HEALTHCARE REFORM

Navigating When the Landmarks Move:
U.S. Healthcare Reform for Commercial Biopharma Executives

By Kim D. Slocum

It was an interesting year, to say the least. 2009 treated us to a number of spectacles. The inauguration of President Obama in January was followed quickly by a pledge to move on a major campaign plank—healthcare reform. By summer we were treated to a very different spectacle as thousands of Americans, often senior citizens, turned out at Congressional “town hall” meetings, often imploring their elected representatives to “keep the government away from my Medicare.” Between the charges and countercharges, the “death panels” and all the other hype, it might be easy to dismiss the whole thing as just another failure in the long line of attempts to reform the broken U.S. healthcare system. However, along the way something new happened. Healthcare reform advanced much further in Congress than at any time since the creation of Medicare and Medicaid back in the 1960s. As of this writing in December 2009, we still do not know precisely what legislation will get to the President’s desk, but what’s transpired to date still represents an important accomplishment. The new law will certainly be less than some people would like and more than others fear, but it will be the first serious healthcare legislation in years. That alone suggests that the usual biopharmaceutical industry practice of ignoring noise in its external environment and keeping its attention focused firmly on core business practices might not be the best course of action this time.

Getting in Early
“If you’re not at the table, you’re on the menu” is a common saying among Washington insiders. PhRMA took swift steps early in the reform process to ensure it was seen as part of the solution rather than part of the problem from the Administration’s perspective. This tactic appears to have paid off handsomely. There has been relatively little public demonization of the traditional pharmaceutical industry this year—in marked contrast to a barrage of negative publicity aimed at health insurers. There also isn’t likely to be much that’s truly toxic for research-based companies in the new legislation. While the House of Representatives bill did call for repeal of the “Non-Interference Clause” of the 2003 Medicare Modernization Act—which would enable the Centers for Medicare and Medicaid Services (CMS) to directly negotiate prices with manufacturers—few pundits believe this provision will survive. The same is likely to be true of the House call for Medicare rebate payments. Neither chamber’s bill contains a provision for re-importation, despite a determined effort by a group of Senators to include one. Even the provisions dealing with biosimilars are benign for innovator companies. Probably the most challenging elements that have a good chance of actually becoming law are the “sunshine” provisions that will require further disclosures of all payments made by biopharmaceutical firms to healthcare professionals. However, this is probably better viewed as an acceleration of an existing trend rather than something new. All this was obtained in exchange for offering roughly $80 billion in discounts to Medicare beneficiaries who find themselves in the infamous “donut hole” with their Part D plans and probably wouldn’t have bought much in the way of branded products anyway. The industry also provided a good deal of the funding for a series of advertisements supporting healthcare reform. All in all, this looks like a classic “win-win” for all concerned.

After Access, Cost
What’s important for biopharmaceutical executives to remember is that healthcare reform isn’t over. To paraphrase British statesman Winston Churchill, where we stand today is best described as “the end of the beginning.” As has been widely discussed, the U.S. healthcare system faces two enormous problems: access and cost. This year’s legislation has primarily focused on the first of these, but the second hasn’t gone away and will get much worse over the next few years. Let’s look at a few of the many data points that trouble policy makers:

For the past 40 years, U.S. healthcare costs have grown at a rate 2.5% faster than the economy as a whole. That’s why healthcare represents a growing proportion of GDP. If the trend continues, by about 2080, the entire U.S. economy will be devoted to healthcare.

Seventy-nine million Baby Boomers are now starting to enter their peak healthcare-consuming years. The first of these are now signing up for Medicare benefits. This will just pour gasoline on the fire represented by Medicare costs. By 2050, Medicare and the Federal portion of the Medicaid program will represent almost 20% of the GDP—nearly the entire size of the Federal government today. The average Boomer won’t be able to pick up the slack since average retirement savings among those 55+ is only about $125,000—far less than the $225,000 experts project will be needed just to pay out-of-pocket healthcare costs under our current
system.

The private sector isn’t doing much better. While more than 150 million Americans get their healthcare as part of a benefits package associated with a job (either theirs or that of someone else in the family), that social contract is breaking down. Employers’ costs for healthcare insurance are now larger than profits from their business operations. Benefits costs are often the second biggest expense for most companies, trailing only wages. Within another decade or so, it will be unusual for workers making less than six-figure salaries to have significant healthcare coverage.

All this means that at some point, probably sooner than later, the U.S. will have to get serious about addressing the financial black hole represented by ever-growing healthcare costs. From a policy perspective, there are really only three ways this can be accomplished. We can raise revenues (increase taxes), we can cut benefits, or we can take it out of the healthcare delivery system.

While these aren’t mutually exclusive, it’s important to note that the first two aren’t likely to be mainstays of any attempt to put healthcare on a more stable economic footing. Americans’ collective appetite for paying more taxes to fund healthcare is very limited. Many polls have shown that $500 per year represents the absolute upper limit that any substantive proportion of the population is willing to pay. Per capita healthcare costs now run at more than 10 times that amount, so this is the proverbial “drop in the bucket.” Cutting benefits is also perilous. Employers have been aggressively cost shifting to employees for nearly a decade, as any biopharma commercial executive wounded by the effect of multi-tier co-pays can attest. However, we also learned this year that cutting Medicare benefits is the new “third rail” of American politics (touch it and you die). Senior citizens turn out to vote in far higher numbers than their proportion of the population as a whole. Even the very dubious claim that healthcare reform was going to reduce Medicare benefits turned out seniors by the carload to protest. Unless politicians have a death wish, that’s unlikely to be the route the country will travel.

Lower-Cost Delivery
That leaves the delivery system. Anyone who provides products or services to healthcare with an expectation of getting paid to do so can expect to hear the proverbial knock at the door. There are fundamentally two ways in which funds can be raised from physicians, hospitals, and biopharmas. The first of these is to make the system more value conscious. This was the fundamental driver behind both the comparative effectiveness review provisions of last February’s American Reinvestment and Recovery Act (ARRA aka the “stimulus”), which many policy makers believe contained more real healthcare system reform than anything now being debated in Congress. Included in that same legislation was an injection of $20 billion to $40 billion in healthcare information technology (HIT). One of the primary purposes of “wiring” American medicine is to allow the collection of massive amounts of de-identified population level data that will allow the country as a whole to better understand what medical interventions work best, for whom, delivered under what circumstances. Already some “islands of automation” like Kaiser Permanente and the Geisinger Clinic use data like this to streamline care and make decisions on which biopharmaceutical innovations have value and which don’t. Expect to see a huge push to kick this activity into high gear over the next three to four years.

Given the complex requirement of defining, measuring, and rewarding “value” in healthcare, it’s distinctly possible that the U.S. will fail in its attempt to do so. If that turns out to be the case, there is another option—price controls. While the traditional image of a “big ugly payer” (like CMS) is the image that comes to mind for biopharma manufacturers, the private sector could also be an emerging threat. Wal-Mart has been quite successful with its $4 generic pharmaceutical program. Close to 1 in 5 of all Americans have signed up for such programs either with Wal-Mart or one of its competitors since 2006. Wal-Mart executives have recently been quoted as calling for drug prices to be based on the cost of manufacturing rather than the methods used today. Should the responsibility for healthcare decision making eventually fall to shallow-pocketed consumers, industry executives can expect these calls to get much louder in coming years.

So what does it all mean? The first and most important lesson is to recognize that the era of applying sufficient promotional muscle to even modestly differentiated new products and achieving success in the market is over. Interestingly, this applies not just to the solid-dose oral products used to treat chronic diseases like hypertension and asthma, but will increasingly affect high-technology injectable “specialty” products as well. There is much emerging data suggesting that both public and private payers will focus most of their efforts of containing spending growth on these expensive agents over the next few years.

The second lesson is to understand that it’s very likely the industry will develop a very different approach to product commercialization over the next few years. The increasing focus on outcomes and “value” means that biopharmas will need to work in collaboration with other stakeholders including patients, providers, and payers to reach a shared definition of innovation. Industry will probably need to assume some degree of financial risk in contracts it negotiates with payers. This means a fundamental redirection of promotional efforts from getting as many patients using a product as possible to getting the right patients on treatment, then supporting them with whatever services they require in addition to a biopharmaceutical agent to obtain the optimal result. All this will be happening in an environment where more information about biopharmaceuticals is available from multiple independent sources and the activities of industry marketers are subject to far greater public scrutiny.

The Shape of Things to Come
The times are clearly changing and the “new normal” for industry is likely to require more hard work to earn acceptable returns on R&D investment. A lot of “accepted wisdom” about how to promote compounds successfully will have to be discarded and a lot of new wisdom will have to be created. However, there is reason for hope. Demand for healthcare services in general and prescription biopharmaceutials in particular isn’t going to decline anytime soon. The trick will be matching the needs and wants of society as a whole with those of the industry and its varied stakeholders.

Commercial executives are often the public face of their companies, so they will likely find themselves in the middle of this struggle. While it may take some beyond their comfort zone, it’s important to remember that the best opportunities usually arise from the biggest challenges. The “brass ring” of success is still there for those with the audacity to grasp it by avoiding the temptation to defend the status quo and instead focus on the chances offered by the emerging environment.

Kim D. Slocum is President of KDS Consulting, an organization devoted to helping healthcare organizations find strategic, sustainable solutions to the business challenges they face. Before founding his consulting firm, Slocum worked for more than 33 years at a variety of pharmaceutical, biotech, and healthcare firms, most recently, as Director of Strategic Planning and Business Development at Astra-Zeneca. He can be reached at kdsconsulting@verizon.net