Industry?

“We are disappointed, but not surprised by today’s vote.”

-Pharmaceutical Research and Manufacturers of America (PhRMA) Senior Vice President Ken Johnson

The American healthcare system took a giant step toward its biggest change since the creation of Medicare 40 years ago on Saturday night. The House of Representatives passed The Affordable Health Care for America Act, or H.R. 3962 with a vote of 220-215, 39 Democrats opposing and 1 Republican supporting. The “health care baton” now passes to the Senate as they develop a parallel bill with selective deviations. Obama expressed that he is “absolutely confident” the Senate will follow the House’s lead in this matter, but most consider it less certain because of opposition from all Republicans and some moderate democrats.The two bills would then be merged into a final consensus version that would have to be approved by each chamber and President Obama (Source).

Below is a link to Obama’s statement regarding the House vote on Saturday night.

Although the House Bill will not stand on its own, there is still plenty of commentary on how its key features may help or hinder the pharmaceutical industry.

One topic of frequent debate is the $30 million, of the $80 million the pharmaceutical industry has agreed to contribute toward overall health care reform, that is expected to go toward paying for the “doughnut hole”. In short, the “doughnut hole” is a gap in Medicare D coverage where seniors falling in between levels of reimbursement must pay full price for their prescriptions. Once these seniors move up to the next level of coverage, fill more prescriptions, they begin to get reimbursed again.  The above mentioned $30 million would go toward paying for half of the prescription drugs that fall into this “doughnut hole” category (source).

At first thought, the $30 million the pharmaceutical industry has agreed to contribute to this cause seems like forgone revenue, an absolute loss. The money will be coming out of the company’s budgets and is technically a fiscal loss, but no industry would make such a grand gesture if there was no benefit. For example, such a “sacrifice for the greater good” will by no means go unnoticed when Washington debates the details of reform. The unlikely compliance of an industry that seems to have so much to loose with the passage of health care reform gives them excellent public opinion and, more than likely, a seat at the bargaining table when the details of the final reform bill are ironed out. In an environment where perceived opinion is everything, the pharmaceutical industry has taken a financial risk in anticipation of an offsetting future gain.

In an analysis by a Morningstar expert in the most recent Wall Street Pharmaceuticals Report, the fiscal benefits of the upfront sacrifice are described:

“Now, that is partly a concession by the pharmaceutical firms, but it’s also going to be beneficial to them as well. Some of the analysis we have seen and some of the analysis that we have done shows that by keeping seniors in the program, it’s going to actually help pharmaceutical firms as soon as seniors get back to that reimbursement level at the top. We’ve seen numbers in the neighborhood of about $20 billion of recouped costs that would happen if seniors stay in the program.”

source

This will greatly affect companies that derive a large amount of their revenue from branded drugs. Filling in the “doughnut hole” will make prescription drugs more affordable, increasing their volume of sales. This prediction is counting on the number of medicare subscribers whose prescriptions fall into the “doughnut hole” to resume treatment after forgoing it because of high cost.  IMS Health, a global research and consulting firm, predicts that the pharmaceutical industry will see a 3.5% annual growth between 2008 and 2013 and that this growth could amount to hundreds of billions of dollars in sales over the next 10 years (source).

These numbers have not even taken into account the non-medicare patients who will become insured under the new healthcare plan. If the final structure provides financial incentive for patients to fill branded drug prescriptions, volumes will only climb higher.

Larry Rothman, a consultant, analyst and adviser to the Pharmaceutical and Biotechnology Industry and its suppliers for over 35 years summarizes the increases in revenue the healthcare bill could have on the pharmaceutical industry based on incremental increase in the insured population and yearly revenue per person in the table below.

Incremental Consumers	Yearly Revenue @ $600	Yearly Revenue @ $750	Yearly Revenue @ $1,000
10,000,000	$6,000,000,000	$7,500,000,000	$10,000,000,000
15,000,000	$9,000,000,000	$11,250,000,000	$15,000,000,000
20,000,000	$12,000,000,000	$15,000,000,000	$20,000,000,000
30,000,000	$18,000,000,000	$22,500,000,000	$30,000,000,000
40,000,000	$24,000,000,000	$30,000,000,000	$40,000,000,000
50,000,000	$30,000,000,000	$37,500,000,000	$50,000,000,000

These estimates are conservative considering an estimated 20 to 50 million uninsured patients are expected to be covered under the new healthcare plan and that the average insured customer incurs pharmaceutical expenses of $600 to $1000 per year. (source)

The variable not accounted for up until this point is the downward pricing pressure on healthcare costs Obama has promised. With this in mind, the effect of healthcare reform policies on the pharmaceutical industry is dependent not only on an increase in volume, but also a potential decrease in price.

The Huffington Post has reported that PhRMA struck a “secret deal” with the Senate Finance Committee in June that they would oppose efforts to bargain for lower drug prices in exchange for the $80 million financial sacrifice and a public push for reform. Whether this is true or not is unclear, but it illustrates the tight grip political affiliation will have on this issue and makes it even more difficult to predict the outcome. Only when the combination House/Senate bill is drafted will its effects become more apparent, or at least as much as politics will allow (source).

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