Now that the Supreme Court has upheld the Affordable Care Act, which market segments of the pharmaceutical community stand to benefit, be adversely hit, or not be affected at all? Two pharma industry veterans offer some insight and predictions.
As the dust settles from the June Supreme Court ruling upholding the constitutionality of most of the Patient Protection and Affordable Care Act (ACA), the U.S. healthcare system continues on the path started by the law’s signing in 2010. Major questions remain on political, financial, and operational fronts at the federal, state, and local market levels.
Will the November elections change the course of ACA implementation and/or financing?
- Will there be other serious challenges to the law’s implementation at the state or national level?
- How many states will opt out of Medicaid expansion, and what will this mean for the various stakeholders?
- How many states will not establish and operate health insurance exchanges?
- What will be the impact of patchwork implementation?
- How will the numerous operational uncertainties and rules be dealt with by the administration (primarily HHS Secretary) and others interpreting the regulations?
Conferences are planned for the months ahead, with industry leaders sharing their insights and predictions on how events could play out and what organizations should be doing. Here is our view of how the impact of the ACA will be felt across industry channels and market segments.
Major Pharma Benefit Managers: They are the clearest winners given expanded coverage and the launch of biosimilars. Growth in enrollment will come primarily from their subcontracted arrangements with insurers who cover smaller fully insured employers as well as individuals. PBM self-insured employer business should remain stable, as the larger employers appear to be maintaining status quo on continuing coverage. Unlike insurers and health plans, their profit margins aren’t being capped. One potential downside for PBMs is expanded regulatory oversight, especially around transparency.
Hospitals: They stand to benefit greatly by increasing numbers of both commercial and Medicaid patients, and fewer uncompensated cases. (Hospitals in states opting out of Medicaid expansion won’t be as fortunate in reducing the number of uncompensated cases.) The Supreme Court ruling did nothing to change the hospitals’ races to establish partnerships and closer alliances with physicians and accountable care organizations (ACOs) for contracting purposes, with Medicare as well as commercial payers. Numerous announcements have been made by commercial insurers such as Aetna, Cigna, and others regarding partnership with ACOs in various markets. The initiatives on quality and outcomes improvement remain active. Many expect to see a drop in (uncompensated) emergency room use and a commensurate increase in (insured) use of urgent care and other ambulatory facilities. On balance, there will be pressure from continued Medicare and Medicaid rate cuts.
Retail Pharmacies: They should benefit from greater prescription volume, but they may be squeezed by altered payer mix, like margin pressure from “self-pay” customers converting to insured arrangements with greater purchasing clout. Large pharmacy chains may find opportunities to receive compensation for medication therapy management (MTM) services.
Drug Wholesalers: They should benefit from increased volume, although over time retail pharmacy generic margins may be squeezed and impact wholesaler margins. Wholesalers already operate on thin margins, and are unlikely to be the target of cost-cutting efforts.
WINNERS/LOSERS: “IT DEPENDS” CATEGORY
Commercial Insurers: While they win by gaining more policyholders, on balance their profits will be capped by the medical loss ratio (MLR) provision on fully insured business. Based on major insurer/HMO stock activity before and after the ruling, we interpret that upholding the law was not in the financial interest of these organizations (see Aetna, UnitedHealthcare, WellPoint, and Cigna). As public and private health insurance exchanges become operational, the major carriers may squeeze out (through pricing practices) or acquire the smaller players over time. Market share and volume will be critical given government-imposed margin limits. Another reaction to the squeezed margins has been the aggressive purchasing of physician organizations by insurance companies seeking revenue streams outside of the MLR. Those commercial insurers involved in managed Medicaid business in states expanding coverage should benefit. Smaller insurers and undercapitalized regional plans face serious challenges.
Physicians: They remain divided in their views of the ACA despite having more insured patients. Nowhere is this more evident than in the primary care versus specialty camps. The continuing trends and expectations include practice mergers and acquisitions, likely Medicare payment cuts (especially for specialists), movement toward health information technology, patient-centered medical homes, and ACOs.
Delays in access due to more patients may be exacerbated by physician retirement trends and a weak pipeline of new physicians. The increased burden on states will likely mean cuts in Medicaid fee schedules and potential withdrawal of physicians from the program. Physician satisfaction is already low, with Medicaid at 56% and Medicare at 81% of commercial rates. Major questions remain regarding if and how rural and/or other independent small practices will band together in various accountable-care collaborations.
Consumers and Employees: This segment has perhaps the biggest spread of winners and losers. Clearly the winners are:
- Dependents staying on a parent’s policy until age 26.
- Those who have wanted to pay for insurance now have subsidies to support purchase.
- Employees who previously needed/wanted preventive services and products are now mandated.
Clearly the losers are:
- Most employees who will see their premiums increase as a result of ACA mandates.
- Employees whose hours are being reduced to 30 per week will avoid employer coverage obligation.
- Individuals now forced to buy insurance and/or pay a penalty/tax who otherwise wouldn’t.
Pharmaceutical, Biotech, and Device Companies: Increased insurance coverage should result in an increase in drug utilization. This is despite $28 billion in new industry taxes in the next 10 years, Medicaid drug rebates, and mandated drug discounts for some Medicare beneficiaries. Medical device manufacturers may see less gain from increased insurance, since demand is less flexible, and still have reforms aimed at cost containment, including a 2.3% industry excise tax. To maintain pricing power, there will continue to be acquisitions aimed at acquiring products that will target underserved markets. The new donut hole provisions will be costly for drug manufacturers, but could reduce generic switches in patients reaching high levels of financial burden (20% of total spending is accounted for by only 1% of persons, and 70% of drug spending by 10% of persons, who spend as much out of pocket on drugs as on housing [top 1%] or groceries [top 10%], respectively).
Employers: Recent employer surveys are consistent in the view that ACA will raise their costs and increase paperwork. The larger self-insured employers, which cover roughly half of commercially insured lives in the U.S., are very different than the smaller fully insured employers. Large employers continue their steady march to high-deductible health plans (HDHPs) to flatten the growth curve, especially with the looming “Cadillac tax” in 2018 facing high-cost plans. They are unlikely for now to shift employees to exchanges. However, the smaller, fully insured segment is mostly cost driven and more willing to push employees to exchanges, public or private. Heated debate remains over the estimates of small employers that will decide to “pay” (the fine for not offering insurance) versus “play” (offer insurance). Smaller employers will clearly be losers financially if they were previously not providing coverage. Both large and small employers have major administrative and reporting requirements related to the ACA, with many details still unclear. Employers are perhaps the biggest losers, with an estimated 1% to 5% cost increase from mandates as well as the aforementioned reporting/communication burden.
WHAT NOW, PHARMA?
The ACA train has left the station, and it will be difficult at this point to undo most of the processes already underway in the near term, regardless of election outcome. The following major themes for pharma should remain in place, with a vigilant eye toward opportunities as they arise. These include:
1. Focus on proving clinical and economic value of products to key stakeholders
2. Maintain and support patient access
3. Elevate importance of coverage for diagnosing and treating relevant conditions to plans, PBMs, and employers, both in traditional plans and in growing consumer-driven health plans/HDHPs
4. Address broad changes to average manufacturer price (AMP) and best price (BP) calculation methodologies and modifications
5. Gain expertise in various emerging risk-sharing scenarios and increase awareness of potential opportunities to enter into risk-sharing arrangements with various stakeholders
6. Engage with organizations interpreting essential health benefits—particularly those involved with public and private health insurance exchanges
7. Implement policies to address the Physician Payments Sunshine Act, which require reporting physician payment data as of January 1, 2013 (while there is an exception for market research activities, advisory boards remain somewhat of a gray area)
Identify opportunities to support evolving provider organizations (e.g., ACOs, patient-centered medical homes) with resources that elevate the value of diagnosing and treating relevant conditions as well as support their efforts to attain and maintain appropriate accreditation. These could include: HEOR expertise and analytical resources, clinical quality and process improvement, communication/patient engagement support, and quality/performance award sponsorships.
The jury is still out on how exactly this will all play out, but hopefully these questions and predictions have prompted more questions as well as ideas on how the industry can productively move forward.