The March 21 passage by Congress of the Patient Protection and Affordable Care Act provides at long last a rough blueprint for driving future commercial opportunities in the second-biggest industry sector of the world’s largest economy. With over 2,400 pages of text and a phase-in timetable that extends to 2019, it is prudent to invoke a higher law—that of unintended consequences—in evaluating how the new measure will impact a frayed biopharmaceuticals business model. Recognizing that the human instinct is to avoid tackling complexity in favor of the pithy discipline of the power-point template, the following is an impressionistic set of sound bites on the effect of reform, in its broadest strategic context.
Call it an amuse bouche in anticipation of the banquet to come for consultants, lawyers and economists.
1. Healthcare is now not only a business, but a social good. With passage of the act, the US finally joins all the other OECD industrialized democracies—save for Mexico and Turkey—in declaring comprehensive, universal coverage an objective of government policy. Evidence from abroad shows that this commitment results inevitably in a rise in regulatory oversight as governments assume the difficult task of making equity concerns an element of market practice. In Europe and Japan, decisions are usually made by small elites, but in the US context this means a proliferation of new commissions, panels, and advisory groups, each with conflicting mandates and subject to influence by a range of interest affiliations. In both cases, “equity” eventually emerges as an empty rhetorical construct because where the public interest—let alone the patient—factors in is very unclear.
2. The consolidation “wave” becomes a tsunami. A simple rule of economics is that when demand—bringing more people into the healthcare system—is not balanced by increased supply—through more physicians and providers—prices and costs will rise. This in turn puts more pressure on margins for all players, and the predictable coping response is to try to control these market forces by becoming the dominant player. Hence what were once defining features of US healthcare—diversity, flexibility, and choice, especially among providers—will yield to the imperatives of size and scale. The trend is already evident in the networking of physician practices, multisite and geographically dominant hospital consortia, and the transformation of Big Pharma from product-niche innovators to service-oriented distribution platforms. And in a near majority of the 50 states today, the market for individual health insurance is effectively controlled by a single provider. While attention has been focused on increased payer clout, provider consolidation is growing too and will set the stage for major conflicts in the next few years over who gets paid, how much, and for what service. Renegotiation of reimbursement codes under CMS will serve as the politicized backdrop for the debate.
3. Reform is framed only as legislative intent—responsibility for execution lies elsewhere. Thousands of pages of implementing regulations must be drafted in a process that is likely to run through 2014, when key elements of the bill are slated to take effect; many of the most significant initiatives in the bill are being tested in the form of HHS waivers or pilot projects. These latter can take as long as a decade to furnish the evidence that can drive real policy changes, by which time technology or market realities will have made their findings obsolete. In addition, the 50 state governments are expected to assume responsibility for many provisions, from enrolling new Medicaid eligibles (to meet the law’s goal of adding 32 million new insured by 2019) to organizing the local insurance market exchanges that will allow consumers to obtain coverage at affordable prices.
More important, the confident predictions of the Democratic leadership in Congress that industry will toe the line based on how politicians interpret the law are misplaced—“gaming the system” to wrest competitive advantage will be firmly established as a tradable currency in reform. It is hard to conclude that the new law creates an environment where change is predictable.
4. Like all reforms, the new law has a domestic focus that fails to address healthcare as a driver of future US competitiveness in a global economy. There was little pushback on this score from the R&D industry, which chose to play the myopic “Washington insider card” to limit exposure to Medicare Part D price negotiation. This may have been a good short-term defense, but it ceded a larger opportunity to recast its image around a more positive agenda, focused on sustaining medical innovation as a driver of global competitiveness. The emphasis was on how drugs alone cannot bend the cost curve given their modest 10 percent share of overall health expenditures. Little mention was made of the more than 150,000 high-paying jobs lost in the R&D segment since 2007—a signal that US status as the global engine of new medicines may not endure.
5. No one—other than Big Pharma—thinks reform should preserve the industry’s high margins and profits. Failure to achieve a broader political realignment around support for the industry as part of an enlightened industrial policy agenda sets the stage for a new round of discussions about industry commitments beyond the $85 billion already pledged, as costs from additions to the insured population begin to mount over the next several years. More important, few observers have explored the policy precedent implied by the very notion of a drug industry “contribution” to defray the cost of expanded access. In a practical sense, how different is this from the punitive approaches taken by state systems like France, with its accord cadres that force the industry to bear the burden of compensating the government for annual overruns in budgeted drug spending, or the “one time” rebates in Germany that are now institutionalized through a consolidated network of sick funds?
6. Projected increases in volume sales of medicines do not guarantee higher profitability—the key metric that counts on Wall Street. A “race to the bottom” trend toward the commoditization of medicines through DIN-tagged generics will gather pace, while the service obligations and costs attached to gaining a good price for real innovations will continue to soar. To win access to reimbursement, high-priced biologics and specialty medicines will need to prove value through extensive testing in diverse, hard-to-recruit populations; against direct comparators rather than placebo; and after registration as well as before it. Investment in supplementary diagnostics will also be required, with the likely result of reducing the size of the treated population. All told, the impact could erode the innovator’s potential period of exclusivity and hence the advantages of a higher price point.
7. Reliance on comparative-effectiveness tools to determine access to medicines may be seen as “un-American,” but pressures to rely on an independent third party to render tough judgments on what health services to forgo suggest that barriers to doing so will eventually fall. Ironically, the driver of this change is likely to be the drug industry itself, as some companies seek to gain competitive advantage through more proactive engagement with the “value police.” This has been the experience in the UK, where many initial guarantees agreed to by industry in the operation of the National Institute for Health and Clinical Excellence [NICE] have been effectively removed as a consequence of efforts by individual companies to mitigate the impact of a negative technology appraisal on access to the NHS.