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Since the Supreme Court upheld the healthcare reform law, many in the pharmaceutical industry now see a clearer path forward. However, simply preparing for the implementation of those components of the law that directly affect manufacturers won’t be the only challenge.

Payers recognize they have to slow the growth of healthcare costs -- and their actions have profound implications for pharmaceutical and medical device companies. Clearly, regulatory approval, physician preference, and patient demand will no longer justify premium pricing for new products. 

Key Drivers of Reform

The Patient Protection and Affordable Care Act (PPACA) was an indicator of just how dysfunctional the healthcare system in the U.S. had become.  Healthcare cost inflation, coupled with lagging quality indicators helped to drive legislative action.  With the law now upheld, the solutions that it imposes have implications for stakeholders across the healthcare system.

Spiraling healthcare costs have been reflected in rising insurance premiums and mirrored in employee contributions that have more than doubled since 2000.  This has precipitated a backlash against insurers.  In the days leading up to the law’s passage, this backlash grew to a battle cry, as a number of well-publicized stories about health plans increasing premiums broke in the national media.  As a result, it’s not surprising that PPACA’s reform efforts focused on insurance reform to increase access. 

Central to the Supreme Court case were a few key issues associated with this.  The individual mandate was imposed to counteract the negative effects of guaranteed issue -- the law’s requirement that insurers stop denying coverage on the basis of pre-existing conditions.  The Medicaid expansion that was the basis of the states’ challenge was also enacted in order to increase coverage for an estimated 16 million new enrollees.  And the issues central to the Supreme Court case were only the tip of the iceberg for payers -- 2700 pages of law and untold thousands of pages of supporting regulation usher in a substantial expansion of government oversight of private insurance, from restrictions on rate increases to prescribed benefits and mandated coverage.

The Supreme Court Ruling

The Supreme Court examined two main challenges to PPACA:

1. The Individual Mandate:  The individual mandate to purchase coverage was challenged on the basis that Congress lacked the constitutional right to compel individuals to participate in a given market.  Defenders of the law argued that individuals already participate in this market, on the basis that all people will need healthcare eventually, so Congress does have the right to regulate how they participate.  A second line of defense put forth by Solicitor General Donald Verrilli argued that the individual mandate was supported by Congress’ constitutional right to levy taxes.  In a 5-4 decision, the court ruled that the individual mandate was a constitutional use of Congress’ taxing power, so the mandate and associated regulations -- including guaranteed issue -- were allowed to stand.  In short, the Supreme Court upheld the law.
2. The Medicaid Expansion: The other challenge to PPACA was related to the law’s provision that states expand access to Medicaid to individuals making up to 133% of the poverty line, or risk losing all federal funding for their existing Medicaid programs.  Challengers argued that the threat of losing all federal funding for Medicaid was unconstitutionally coercive.  The court ruled, in a 7-2 decision, that the threat to withhold states’ existing Medicaid programs did represent an unconstitutional assault on states’ rights.  The ruling enabled states to opt out of the Medicaid expansion if they choose without losing their current funding.

The ACA’s Impact on Payers

Because states are still deciding whether or not to participate, the implications of the Medicaid expansion are as yet unclear.  But there are a number of parts of PPACA designed to impact private payers that have repercussions for pharma.  Key features of the legislation that impact private payers include:

1. Medical Loss Ratios (MLR): While many states have defined MLRs in the past, PPACA standardizes them across states at a high level.  This ratio quantifies how premiums collected by insurers must be spent, and requires that no more than either 80 or 85% (depending on the size of the health plan) be spent on benefits to beneficiaries.  If the insurer pays less, they have to refund the “excess” premiums to the plan members.  Managing this ratio will require payers to master a new balancing act -- monitoring what they pay out and making sure that administrative and marketing costs remain proportionally in check.
2. Accountable Care Organizations (ACO) and Bundled Pricing: PPACA includes provisions for pilots of these alternative models of delivery and payment for care, intended to incentivize providers to deliver better outcomes while controlling costs.  Private payers recognize that these models provide the opportunity to shift some of their risk to providers, and are even experimenting with new approaches of their own.
3. Essential Health Benefits (EHB): The EHB defines a comprehensive set of healthcare services to be covered by plans and sets limits on the consumer’s liability. This limits the extent to which plans can differentiate and shift costs to consumers.  What will be covered and to what extent is yet to be determined, but in essence, the law tries to ensure that small employers and individuals have access to plans similar to what employees at large companies receive.  While the EHB is being designed for new plans, in time we expect it to be expanded across all plans. 
4. Health Insurance Exchanges: As designed, there will be 50 different exchanges, 1 for each state, plus the potential for regional exchanges.  This will increase the complexity of operations for insurers because there is no requirement for uniformity -- individual states can modify essential health minimums, how the exchange operates, and so forth.  To participate in the exchanges, payers must offer the EHB and accept limits on what they can charge consumers.  In addition, as government and employers shift people to these exchanges, the insurers’ marketplace will shift from a wholesale to a vastly expanded retail environment, requiring them to modify their sales approach.

What These Changes Mean for Pharma

It could be argued that the implications for pharma are what they’ve always been -- give us more at less cost.  What’s new is the type of information payers will be requesting and their new willingness to draw ‘hard lines in the sand’ in making coverage decisions and engaging others in placing pressure on pharma.

Recognizing the need to manage data more effectively in order to drive changes that help control costs, payers are actively building (or acquiring) this capability.  They intend to use data to understand product use and outcomes, support coverage decisions, and influence treatment decisions.  To control costs, payers will give more attention to identifying the appropriate patient and influencing appropriate product usage.  They’ll monitor who is receiving a product, for what diagnosis, and evaluate product success relative to the outcomes promoted by the manufacturer.  To ensure the right patient receives the product, they’ll place more restrictions, like specialty limitations, on product use.  When use and outcomes aren’t aligned, expect further pressure on pricing, particularly price increases. 

As providers are forced by payers to assume more responsibility for costs and outcomes of their treatment decisions, they’ll look to manufacturers to provide better data to justify product use.  This demand for evidence will go beyond the traditional randomized clinical trial data generated for product approval.  Providers will be seeking real-world evidence that documents outcomes in populations that are representative of their patients.  As providers become more aligned with payers, they’ll become more conservative in their treatment choice.  This behavior change, coupled with additional product restrictions, will contribute to decreased product sales.

Competing in This Environment

To compete in this environment, manufacturers will need to rethink how they approach payers and make sure they have data that fully represents the economic and clinical value of their product.

Going forward, data will be critical.  Payers have always been concerned with clinical efficacy and how a product compares to standard of care, but now the conversation is turning to ‘so what’?  Does the data justify the cost?  Does it provide that much more value in terms of outcomes?  And while they make these demands, payers are developing the capacity to do the analytics themselves.

Pharmaceutical companies need to be thinking of how to differentiate themselves.  The most successful companies will be able to demonstrate economic and clinical data to support the value of their products against growing payer pushback.