Healthcare reform requires a hard look at drug costs and savings

Among members of the new administration, congressional leaders, payors, and providers, many are eager to transform the nation's healthcare system to curb unnecessary spending and make coverage more fair and efficient. A chief problem is that the US healthcare bill keeps increasing faster than the rest of the economy, with little to show in the way of quality improvement.

Key Points

Among members of the new administration, congressional leaders, payors, and providers, many are eager to transform the nation's healthcare system to curb unnecessary spending and make coverage more fair and efficient. A chief problem is that the US healthcare bill keeps increasing faster than the rest of the economy, with little to show in the way of quality improvement. Spending on pharmaceuticals has slowed visibly but is still on the rise, drawing the attention of cost-cutters on all sides.

Reducing outlays for healthcare is an enormous challenge. The Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid Services (CMS) estimate that the nation will spend $2.6 trillion for healthcare in 2009, 17% of gross domestic product (GDP); by 2017, healthcare spending is projected to increase to 20% of GDP. According to CBO, federal expenditures for Medicare and Medicaid will grow from $720 billion in 2009 to approximately $1.4 trillion by 2019, and the number of uninsured Americans will increase from today's 45 million to approximately 54 million in 10 years as health insurance premiums increase faster than incomes.


This trend was "one of the major factors driving down overall healthcare spending in 2007," said CMS statistician Micah Hartman; outlays for healthcare grew only 6.1% in 2007 to $2.2 trillion, the smallest rate of increase since 1998. However, healthcare still consumes a large proportion of the overall economy, with expenditures for hospitals, physicians, and other healthcare products and services climbing faster than inflation, a trend likely to be aggravated by the recession.

The slowdown in drug spending was caused primarily by increased use of generic drugs, which accounted for 67% of drugs dispensed in 2007, up from 63% in 2006, CMS reported. That shift reflects more blockbuster drugs coming off patent, the expiration of 6-month exclusivity periods, and the establishment of multi-tier drug formularies that set higher copays for branded products.

Drug use also declined in some therapeutic areas, CMS noted, perhaps owing to more visible concerns about drug safety. A proliferation of boxed warnings required by FDA may have discouraged patients and prescribers from using certain treatments. And fewer new blockbuster drugs coming to market reduced the number of products that could command premium prices.

Despite the restrained growth in spending on prescription drugs, actual outlays for pharmaceuticals continue to increase and are projected to reach $264 billion this year. Approximately $100 billion comes from government coffers, with half of that involving the Medicare drug benefit, making pharmaceuticals a likely target for the budget analysts.


One current cost-cutting proposal advocates extending the power of generics as a way to drive down spending for biotech therapies. Regarding such a move, CBO estimates that the federal government could save $9.2 billion over 10 years by establishing an abbreviated pathway for FDA to approve follow-on biologics. For its analysis, CBO assumes a 12-year exclusivity period for brand-name products and limited requirements for duplicating innovator clinical trials. Medicare would save the most, but other public and private health programs also stand to gain from access to less expensive biotech treatments.

The federal government would save even more-approximately $12 billion over 10 years-if CMS also revised billing codes for biologics dispensed by physicians under Medicare Part B. Placing a follow-on biologic in the same billing code as a brand-name counterpart would provide a strong incentive for physicians to prescribe the lower-cost therapy because they would be reimbursed on the basis of a weighted average of the prices paid for all drugs with the same code.

Some manufacturers object that such incentives might encourage the use of biosimilars that increase risks to patient safety or therapeutic efficacy. And follow-on biologics could decrease revenues for biotech companies and lead to reduced research and development of new products. But analysts point out that industry losses would be offset by larger gains for public and private health plans, which could translate into lower insurance premiums, higher wages, and a parallel boost in federal tax revenues.

Another strategy for reducing government outlays on drugs is to require manufacturers to pay rebates on medications purchased for Medicare Part D enrollees. Rep. Henry Waxman (D-Calif), chairman of the House Energy and Commerce Committee, champions this idea. He believes that pharmaceutical companies have raked in big profits from Part D through the elimination of rebates previously paid to state Medicaid programs for drugs delivered to low-income seniors, who are now covered by the Medicare drug benefit.

CBO calculates that a mandatory 15% rebate of the average manufacturer price beginning in 2011 would save the government $33 billion over 5 years and $110 billion over 10 years (2011–2019). Under this plan, manufacturers would have to pay the rebates or lose coverage by Medicaid, the Veterans Health Administration, and other government health programs, as well as by Medicare Parts B and D.


Other strategies for cutting expenditures are less promising, CBO points out. Prevention and disease-management programs may lessen the need for expensive care for some patients, but such initiatives have costs, especially if provided to large populations. Anti-obesity and antismoking campaigns that enable people to live longer, moreover, may increase demand over the long run for more care for the elderly. Modifying the nation's system for determining medical malpractice similarly would have only a modest effect on total healthcare expenditures. Many policy-makers support wider adoption of health information technology (IT) as key to establishing more efficient healthcare operations, but implementation of a national health IT system would cost billions of dollars.

CBO also agrees with insurers and pharmacy benefit managers that permitting the federal government to negotiate lower Medicare drug prices with pharmaceutical companies is likely to produce "small if any savings." The secretary for Health and Human Services might persuade manufacturers to reduce prices for select single-source products but is unlikely to have sufficient leverage to secure significant discounts.

And many budget analysts are skeptical that comparative research on which drugs and medical procedures are most effective will save money in the near term. CBO calculates that such efforts could reduce total spending on healthcare by approximately $8 billion over 10 years (2010–2019), but up-front research costs could eat into most of those gains and end up yielding limited savings.

Even so, there is growing support in Congress for the establishment of an independent comparative research organization, something like the quasi-governmental entity proposed last year by Senate Finance Committee chairman Max Baucus (D-Mont). Many insurers and payors maintain that to be useful to the healthcare system, effectiveness research has to weigh prices and expenditures, as is done by the United Kingdom's National Institute for Clinical Excellence (NICE). But how costs would be evaluated and compared remains a thorny topic for many in the biopharmaceutical research community.

These issues will be revisited in coming months under a number of initiatives. First up is reauthorization of the State Children's Health Insurance Program (SCHIP), which was approved in the House in January and must win Senate renewal by April. Congress and the White House also need to agree on a 2010 budget, tax changes, and additional economic stimulus proposals. And the Medicare physician-pay issue has to be revisited by year's end. Many legislative experts believe that there is not enough time to address broad health issues this year, whereas advocates for reform make the case that American industry cannot compete globally unless the nation develops a more efficient and cost-effective healthcare system.

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