The bills currently being debated in Congress provide a variety of perspectives on what could be a massive overhaul of healthcare in the U.S. What ultimately comes out of Congress and makes it to the President's desk for signature will almost certainly be a bill which significantly increases the amount of people with health insurance.
While a significant increase in the insured population should correspondingly mean a much larger customer base, this upside potential is offset by the pharmaceutical industry’s $80 billion worth of concessions built into the plan over the next ten years. What is more important for the drug companies is the final bill’s impact on three critical areas of their business:
Payer mix represents the distribution of prescriptions reimbursed among private health insurance plans, government funded health plans or paid for in cash by uninsured or underinsured individuals. Currently, most civilian, non-institutionalized Americans are covered under a private health plan (61%) versus those covered under a government funded plan (21%) or have no plan (18%). Payer mix is relevant because, on average, pharmaceutical companies receive very different revenues for the same drug depending on whether it is ultimately reimbursed by a private health plan, government funded plan or paid for in cash. According to the data provided by the Congressional Budget Office and using average wholesale price (AWP) as a benchmark, on average, net sales are highest for drugs paid for in cash and lowest for drugs reimbursed under a government funded plan. So, all things being equal, a shift in the payer mix from individuals or private plans to government plans would suggest a negative impact on overall profitability for pharmaceutical companies.
Reimbursement is the sales price that a payer (government agencies, private insurers or individuals) ultimately pays for a drug, net of any rebates or discounts received. Reimbursement is important to pharmaceutical companies because any rebates or discounts that modify the final price of a drug to a payer also modifies their revenue and profit. Generally speaking, as a payer’s negotiating power increases, either through government legislation or concentration of buyers, reimbursement levels go down. For example, the graph above demonstrates that government payers, a highly concentrated group of purchasers often with legislated pricing rules, provide the lowest levels of reimbursement. Similarly, individuals that are either uninsured or underinsured generally pay with cash and typically pay the highest levels of reimbursement. These relative reimbursement levels impact pharmaceutical revenues based on the payer mix for a given drug.
In addition to negotiating power, the availability of lower priced substitutes also tends to lower reimbursement. In the pharmaceutical context, generic products and re-imported drugs represent potentially lower priced substitutes for branded pharmaceuticals. Reform that promotes the use or increases the availability of generics or allows re-importation of drugs from countries with lower prices would lower the reimbursement for pharmaceuticals, absent other related price controls or a strategic response from the pharmaceutical industry.
As discussed earlier, revenue is a function of price and quantity. Utilization is defined as the quantity of pharmaceuticals consumed. One of the key ways that overall drug utilization would increase under broad healthcare reform is through the reduction or elimination of the number of uninsured patients. The chart below shows the per capita spending on healthcare in general for an uninsured or underinsured individual versus a fully insured individual.
Some estimates suggest that providing coverage to the 41.1 million uninsured and 35.8 million underinsured individuals in the U.S. could increase spending on healthcare by as much as $123 billion, a portion of which would represent new payments for pharmaceuticals. It is important to recognize that this impact would differ significantly by class of drug because the uninsured as a population have a unique set of characteristics. For example, cholinesterase inhibitors for treatment of dementia in Alzheimer’s patients would likely not see a significant change in utilization as Alzheimer’s is most common in elderly patients, a class already covered by Medicare.
Utilization would also be impacted through any bias toward generics versus branded pharmaceuticals. Although reducing the number of uninsured patients would increase utilization of both brand and generic drugs, a historical bias towards generics would imply an increase of generic utilization. Similarly, further lowering the barriers to generic entry would also shift utilization from branded drugs to generics as payers opt for the less costly alternative. The increased use and acceptance of generics will also increase competition and drive down the cost of branded drugs.
Healthcare reform, no matter what form it ultimately takes, will almost certainly result in dramatic changes for the pharmaceutical industry. How healthcare reform impacts payer mix, reimbursement and utilization is a complex set of circumstances that will not be determined until the final legislation is signed into law. The general opinion is that the pharmaceutical industry is going to see increased volumes but also concessions on pricing. What pharmaceutical firms have proposed, and has been largely accepted within the Senate Finance Committee bill, is $80 billion worth of concessions over the next ten years. Those concessions are estimated to be largely offset by the increased volumes and many feel there may actually be an upside potential. The key is going to be whether or not there is a “Public Option” or whether the structure, as it is put in place, has the impact of forcing a large majority of those already insured into some type of public option with the corresponding impact of negotiated reimbursement at the low end of the scale.
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