Health reform expands drug coverage, supports outcomes research

Key Points

The massive health reform legislation approved by Congress in March promises to significantly expand the number of Americans with healthcare coverage and pharmacy benefits. In addition to changing how insurers and health plans provide drug benefits, the new law closes up much of the controversial "donut hole" in the Medicare drug benefit program, establishes a pathway for developing and marketing follow-on versions of biotech therapies and bolsters government support for comparative effectiveness research (CER), all important for expanding appropriate drug utilization by patients.

BROADER DRUG BENEFITS

The main selling point for the reform package is that it expands healthcare coverage to about 32 million uninsured. Individuals and workers at small companies will be able to purchase coverage through new state-based insurance exchanges, many to meet the individual coverage mandate. Prescription drug coverage is included on the list of essential benefits required for all insurance plans offered through the exchanges, increasing the prospect for payer reimbursement of orphan drugs and specialty products. In addition, insurance market reform-which prevents denial of coverage based on pre-existing conditions, curbs annual and lifetime limits, and encourages preventive care-promises to expand pharmacy benefits to patients with serious or chronic health conditions and in need of medicines.

Moreover, a big jump in Medicaid drug rebates will yield $38 billion in additional revenues to support program expansion, while also opening the door for insurers and pharmacy benefit managers (PBMs) to seek deeper discounts on drugs. The legislation boosts rebates from 15% to 23.1% of average manufacturer price (AMP) for brand drugs, and from 11% to 13% for generic drugs, retroactive to the beginning of this year (2010). That essentially raises the "best price" on many drugs, creating an opportunity for managed care organizations to renegotiate discounts and formulary placement. The higher rebates extend to new formulations of oral solid dosage forms and can be collected by Medicaid managed care organizations, a change that may also encourage community health centers to press for additional discounts.

Multiple changes to Medicare, moreover, will enhance drug utilization by seniors. The legislation authorizes annual wellness visits that will produce personalized prevention plans with recommendations for immunizations and prescribed medications. There's more outreach to low-income beneficiaries to encourage appropriate drug use, plus improved complaint and appeals systems that can help seniors obtain access to needed therapies. The bill codifies mandatory coverage of medicines in six protected drug classes by Part D drug plan formularies, while leaving the door open to future modification of that policy.

The biggest change to Part D is to close up the confusing donut hole that now imposes hefty out-of-pocket costs on seniors. Currently, Medicare beneficiaries who spend more than $2,830 on medicines hit a coverage gap where they have to pay the full cost of prescriptions; after drug outlays exceed $6,440, the government covers 95% of additional "catastrophic" costs.

To provide some immediate relief, the government is giving a $250 rebate to beneficiaries who fall in the donut hole this year (2010). Beginning in January 2011, manufacturers will cover 50% of the negotiated cost of brand medicines filled by seniors in the gap. Medicare beneficiaries will pay the reduced price at the pharmacy counter, and manufacturers will reimburse pharmacies for the difference. Discounts won't apply to low-income seniors who have minimal copayments, to retirees in employer drug plans, or to higher-income beneficiaries (ie, individuals with income more than $85,000).

While brand manufacturers will continue to pay 50% of gap drug outlays every year, in 2013 Medicare will move to close the donut hole further by covering a portion of the remaining cost to beneficiaries, starting low but ramping up to pay 25% of donut hole expenditures by 2020. For generic drugs, Medicare will increase coverage of gap products starting in 2011 until plans pay 75% of the cost and beneficiaries 25% in 2020. At that point, policy-makers consider the donut hole essentially closed because the remaining 25% copayments will be in line with beneficiary fees on drugs prior to hitting the coverage gap.

Closing the donut hole is projected to cost drug manufacturers some $32 billion over 10 years, while the government will contribute $38 billion, some of that covered by the $28 billion in fees that drug companies also will pay over the coming decade. The change is expected to boost compliance with prescribed therapy and to reduce the growing number of seniors who stop taking drugs or switch to generics when they hit the gap. The lower cost to beneficiaries also will move seniors through the donut hole more quickly to catastrophic coverage.

BIOSIMILARS AND OUTCOMES RESEARCH

In exchange for added fees and rebates, pharmaceutical companies gained a pathway for FDA to authorize follow-on biologics (FOBs). After years of debate on this issue, innovator firms won an unprecedented 12-year data exclusivity period for all reference biotech products, with the possibility of a 6-month extension for sponsors who conduct pediatric studies. CBO analysts say the program will save the government-and cost manufacturers-$7 billion over 10 years. Generic drug companies and PBMs complained that the savings could have been well over $50 billion with shorter exclusivity periods, but biotech companies maintained that the policy is important for encouraging investment in research on breakthrough therapies.

Clearer guidelines on developing "biosimilars" and "biobetters" stand to benefit the healthcare system overall. FDA now has the task of deciding what analytical assays and clinical studies will be needed to document FOB safety, purity, and potency, and what criteria could support product interchangeability, a critical issue for marketing and reimbursement. Sponsors will pay FDA user fees; there's a process for innovators to challenge patent infringements; and Medicare Part B will pay for biosimilars at ASP (average sales price) plus 6%, an amount considered high enough to encourage physician prescribing of less-costly FOBs, explained Avalere Health Director Margaret Nowak.

Another important reform provision establishes a new non-profit, non-government Patient-Centered Outcomes Research Institute to support CER. Funding for the new entity starts small, but increases to $150 million in 2012 and subsequent years by tapping into the Medicare trust fund and collecting fees from insurance companies. The Institute will form a governing board this September and is scheduled to issue CER methodology guidelines next year.

Specifics in the legislation distinguish this program from the United Kingdom's National Institute for Health and Clinical Excellence (NICE). There's a curb on using quality-adjusted life years (QALY) as a threshold for establishing cost-effectiveness, plus limits on using CER findings to determine coverage or reimbursement decisions by Medicare and other government health programs. Research has to recognize differences in patient populations, and all information has to be made public. The United States Department of Health and Human Services Agency for Healthcare Research and Quality (AHRQ) will continue to play an important role in disseminating CER results and in distributing grants to research organizations.

MORE TRANSPARENCY, OVERSIGHT

Drug marketing and research also may be affected by new "Sunshine" provisions that require national disclosure of payments and reimbursement by pharmaceutical companies to physicians. Beginning in 2013, drug, biotech, and medical device firms have to report payments to healthcare providers that exceed a measly $10 or add up to $100 a year.

Another transparency provision requires PBMs to report to HHS on drug rebates and discounts as well as their generic drug dispensing rates. These reports, though, will be kept confidential, but will be available to Medicare analysts and Congress to help shape payment policies.

Looming on the horizon is a new Independent Medicare Advisory Board, formed to propose ways to slow the growth of Medicare spending. There is concern among providers and manufacturers that the panel could institute important changes affecting Part D reimbursement without legislative review. The board won't be up and running until 2014, which provides time for industry to press for modifications.

Policy-makers may not do that, though, as they are anxious to gain any and all savings from healthcare providers. The new law looks to "bend the cost curve" on the nation's healthcare system by cutting fraud and waste, establishing electronic medical records, identifying more effective medical treatments, and bolstering preventive care. These strategies may improve healthcare quality but won't make any real dent in federal expenditures. To pay for the program, the new law cuts Medicare provider fees, which Congress often rescinds, and taxes high-income consumers and healthcare companies, which do little to curb healthcare spending overall, and may boost outlays even more.