Health Reform Shapes Drug Development

August 1, 2009
Jill Wechsler

Jill Wechsler is ACT's Washington Editor

Applied Clinical Trials

Applied Clinical Trials, Applied Clinical Trials-08-01-2009, Volume 0, Issue 0

Pressure to reduce health care spending puts R&D, costs, and coverage on the negotiating table.

Sponsors of biomedical research generally support initiatives to make the nation's costly health care system more efficient and effective. Expanding coverage to some 45 million Americans is not only a moral necessity, which President Barack Obama emphasizes, it also would greatly enlarge the pool of customers for drugs and medical products and enhance compliance with prescribed treatments.

Jill Wechsler

That said, pharmaceutical companies are leery of being hit with cost controls and regulatory changes designed to help pay the trillion-dollar cost of achieving universal coverage. Congressional leaders propose to increase access to health care by expanding Medicaid; requiring all individuals to obtain coverage; mandating that employers play (provide insurance to workers) or pay a penalty; reforming the insurance market to limit exclusions based on pre-existing conditions; and forming an insurance exchange that will offer coverage options to the uninsured, including some kind of government-supported public plan.

Policy makers are looking to pay the $1 trillion coverage bill with tax increases, Medicare and Medicaid savings, and policy changes designed to reduce health care expenditures. The main concern of medical product manufacturers is that such approaches will curb revenues needed to support future R&D and will promote product cost over quality and effectiveness.

"Encouraging innovation needs to be the purpose of U.S. health care reform, not its victim," said Eli Lilly Chairman John Lechleiter in a speech in Washington in May. He complained that the word "innovation" never comes up in the health care debate, but that it's imperative to "preserve an environment where innovation is possible."

The mantra for industry is that appropriate drug utilization and better compliance with prescribed treatment will curb health care spending over the long run. Lechleiter acknowledged that the status quo is not an option, and that improved access and cost management are critical. At the same time, reform needs to maintain choice in coverage and treatment and to address the health care needs of individual patients.

New pathways

The tradeoff between protecting innovation and expanding access to needed medicines is central to the debate over establishing a legal pathway for FDA approval of follow-on biologics (FOBs). Innovator firms now support authorization for biosimilars, provided that establishes sufficient market exclusivity for biotech manufacturers to recoup investment in R&D. The Congressional Budget Office (CBO) has calculated that an FOB program with a moderate exclusivity period, say around seven years, would generate about seven to $10 billion over 10 years. The savings would be less with the 12 years of exclusivity adopted in legislation approved last month by the Senate Health, Education, Labor and Pensions (HELP) Committee. Even fairly modest savings estimates, though, are enough to spur negotiations to get an FOB measure into the final reform bill.

Reformers also eye other proposals for increasing access to generic drugs, such as a ban on payments by brand-name firms to generics companies to delay generic competition. Barring pay-for-delay settlements, according to Federal Trade Commission chairman Jon Leibowitz, would save the federal government $12 billion over 10 years and yield even greater savings to consumers and states. Leibowitz also supports curbs on authorized generics, but evidence that these products may lower drug prices may keep it out of the health reform legislation.

Challenge to Part D

Policy makers hope to reduce Medicare outlays by some $300 billion over 10 years through changes in reimbursement to doctors, hospitals, and other providers. Such moves also threaten to erode market-based competition in the Medicare Part D drug benefit.

For example, House Energy & Commerce Committee chairman Henry Waxman (D-CA) wants to impose rebates on drugs prescribed to low-income seniors shifted from Medicaid drug benefits to Medicare Part D five years ago. "We're simply going to ask the pharmaceutical companies to pay us back the money," Waxman said at a June news conference to unveil the House health reform plan. Manufacturers fear that rebates on drugs for so-called dual eligibles will be very complicated to administer and thus will open the door to rebates on all drugs covered by Part D plans.

In an interesting maneuver, Waxman included a new rebate involving duals in the House reform bill as a way to help cover the cost of closing the notorious Part D coverage gap over 15 years. That provision also requires manufacturers to offer 50% discounts on medicines prescribed to Medicare patients that fall into the doughnut hole, as proposed earlier by industry as a voluntary initiative.

Pharma companies appear more willing to pay higher rebates on Medicaid drugs than to undermine Part D pricing. The House bill also proposes to save $20 billion over 10 years by boosting the basic Medicaid drug rebate from 15% to 22%, extending rebates for new formulations of existing drugs, hiking rebates on generic drugs, and requiring manufacturers to pay rebates to states for drugs provided to Medicare managed care plans.

The greatest threat to competitive drug pricing, though, has emerged in proposals to establish a public plan option that has authority to pay Medicare rates to hospitals and providers. But it opens the door to a larger government role in pharma pricing. Insurers, payers, and providers strongly oppose a government-run coverage plan for fear it will eliminate private insurance altogether.

Similarly, proposals to authorize government negotiation of drug prices for therapies covered by the public plan has raised alarms among pharma companies. That's not as threatening as full repeal of the non-interference clause, which prevents federal negotiation of drug prices for Medicare Part D.

Congressional leaders will continue to fine-tune the public plan option to encourage employers to retain worker health benefits, but current proposals appear likely to undermine the existing system over the long run. Even without a government health plan, Congress is likely to establish some kind of federal health board with authority to make certain decisions on payments and benefits. This board is likely to have authority over medical product coverage, pricing, and cost-effectiveness standards.

Careful comparisons

A federal health board also could play a role in overseeing more comparative effectiveness research (CER), which is intended to better inform treatment decisions and ensure appropriate use of medical products. Heated debate over the structure of a CER governing body and its authority exists between some of Congress proposing to position a CER agency within the Department of Health and Human Services, while others prefer an independent public–private entity.

The really hot-button issue on Capitol Hill is how payers and insurers will use the resulting CER information. Democrats prefer to keep language on the use of CER fairly vague, while Republicans want explicit restrictions against using CER data to determine treatment and reimbursement for fear that would lead to health care rationing and government interference in medical decisions. The IOM report lists a number of CER priorities that seek evidence comparing the effectiveness and costs of prescription drugs to other treatments, proposals that reinforce those who consider cost-effectiveness a valid CER research subject.

Disclosure & deductions

Reform legislation also includes "sunshine" provisions requiring pharmaceutical companies to disclose virtually all payments to physicians and health care providers, including fees to clinical investigators. Industry has supported federal sunshine legislation, provided it establishes national standards and reporting requirements that preempt a growing number of state disclosure policies. The House reform bill, however, permits states to continue disclosure requirements that differ from the federal program.

Pharma companies also may be hit with new fees and taxes to support expanded coverage. Sponsors may have deflected earlier proposals to curb the corporate tax deduction allowed for drug advertising and for R&D expenditures. But there's talk of new drug re-importing programs and other price-cutting strategies.

President Obama wants to sign health reform legislation this year and has signaled he'll accept a measure with a $1 trillion, 10-year price tag that covers at least 75% of the uninsured. Many of the details in reform legislation will be hammered out on Capitol Hill this fall by a committee formed to reconcile differences between House and Senate bills. There will be considerable horse-trading and maneuvering over health exchanges, public vs. private plans, tax reforms, and price controls, with everyone keeping a sharp eye on costs and coverage.

Jill Wechsler is the Washington editor of Applied Clinical Trials, (301) 656-4634 jwechsler@advanstar.com