Economic crisis will challenge Obama's health coverage expansion plans

Key Points

During his campaign for the presidency, President-elect Barack Obama promised to change Washington policies and practices. He stated that all Americans have a right to healthcare and that he will expand coverage for the uninsured. His strategy is to expand federal and local government programs that provide care for individuals and children, and to require employers to "play or pay" to support insurance for workers. Although Obama stopped short of backing a mandate for universal coverage as advocated by many Democrats, his proposals raise the prospect of increased government involvement in the nation's healthcare system.

Many voters cited healthcare as a key election issue; however, the need to address a rising unemployment rate and low economic growth may force Obama to seek more limited changes in the near future. The soaring federal budget deficit also is likely to intensify the hunt for ways to cut healthcare spending, with a focus on pharmaceutical costs and value.

CHILDREN FIRST

Expanding SCHIP and Medicaid would help Obama fulfill his promise to provide healthcare for every child and to provide coverage for approximately 25 million of the uninsured population. But other reform proposals may take longer. During the campaign, Obama talked about requiring large employers to support insurance coverage for workers or pay a fee. Individuals without work-based coverage and small employers would gain access to private insurance options and a government-sponsored national plan through a National Insurance Exchange. All insurers would have to issue coverage to all applicants without regard to pre-existing conditions.

Expanded coverage means increased use of prescription drugs, as third-party payment for healthcare services and products boosts medication use by shielding consumers from the real cost of drugs. With establishment of the Medicare drug benefit four years ago, millions of seniors joined the system.

CUTTING COSTS

Further expansion of healthcare coverage will be challenging-and expensive. The Obama reform proposal was pegged to cost between $1.2 trillion and $1.6 trillion over 10 years (2010–2019), depending on various assumptions and models. The plan thus includes initiatives to reduce federal spending for healthcare. Health-information technology, including electronic prescribing, would net $100 billion over 10 years. There could be additional savings from expanded disease-management programs, coordinated-care models, and pay-for-performance initiatives.

Obama also took up the cause of comparative effectiveness, predicting that an institute producing research on the relative effectiveness of various treatments would save money by reducing unnecessary treatment. But analysis by the Lewin Group puts the savings at a modest $40 billion, based on low expectations that providers and patients will adhere to new medical guidelines.

Because these strategies yield little in the way of near-term savings, a more popular tactic is to cut government outlays for prescription drugs. Many Democrats believe they can save millions by revoking the Medicare "noninterference clause," a controversial policy that prevents the secretary of Health and Human Services (HHS) from directly negotiating payments for drugs covered by Medicare drug plans.

The Medicare Part D program relies on private insurers to hold down costs by demanding low prices and rebates from pharmaceutical companies. That approach has worked to some extent, as seen in the recent announcement from the Centers for Medicare and Medicaid Services (CMS) that Medicare spending on drugs totaled $44 billion for fiscal year 2008, much less than the $74 billion originally predicted. However, Medicare drug plans do pay more for drugs than federal healthcare programs offered by the Veterans Administration and the Department of Defense, among others, which can use federal supply-schedule rates. And state-administered Medicaid programs reduce outlays for drugs by collecting additional rebates from manufacturers.

A likely first order of business for many Democrats will be to simplify and centralize the Part D program. Insurers and pharmaceutical manufacturers lobbied for the competitive approach to avoid creating a central Medicare formulary that would provide a cost-and-coverage model for the broader healthcare market. Insurers thus have crafted plans with noticeable differences in formulary coverage, copayments, and premiums. Although the resulting variation has expanded choices and contained outlays, the program also has confused seniors and created disparities in beneficiary costs.

Allowing direct price negotiations by the HHS secretary could cut revenues to drug manufacturers by approximately $10 billion to $30 billion, according to the Boston Consulting Group, depending on whether insurers and pharmacy benefit managers demand the same low prices set by Medicare. The potential effect of direct government price negotiations is unclear, however. There is not much room to negotiate lower prices for drugs that have no therapeutic alternatives or for products in those classes for which Medicare requires coverage of all drugs. Manufacturers may be reluctant to accept a very low price that could extend to the broader market, but it would be difficult to refuse to sell a chronic-care therapy to the huge Medicare population.

Another strategy for curbing Medicare drug outlays is to require manufacturers to pay rebates to CMS. This could start with reimbursement for drugs provided to dual-eligible seniors enrolled in Part D plans, those low-income beneficiaries who previously obtained drug coverage from state Medicaid plans. Switching these patients to Medicare drug benefits reduced pharmaceutical makers' Medicaid rebates and raised manufacturer revenues. Many congressional leaders would like to reverse that shift.

IMPORTS AND GENERICS

Democrats and Republicans alike have considered reducing drug prices by making it easier to re-import drugs from other countries. Obama offers the usual caveat that imported drugs must be safe and effective. But taking steps to ensure product quality appears to limit potential savings. Several state and local drug import programs have been dropped because of high costs and low consumer interest, and extending drug coverage to seniors has eliminated a large pool of customers for re-import programs.

Moreover, recent reports about contaminated heparin from China and manufacturing quality problems with some Indian generic drugs are causing many lawmakers to be hesitant about opening the gates too wide to less-regulated imports. Obama advisers have acknowledged that enthusiasm for drug re-importing has waned since the heparin incident earlier this year.

The new administration may prefer to make generic drugs more readily available to patients and payors. At the annual meeting of the Generic Pharmaceutical Association in September, Obama health-policy adviser Dora Hughes said that reducing barriers to generic drug use should be central to health-reform efforts. Hughes voiced support for curbing reverse-payment agreements and backed legislation that would allow FDA to approve generic versions of biologics. But the market exclusivity period for brand-name biotech therapies, she said, should be much shorter than the 14 years advocated by the biotechnology industry.

With Democrats extending their control in both houses of Congress, chances are good for votes on additional measures related to pharmaceutical marketing and regulation. Bills are in the works to limit direct-to-consumer advertising and to require greater transparency in pharmaceutical sales and marketing activities. A priority for many members of Congress is likely to be expansion of FDA oversight of imported medical products and foods, and any FDA legislation will provide a vehicle for enacting additional drug safety and marketing measures.

Although savings may be elusive from many of these cost-cutting policies, such proposals are likely to gain support on Capitol Hill and in the White House. Many political leaders believe it's possible to ratchet down outlays for prescription drugs without undermining biomedical research and development or patient access to needed treatment. And the prospect of saving approximately $60 billion in the process may be much too attractive to pass up in these economically difficult times.

Ms Wechsler is a Washington-based reporter specializing in federal and state healthcare issues.