Tuesday, June 23, 2009

PhRMA’s Bold Gamble


Yesterday, President Obama announced a plan under which drug makers will forgo $80 billion in revenues over the next ten years by paying half the cost of prescriptions for patients in the Medicare Part D "doughnut hole." See:


As I see it, PhRMA has shrewdly slowed (but not stopped) the momentum behind harsher "reforms" such as Medicare Part D rebates (Get Ready for Part D Reform) or importation fairytales (Surprise! New Importation Bill Introduced). I suspect the reprieve will be short-lived as the pharmaceutical industry will be forced to make more quid pro quo deals with the government.


 
President Obama's remarks yesterday make the game crystal clear:


And drug and insurance companies stand to benefit when tens of millions more Americans have coverage. So we're asking them, in exchange, to make essential concessions to reform the system and help reduce costs. It's only fair.

The pharmaceutical industry will suffer some pain from the lost revenue. Perhaps all of us will suffer, too, if there is less money left for the development of innovative new drugs. Is that really fair?

Two other comments:

This deal represents significant savings for consumers.

CMS recently estimated that cumulative outpatient drug spending from 2009 through 2018 (ten years) will be $3.3 trillion dollars, of which $584.4 billion will be out-of-pocket payments by consumers. (I discuss these forecasts on February 26 in Who Will Pay for Prescription Drugs?)

Thus, yesterday's deal could reduce aggregate consumer out-of-pocket payments by as much as 13.7% (=80/584.4). Note that the proposal only covers the 3.4 million beneficiaries that have out-of-pocket spending in the coverage gap of Part D, not all consumers. My computation is just a way to size the proposal, not a measure of actual savings by any individual.

For consumers that reach the coverage gap, they will receive a 50% discount off the negotiated price in their Part D plan (rather than pay 100% as they currently do). But the full negotiated price (100%) will count toward their true out-of-pocket cost, which means they spend less out-of-pocket to reach the catastrophic threshold.
Other sectors of health care can't match this deal.

The two largest components of U.S. health care spending – hospital care (32%) and physician services (21%) – represent services provided by people. A similar price cut from providers would be extraordinarily difficult because reduced spending would come primarily from lower labor costs, i.e., fewer people or lower salaries. I don't see that happening anytime soon, although my medical doctor friends claim to be worried.
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So, what do you think? Did pharma make a smart deal or are they playing with fire?
[Updated on June 23 at 9:15 AM EST]

9 comments:

  1. AnonymousJune 23, 2009

    Such a deal - PhRMA was already willing to support senior's through the donut hole via their individual Patient Assistance Programs (PAP's)to keep the senior's from going Generic. Now they only have to pay for half - again, such a deal!!!

    ReplyDelete
  2. AnonymousJune 23, 2009

    As I see it low-income to middle-income Part-D plan members will be asked to purchase expensive branded medications with higher co-pays in the donut hole? Such a deal! Instead of moving patients to lower cost generics in the donut hole we will maintain them long-term on expensive branded drugs that in many cases offer no clinical superior advantage. This is health care reform???

    ReplyDelete
  3. AnonymousJune 23, 2009

    There seems to be a media focus on the issue of seniors switching to generics when they hit the gap.

    However, there is research indicating that seniors stop taking "expensive" drugs altogether once they hit the gap. One study published in Health Affairs in February 2009 indicates a 14% rate of drug discontinuation associated with patients who hit the gap (compared against a control group).

    For brand name prescriptions that are filled during the initial coverage under Part-D, seniors nearly always receive the generic when there are generically substitutable / bioequivalent versions of the prescribed brand available.

    The effort to change from a Single Source Brand (non-generically available) to a generic is more challenging. Doing so requires a new Rx from the prescriber as well as possible dose titration.

    Given these factors, I believe that the threat of generic substitution is being overplayed in the media. I think the threat of total therapy cessation (and related increases in morbidity and mortality) are under appreciated.

    Regardless of the cause, the opportunity for PhRMA is certainly in the increasing utilization during the gap... they are winning in this proposition.

    ReplyDelete
  4. AnonymousJune 24, 2009

    Nice (quick!) catch by several of your readers on the idea of Pharma paying half the donut hole to keep seniors on brands, rather than letting them (and the system) save a ton more by using generics. I love it.

    ReplyDelete
  5. AnonymousJune 24, 2009

    With Pharma absorbing these "costs" will they finally do away with the "rebate" model they have in place with PBM's?

    ReplyDelete
  6. AnonymousJune 24, 2009

    "Other sectors of health care can't match this deal.


    The two largest components of U.S. health care spending – hospital care (32%) and physician services (21%) – represent services provided by people. A similar price cut from providers would be extraordinarily difficult because reduced spending would come primarily from lower labor costs, i.e., fewer people or lower salaries. I don't see that happening anytime soon, although my medical doctor friends claim to be worried."

    What about the insurance industry? Why should they be so profitable when they dont provide healthcare?

    ReplyDelete
  7. So, is it true that Obama allowed is not requiring mandatory generic substitution by the pharmacist when there is a lower-cost equivalent chemical generic medication? If so, then Pharma wins in this game, and the admin and patients lose. in Canada, we have mandatory generic substitution almost everywhere, but even with that, our Generic Fill Rate is less than the US.

    ReplyDelete
  8. FYI, according to the following article from Politico, there may be less to the PhRMA deal than meets the eye:

    Pharmaceutical deal still has question marks

    Adam

    ReplyDelete
  9. I predicted that PhRMA's move would slow momentum behind importation. Looks like it worked. Check out this article from the WSJ today:

    White House Assures Drug Makers on Reimportation.

    Adam

    ReplyDelete

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