Health Care Reform: Impact on Drug Channels, Post-SCOTUS

"It is not our job to protect the people from the consequences of their political choices."

Hey, did you hear about the Supreme Court’s decision on the Patient Protection and Affordable Care Act (ACA) Yeah, I thought so.

I won’t rehash the constitutional issues. As long-time readers know, I think the ACA is messy, inelegant legislation with enormous unintended consequences. Nonetheless, it’s the law of the land (for now), so let’s review what it means for drug channel participants.

• Pharmacy Benefit Managers (PBMs) will gain from the expanded coverage and the launch of biosmiliars. The “transparency” requirements should not be material.
• Retail pharmacies will benefit from increased prescription volume and various legislative “fixes,” but face margin risk as the uninsured get the advantage of third-party bargaining power.
• Drug wholesalers will benefit from increased volume, although pharmacies’ generic margin pressure will flow up the channel.
• For pharmaceutical manufacturers, the gains from increased prescription volume and expanded coverage are offset by new fees and higher rebates. The impact of biosimilars depends on whether your company is facing biosimilar competition, or planning to become a biosimilar competitor.

Read on for details. And whether we like it or not, the Centers for Medicare and Medicaid Services (CMS) has almost unlimited power to reshape our healthcare system via regulation. Be afraid. Be very afraid.

OVERALL IMPACT ON PHARMACY CHANNELS

In anticipation of yesterday’s ruling, I have recently published three overview articles for your health reform pleasure:

• In The Outlook for Drug Spending (With or Without ACA), I show that annual retail drug spending is projected to be $25.9 billion (+7.2%) higher in 2021 than it would have been without healthcare reform.

• In Who Will Pay for Prescription Drugs in 2021?, I document how government payers will crowd out private insurance and consumer out-of-pocket spending.

• In Health Care and the Coming U.S. Fiscal Disaster, I summarize projections showing how health care cost increases are leading to fiscal ruin for the United States.

You may also be interested in Healthcare Reform Hits U.S. Drug Spending in 2010, which explains the first-year effects of the health care reform bill.

PHARMACY BENEFIT MANAGERS

Pharmacy Benefit Managers (PBMs) will be the big winners from health care reform since they will administer expanded prescription drug insurance for plans sold through health insurance exchanges. According to CMS projections, this brand-new market will appear in 2014 and be fully running by 2018, which is conveniently right after the generic wave ends. (See Medco’s Latest Update on the Generic Wave for a slightly-dated look at the generic wave.)

PBMs will benefit somewhat less if too many employers stop offering health insurance and shift employees to the exchange plans, which will likely have lower margins than traditional commercial business. See Will Exchanges Crowd Out Employer Coverage?

PBMs will also gain from biosimilars. The ACA authorizes a new regulatory pathway for the FDA in approving biosimilars, while also granting biologics innovators 12 years of exclusive use before a biosimilar version may be developed. (Patent Docs has a useful legislative background.) I expect competition between the innovator biologic and the biosimilar (follow-on biologic) to resemble brand-to-brand competition rather than brand-generic competition, i.e., no automatic substitution of biosimilar for innovator biologic. Thus, the PBMs can apply their rebate/formulary models.

RETAIL PHARMACY

Pharmacies will benefit from the expected overall growth in demand for prescription pharmaceuticals and the corresponding increase in prescription drug spending. However, there are at least two ways in which healthcare reform will be negative for pharmacy profits:

One, greater insurance coverage will likely depress pharmacy margins. Pharmacies earn much higher profit margins from uninsured and underinsured individuals, a.k.a. “cash-paying customers.” (Yes, really.) As I show in Who Will Pay for Prescription Drugs in 2021?, consumers’ share of drug spending will drop to a record-low 14% of spending, due to the subsidized exchange coverage and expanded Medicaid coverage.

Two, the “fix” to Average Manufacturer Price (AMP) turned out to be bad for pharmacies. After the health care reform bill passed, the pharmacy trade associations bragged that their lobbying “dramatically reducing the AMP cuts.” Whoops! Turns out that AMP-based reimbursement limits are much lower than expected because generic drugs are super cheap. See The Pharmacy Reimbursement Hit from AMP-Based FULs and Generic Plavix: Let's Do the Price Limbo.

That said, the AMP effect could be smaller if states opt-out of the expansion, as permitted by the Supreme Court's other major decision yesterday. Here's a good overview from the Wall Street Journal: Medicaid Decision Looms for States.

WHOLESALERS

Revenues of drug wholesalers are linked not to overall economic cycles but to growth in prescription drug spending, so wholesalers should benefit from projected spending growth due to health care reform.

However, wholesalers will be indirectly affected by the changes to pharmacies, especially for generic drugs. A majority of wholesaler profits come from generic drugs. (See Wholesaler Profits in the Generic Wave.) Drug wholesalers will face margin pressure on generic drug sales, because pharmacies will be more price sensitive and require bigger discounts to remain competitive.

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So, Drug Channels readers, what do you think about the Supreme Court’s decision?

BONUS

Did you hear how CNN misreported the decision? Jon Stewart has an amusing take on their mistake.