Health Care Reform and Effect on Prescription Drug Costs - Research Paper Example

Abstract Healthcare reform legislation’s general impact and consequences on the prices of prescription drugs are not quite easy to comprehend, by the fact that certain provisions will not take effect for several years, courts actions and rulings, conflicts and contentions at state level, or partisan stand in Congress and Senate could cause significant delays or major revisions to the legislation. Nonetheless, there is going to have significant impact on the healthcare economy and bottom line of manufacturers as there are many provisions in the health-care-reform law that are likely to have the direct or indirect consequence of increasing the volume of product sales that include prescription drugs. Introduction The Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, better known as Health Care reform law enacted on March 23, 2010 have been viewed with both appreciation and concerns by the major stakeholders of the health care system. Healthcare reform legislation’s general impact and consequences on the prices of prescription drugs are not quite easy to comprehend, by the fact that certain provisions will not take effect for several years, courts actions and rulings, conflicts and contentions at state level, or partisan stand in Congress and Senate could cause significant delays or major revisions to the legislation. Nonetheless, there is going to have significant impact on the healthcare economy and bottom line of manufacturers as there are many provisions in the health-care-reform law that are likely to have the direct or indirect consequence of increasing the volume of product sales that include prescription drugs. The supply chain of prescription drugs from manufacturers to consumers has a series of stakeholders, for example, wholesalers, pharmacies, and insurers. The impact of any legislation on prices is quite complex due to intricate mechanisms of fixing prices that involve many stakeholders in the value chain. The price paid by a pharmacy to buy a brand-name drug from the manufacturers is generally not the net cost of buying the drug from the manufacturer because manufacturers give discounts/rebates on brand name drugs to insurers. There are many different prices paid along the supply chain. It will be interesting to analyze the impact of new reform law on the prescription drugs. Healthcare System before the Enactment of Reform Law The current U.S. system of federal healthcare came into being in 1965 through Congress’s amendment of the Social Security Act and the establishment of Medicare and Medicaid. Medicare began as a national health insurance program for persons age 65 and over, regardless of income or wealth. In 1973, coverage was extended for those on disability for at least two consecutive years. Medicare provides enrollees with a basic program of hospital insurance and supplementary assistance program to aid in paying healthcare bills (Raffel and Raffel 1994). Through this, everyone who is old enough receives some healthcare.  Medicaid is also a national health insurance program, but it is administered by states and it can potentially assist a broader range of people than Medicare. It serves to provide services for the “categorically needy,” such as those who are blind, aged, or disabled, and for the “medically needy,” those who can afford to live, but cannot afford to pay for medical care (Raffel and Raffel 1994). People may enroll in these independent health insurance plans through their employer or on their own if they can pay for it. It is meant for a person with high medical costs and is not old enough. However, financial burdens greatly limit the system’s accessibility. Census estimates from 1999 indicate that 43 million Americans live without health insurance even though 75 percent of them have a full-time job or live in a household with at least one member working full-time (Mueller 2001) for Medicare. The Americans blithely proclaim their health care system to be the best in the world, however, costs and access to healthcare have become real concern. Its health care spending in 2009 reached $2.5 trillion, which translates to $8,086 per person or 17.6% of the nation’s Gross Domestic Product (CMS.gov 2011). According to the Institute of the Medicine of National Academies, lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States. It emphasizes that by 2010 everyone in the United States should have health insurance. Lack of regular care can result in more expensive care for preventable or treatable conditions, and disruptions in learning and development (Iom.edu 2011).  The United States loses the $65 billion to $130 billion annually as a result of the poor health and early deaths of uninsured adults. That entails the president and Congress to act immediately by establishing a firm and explicit plan to reach this goal. The recommendation, envisions an approach that will promote better overall health for individuals, families, communities, and the nation by providing financial access for everyone to necessary, appropriate, and effective health services (Iom.edu 2011). Health Care Reform Law 2010 The healthcare reform bill signed by president Obama on 23 March, 2010 to overhaul the healthcare promises to provide health insurance to 32 million covering 95 % of the Americans at the expected cost of 910 billion $ over the period of 10 years, who do not have health insurance (White house 2011). Its provisions are not yet fully unfolded; it is change in the right direction. Many states in the US are taking measures not to focus exclusively on the poor, but seek to guarantee health access to all uninsured people, achieving universal coverage. It needs federal leadership and support, regardless of strategy is adopted to achieve this goal.  Health Care Reform and Effect on Prescription Drug Costs The Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, better known as Health Care reform law, “require manufacturers of brand-name drugs to provide new discounts and rebates for drugs purchased through Medicare and Medicaid, with the amount of those discounts and rebates based on the prices of the drug” (Congressional Budget Office 2010). However, manufacturers thus have an incentive to raise those prices to offset the costs of providing the new discounts and rebates, although other forces will limit their ability to do so. That would probably give latitude to the manufacturers in effecting the net cost price for the prescription drugs. Of the nearly 50 provisions of the health-care-reform law that affect drugs and biologics, approximately 20 are likely to have the direct or indirect consequence of increasing the volume of product sales. With 32 million formerly uninsured citizens are expected to be added to the ranks of new customers, and as much as $115 billion in new business over 10 years (Smith 2010). The CBO’s estimation of drugs already covered by Medicare’s drug benefit, the provisions in the legislation would raise the prices paid by pharmacies less any rebates paid to insurers by manufacturers by about 1 percent, on average. That increase in prices would make federal costs for Medicare’s drug benefit and the costs faced by some beneficiaries slightly higher, while the new discounts would make the costs substantially lower for other beneficiaries. Regarding the new drugs purchased through Medicaid, the provisions in the law would raise the prices paid by pharmacies by about on average 4 percent (CBO 2010). However, currently available drugs purchased through Medicaid, that account for the bulk of projected Medicaid drug spending over the next decade, other provisions of law will constrain manufacturers to raise prices to offset the new rebates. The combined effect of the increase in prices and new rebates is that Medicaid would pay less for drugs, on average, than it would in the absence of these provisions. The rebates also vary for every buyer and also for each drug as there are different ways and modes of determination. Federal law entails manufacturers to pay a statutory rebate for drugs dispensed to Medicaid beneficiaries, whereas for Medicare Part D and in the private sector, insurers negotiate with brand-name drug manufacturers over the rebate amounts. Manufacturers offer rebates to buyers who somehow influence the market shares of their drugs by charging a lower payment for those preferred drugs. A purchaser’s bargaining power with manufacturers reflects its ability to influence which drug is purchased from a set of therapeutically similar drugs, resulting in different net prices for the same drug. The result, as some suggest, is likely to be that the “mandate for coverage increases the likelihood of substantive discussions about cost containment” (Healthcare Reform 2010). Effects of the New Required Medicare Discount The prescription drug manufacturers and importers who sell products to government health-care programs will have to pay out almost $30 billion in fees over the next 10 years, companies with total sales of $5 million or less will not be required to pay any fee (Steinke 2010). Another estimated $30 billion will be contributed by the biopharmaceutical industry through deep discounts off the negotiated price of branded drugs to fill the Medicare prescription coverage gap, known as the “doughnut hole” (the final $20 billion of the $80 billion low-estimate pharma tally comes from the Medicaid rebate previously mentioned) (Steinke 2010). Currently, the standard outpatient prescription drug benefit under Part D of Medicare has the following features: an annual deductible for which the beneficiary is responsible; a dollar range of coverage in which the beneficiary pays 25 percent of the cost of covered drugs; and a catastrophic threshold above which the beneficiary pays about 5 percent of the cost of covered drugs (CBO 2010). In the gap between the end of the initial coverage range and the catastrophic threshold commonly referred to as the doughnut hole most beneficiaries are liable for all of their drug costs. For Part D insurance coverage, most beneficiaries pay premiums that finance about 25 percent of the cost of the coverage (on average); the federal government pays the remaining 75 percent (CBO 2010). Under Medicare Part D, specialty-tier prescription drugs are typically composed of injectable, branded drugs with a minimum cost of $600 per month and are often indicated for special purposes such as enzyme replacement, blood modifiers, and transplantation (Hargrave 2009). Beneficiaries with limited means, however, may enroll in a low-income subsidy (LIS) program, through which the federal government covers a much larger share of their prescription drug costs including the premiums and most of their spending in the doughnut hole. Starting in 2011, the health care legislation requires manufacturers to provide a 50 percent discount to Part D beneficiaries who are not enrolled in the LIS program for brand-name drugs they purchase in the doughnut hole. Many of those 20 provisions of the law affecting sales volume also require the industry to discount prices (either directly or indirectly because of the differences in out-of-pocket price vs. the government price) or to give rebates (e.g., the basic Medicaid rebate for brands increased from 15.1 to 23.1%, retroactive to 1 January 2010) (Milne and Kaitin 2010). Nonetheless, this trade-off still leaves the industry with a projected $10–35 billion profit over 10 years (Milne and Kaitin 2010). According to a new US Government Accountability Office (GAO) report, specialty drugs account for much of the out-of-pocket spending by Medicare recipients; the GAO determined that 55% of Part D enrollees who used at least one specialty-tier drug reached “catastrophic” levels of out-of-pocket spending, compared with only 8% of all Part D beneficiaries who filed claims but did not use any specialty-tier drugs (GAO 2010). There are many credit and incentives for the small and medium sized companies (SMEs) operating in the health care sector. SMEs are often considered the seedbed of innovation, and in recognition of this fact, the legislation has both direct and indirect incentives to stimulate innovation in this sector. An example of the former is the two-year Qualifying Therapeutics Discovery Project Credit program, which provides up to $1 billion in tax credits for research expenses in tax years 2009 and 2010 for companies with 250 or fewer employees. It might seem that $1 billion would not go very far among the estimated 1,000 SMEs in this category. Actually, though, only about 20% of these companies will be eligible for the credit; the rest do not have taxable income or they have other tax issues that disqualify them (Yang 2010). Finally, the new health-care-reform law is expected to create new lines of business in areas as diverse as medical information technology, education, retail stores, and methods of delivery (Health care 2010). In general, both supporters and critics of the new health-care-reform legislation feel that Big Pharma will benefit from the law’s provisions. Indeed, when Congressman Henry Waxman heard that PhRMA, the trade association of primarily large pharmaceutical companies, had paid out one-third of the over $200 million spent by all sides in the media wars leading up to the bill’s passage, he commented, “They’re certainly going to get a very high return on that investment.” Fram 2010 (in Milne and Kaitin 2010). Conclusion Over the past two years, the US pharmaceutical and healthcare industries were preparing themselves for passage of some type of health-reform legislation with both appreciation and apprehensions about the impact any law would be likely to have on the structure and viability of the research-based industry. Due to complexity of the healthcare system and legislation procedures and its universal impact in the United States, it is not easy to come out with any specific number or figure about the impact of healthcare reform law on the prescription drugs, that too when the law will unfold in phases and only a few provisions have come into effect since September 2010, after its passage in March 2010. Nevertheless, with magnitude and scope of the reform law, there will be impact on the net cost of the prescription drugs in the near future, in all probability it will be a gain for the big pharmaceutical companies. 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Specialty drugs force high Medicare out-of-pocket costs. Dow Jones Newswires Read More