Obama’s crusade to make US healthcare work efficiently and effectively

The Democrats are now in the White House and widespread changes are anticipated for US healthcare and ultimately for Pharma. President Obama’s proposed changes of universal healthcare coverage, continued support of R&D tax credits and increased investment in scientific technology and personalized medicine are all positive for Pharma revenue.

However, the negative side of Obama’s reforms lies with the planned implementation of ‘comparative effectiveness’ research and direct drug price negotiations with government payers. The implementation of the aforementioned reforms is driven by the need to support extended public healthcare costs, says Datamonitor pharmaceutical strategy senior analyst Dr. Sandra Reynolds. “The introduction of such reforms could signal an end to free market pricing in the US public healthcare system,” she says.

The US healthcare system’s public spending is escalating with very little impact on the nation’s health outcomes

Several factors if left unchecked are set to escalate US healthcare spend to unsustainable levels within the next decade:

· Financial crisis impact on private insurance coverage – The US healthcare system is funded by a combination of private insurance through an employer (59.3% of the total US population), and government funded programs (27.8% of total population). The remaining 15.3% of the population is currently uninsured with no access to healthcare (1). However, with the current financial crisis, employers are finding it increasingly difficult to provide healthcare coverage and the rising unemployment figures have resulted in a further strain on Medicaid, driving up the cost of public health.

· Further strain on public insurance schemes – Currently, the Federal government provides health coverage through Medicare (for the elderly), Medicaid (for poor and children of families that do not qualify for Medicaid) and military programs. US healthcare expenditure rose rapidly from 9.1% in 1980 to 17% in 2008 and this rise is expected to continue over the next decade, outpacing income and inflation. As such, healthcare expenditure will account for 20% of the gross domestic product or $4.3 trillion by 2017 if left unchecked (2). By comparison, most major industrialized nations spend eight to 10% of their GDP on healthcare (3).

· Baby boomers hit 65 – The US has a large aging population with the oldest baby boomers eligible for Medicare by 2011. This generation is expected to account for 20% of GDP by 2010 compared with 12% in 2008 (4).

· High drug, medical device and administrative costs stretch budgets – The US system is highly fragmented and inefficient. Drug prices and administrative costs are the most expensive in the seven major markets and there is a certain degree of overcharging by physicians for outpatient services due to the discretionary nature of the fee-for-service reimbursement system (5). Furthermore, the introduction and uptake of more expensive agents such as biologics (over $45.4 billion spent on biologics in 2007 alone), medical devices and diagnostic measures are contributing to the significant rise in healthcare spending in the US.

· Increased prevalence of chronic diseases – Obesity and smoking-related illnesses such as diabetes and cardiovascular disease are becoming a major health issue for the US, with $600 to $1,600 more being spent on the obese and morbidly obese than on individuals of normal weight (6).

Obama election manifesto – to provide quality, affordable and portable healthcare insurance to all US citizens

A key feature of Obama’s election manifesto was to address the unavoidable issue of America’s growing uninsured population, making healthcare affordable to all US citizens, especially for children and regardless of pre-existing conditions. These proposals draw on the success of ongoing healthcare schemes, which have met these goals, but at a price, such as the Federal Employees Health Benefit Program (FEHBP) and the Massachusetts expanding healthcare reimbursement scheme.

However, the flaw in Obama’s national healthcare plan is that it does not include mandatory insurance coverage, something that Massachusetts found to be essential in reducing the number of uninsured citizens. Obama’s plan may after bipartisan consultation include the following features:
· Large employers will be required to provide and contribute to healthcare insurance for its employees, while small employers will be encouraged through corporation tax credits to provide insurance.

· Mandatory insurance coverage similar to the FEHPB scheme currently in place for Federal employees would be available for those not covered by employer-based insurance schemes.

With strong support from both Democrats and Republicans for major healthcare reform, it seems that with modifications universal healthcare will become a reality in the next few years. However, it will come at a price with estimates of $2 trillion dollars over 10 years. Consequently, the government will be looking to Pharma to recoup some of the costs through cheaper drugs (7). One area Obama’s office tackled early on in his tenure was the provision of healthcare for all uninsured US children. On February 5 2009, Obama signed the expanded State Children’s Health Insurance Program (SCHIP) bill into law, providing a quick win, and highlighting his commitment to healthcare reform(8), Dr. Reynolds says. “Passage of this legislation was a major political victory for Obama because former President George W. Bush vetoed two similar bills in 2007.

“However, one of the main arguments against the bill is that it may drive families who currently pay for private healthcare to switch to a state-funded option, in order to limit out of pocket costs,” she says.

The good news for Pharma

Obama’s universal healthcare program when introduced will:

· Increase demand for drugs – both branded and generic;

· Reduce the need for free drug programs – due to universal healthcare coverage;

· Boost pediatric drug and vaccine programs – through the extension of SCHIP.

Obama’s continuing support for R&D tax credits will be seen as offering Pharma an olive branch, and attempts to counter Pharma’s primary argument of lack of state support for pharmaceutical innovation. Obama’s backing of scientific technology and the recent introduction of stem cell research is all positive news for the pharmaceutical industry as it will create opportunity for new innovative drug research – an area severely circumscribed by the Bush administration.

The need to fix the ‘donut hole’** will ensure that more citizens will be covered and therefore will not skimp or go without medication, as out-of-pocket costs will be significantly reduced. However, this is an expensive hole to fill, and former Health and Human Services (HHS) Secretary-nominee Tom Daschle acknowledges that if the Federal government has to bridge the gap it will cost $134 bn from 2010–19 (9). As a result, until the donut hole can be filled (ie once the economy is back on track), this issue is anticipated to be dealt with only through minor amendments to patient coverage.

The good news for Pharma is that with a maximum of 15.8% increase in patient coverage (i.e. current uninsured), the combined US top 40 pharma company sales has the potential to increase by a similar amount, from $284 bn in 2009 to $324 bn (based on existing healthcare plans)***.

The bad news for Pharma

Generic drug use has increased in the US (5.4% increase by volume in 2008 from the previous year), but nowhere near the extent required to support Obama’s universal healthcare plan. Consequently, there will be greater efforts to incentivize generic prescription over more expensive brands within the next four years (10).

Obama hopes to achieve this through several means:

· Ban of generic settlements – outlawing agreements between innovators and generics companies, delaying generic entry;

· Introduction of a biosimilars pathway – this is expected imminently in an effort to cut costs of expensive biologics that is partly responsible for the rise in healthcare drug costs;

· Re-examination of marketing exclusivity – this is another contentious issue with Pharma pushing for 14 years and generics companies believing that three to five years is adequate. As such, market exclusivity will probably be initially at least 12 years. Safety will be of the utmost importance to any biosimilars pathway program. If the pathway proves to be successful then marketing exclusivity for branded biologics may decrease, especially if healthcare costs continue to rise in a weak US economy.

Overall, while drug volumes are expected to increase by 15.8% as a result of coverage of the previously uninsured, earlier and faster brand erosion is anticipated at patent expiry. With the introduction of biosimilars expected within the next five years, this is further set to impact branded drug revenues.

The uncertain news for Pharma

Three key uncertainties lie ahead for Pharma and the US healthcare system:

· Who will replace Tom Daschle as the nomination for HHS Secretary?

· Will there be a lift on the ban of re-imported drugs?

· When will price negotiation between Pharma and Washington be introduced?

Tom Daschle’s nomination withdrawal from HHS Secretary was a major blow for Obama, because Daschle’s combined political, policy and legislative experience made him the President’s first choice. Unfortunately, his oversight on paying Federal taxes and his strong ties with the Pharma industry meant he could no longer remain a nominee. Trying to find his replacement will not be an easy task and probably one that Obama will not rush, as he needs to get it right. Regardless of whoever takes up the post, Pharma will have to readdress its lobbying strategy going forward. Despite the setback of Daschle’s withdrawal, it is hard to imagine that it will alter Obama’s determination to reform healthcare; at best, it may buy some more time for Pharma.

Lifting the ban on drug re-importation and initiating price negotiations between Pharma and Washington could if introduced slash prescription drug costs, aiding universal healthcare coverage, while simultaneously curtailing drug sales.

Drug re-importation would lead to big revenue losses for Pharma, given that drugs sold in the US are priced at an average 67% premium to the rest of the world (11). During his campaign Obama was very supportive of lifting the ban. However, with several high profile safety scares regarding medicines manufactured abroad (e.g. the China Heparin scare), there has been less emphasis on this since Obama took office, Dr. Reynolds says. “Furthermore, if the ban were to be lifted, all drugs re-imported would have to passed by the FDA, an agency which is already working at (if not beyond) its maximum capacity.”

As such, re-importation will not happen until FDA reforms are in place, and public confidence in the agency is restored. “The appointment of a permanent commissioner will be the first major step to reform”, Dr. Reynolds says.

“The incoming commissioner will be charged with overhauling the FDA, as well as proposals to create two separate bodies to deal with pharmaceuticals and food independently.”

However, the ability of the agency to assess the safety of foreign drugs will ultimately be governed by its allotted funding. With a current budget of $2.3 bn, this would certainly need to be increased by at least two-fold over the next five years according to the FDA Science Board (12).

The proposal that Pharma will most strongly oppose is the introduction of direct price negotiation with Washington. The argument that Pharma puts forward is that it already negotiates drug prices with insurance providers for public plans and offers significant discounts. If introduced, this change could potentially have a dramatic affect on Pharma profits as the government could literally dictate drug prices, leaving Pharma no option but to accept or lose out on one of its most lucrative markets. It is important to note here that a system such as the UK’s National Institute of Clinical Excellence (NICE) will not fly in the US because Americans are firm believers in limiting government control, Dr. Reynolds says. “This will also be a huge political battle for Obama if he pushes for it because the current economic woes are much more important to the average American than price negotiations with Pharma.

“This proposal will likely be delayed or put on the back burner,” she says.

Comparative effectiveness**** is another tool on the Obama agenda set to help cut the wastefulness of the US healthcare system. Clearly, this is also not a move favored by Pharma, which states it will compromise patient care. As such, this could be a tough sell for Obama with physicians and patients. Furthermore, Washington will need to ensure that the system is based on credible scientific data, as any controversy will only lead to confrontation, delays and ultimately failure.

Overall, Pharma knew that unavoidable healthcare reforms were on the agenda, regardless of whether Obama or McCain were elected, as healthcare costs are escalating and unsustainable (13).

The realization that tackling healthcare spending is critical to the country’s long-term fiscal well being now requires some major changes to US healthcare. Given the current economic crisis, some of Obama’s healthcare initiatives may have to wait, with the exception of SCHIP, Dr. Reynolds says. “On the plus side, this will provide Pharma with extra time to lobby Washington in order to try and negotiate the best deal it can.

“Inevitably, Pharma will have to accept losses in areas such as timely generic market entry, as it will no longer be acceptable to stall generic makers from entering the market post patent expiry. However, potential compromises in other areas including biosimilar marketing exclusivity – 12 years instead of the three to five that biosimilar manufactures would like – are anticipated,” she says.
 

top