A Life Sciences Industry Stance on Health Care ReformDeloitte Debates |
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Now that health care reform has been signed into law, life science companies must make sure they fully understand the resulting mandates. Although the direct effects -- such as new fees and taxes and an expanded consumer base -- are relatively clear, there are many indirect effects that require careful assessment and planning. Also, the exact effects will likely be different for every company and industry sub-sector.
Here are some key opportunities and challenges that we see executives in life sciences wrestling with as they plan for the future:
| Opportunities | Challenges | |
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BioPharma Expanded coverage may outweigh price pressure |
Insurance mandates are likely to extend coverage to over 30 million additional patients (with an estimated even split between Medicaid and Commercial). Prevention programs may result in more aggressive use of certain drug classes, creating greater market opportunities. Physicians will be required to implement patient adherence and compliance programs, increasing product use. The 12-year exclusivity period provides an exclusive market from bio-similar drugs. HIT and patient-level data provide opportunities for increased manufacturer efficiency (e.g., improved clinical trial design, reduced investigator and patient recruitment time and enhanced access for health outcomes and comparative effectiveness research). |
Price pressure may rise due to increased rebate requirements, episode based payments, new industry fees (starting at $2.5B in 2011) and pricing disclosure requirements. Performance-based reimbursement tied to comparative effectiveness and outcomes could reduce the market for “me too” products and create portfolio challenges Streamlined FDA approval path for follow-on biologics may increase competition. BioPharma companies most at risk include those with:
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Devices Consumerism and comparative effectiveness are likely to drive success |
Devices for consumer/home use may benefit from two general trends not directly tied to the new laws: increased consumerism and increased technology availability. The economic case for home monitoring and tele-medicine is clear and will be reimbursed, especially with anticipated provider capacity constraints. New innovations that push the existing standard of care could capture a price premium, but only if they can show clear evidence of improved effectiveness. (Example: bio surgical devices that stop bleeding and speed healing with less invasiveness and lower risk of infection). |
Financial implications of the 2.3 percent excise tax effective January 2013. Devices in a hospital setting will be more likely to face price pressure -- especially as bundled payments go into effect. Increased emphasis on comparative effectiveness could make it harder to justify certain procedures (e.g., ortho implants and stents that already face price challenges due to lack of clear evidence). Device companies most at risk include those with a high concentration of use in hospitals. |
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Diagnostics Proven precision, prediction and prevention provide a platform for growth |
In vitro diagnostics(including molecular) are most likely to benefit, thanks to an expanded patient population and emphasis on personalized medicine and disease prevention. A lack of tort reform will likely cause the practice of defensive medicine to continue. |
Financial implications of the 2.9 percent excise tax effective January 2013. Imaging has historically been over-utilized with uncertain cost-benefit justification. Health reform limits physician referrals to facilities they own, which is likely to produce more free-standing imaging facilities. Decreased reimbursement rates are likely to curb the use and frequency of medical imaging. Comparative effectiveness data may not favor use of imaging in diagnostics. Diagnostic companies most at risk include those with significant imaging portfolios that do not have a clear cost-benefit case. |
My take
Andrew Vaz, National Managing Director, Life Sciences and Health Care Practice, Deloitte Consulting LLP
Back in January, many people thought health care reform was dead. But now that it has passed into law, life sciences companies must come to terms with the new environment and figure out the best way to move ahead. Here are some key points to consider:
- Analyze the needs of new consumers. For life sciences companies, one of the main upsides of health care reform is that more than 30 million additional people are expected to have health care coverage. This greatly increases the potential market for their products. Now that companies know what is going to happen, they can start taking immediate action to understand the needs of these new consumers and figure out how to maximize their value to the business.
- Anticipate new influencers. Health care reform expands the federal government’s role as a customer for medicines and medical devices. But the new laws also have a huge impact on the life sciences industry’s other highly influential customers, such as health plans, providers and state governments. These other influencers will face tremendous cost pressure, as well as other new requirements that will greatly affect what they do. For example, providers will be responsible for a patient’s overall outcome – not just the part of the work they performed – and will be paid accordingly. Life sciences companies should consider these secondary impacts when deciding who to sell their products to -- and how.
- Invest in product effectiveness. Companies can expect government agencies – armed with new systems and comprehensive health data -- to take a much harder look at product effectiveness and cost efficiency. Products that are demonstrably more effective will benefit and will warrant a premium price. Others will become generic commodities. To capitalize on improved data availability and transparency, companies must focus more attention on product effectiveness.
- Get ready for margin pressure. A primary objective of health care reform is to rein in rising costs. Life sciences companies can expect to face pricing pressure and margin erosion, as well as a steadily rising burden of taxes, fees and rebates. Increased drug rebates start in 2010, fees in 2011 and device excise taxes in 2013. In earlier negotiations, the life sciences industry had agreed to $80 billion in price concessions and rebates to help reduce the size of the so-called “donut hole” (the gap in Medicare coverage where the beneficiary is financially responsible for the entire cost of prescription drugs). However, the passed bill goes even further, aiming to completely close the hole by 2020 with only 25 percent cost share remaining. This is to be funded through industry rebates (Beneficiaries will get a 50 percent discount on brand name drugs and in subsequent years, the discounts will be expanded, with coverage extended to generic drugs). Additional price pressures will stem from the expanded $340 billion program to cover certain entities at a reduced priced for inpatient care.
- Prepare to defend prices. With consolidation in payors and purchasers and increased pressure on best-price transparency from government buyers, product pricing will need to be defensible. In fact, manufacturers may be required to openly share their pricing. This increased transparency will dictate more thoughtful pricing throughout a product’s lifecycle, as well as careful differentiation across geographies. Market share-based pricing will be replaced with margin-based pricing. Companies without sufficient analytical tools to verify the return on pricing “discounts” may find themselves at a competitive disadvantage.
- Make fully-informed portfolio decisions. Today, many drug manufacturers do not incorporate outcomes research until Phase 2 trials planning. Also, contact with payors tends to be limited and somewhat superficial. In the future, forward-thinkers and innovators will make health economics and outcomes research a formal part of their portfolio decisions, starting in Phase 1. They will also increase their interactions with payors and customers as key elements of their portfolio decisions and product/trial design.
- Expect intense scrutiny from the government. The new laws provide 12 years of patent protection for biologics, which is an important win for life sciences companies. On the flip side, companies can expect a lot more oversight and scrutiny from government agencies such as the Food and Drug Administration (FDA) and National Institute for Health (NIH).Other mandates that will increase transparency and scrutiny include (1) the “sunshine provision” where physicians will be required to disclose payments from drug and device companies and (2) new Part D provisions that require participating PBMs to disclose rebates, discounts, pricing concessions and generic drug utilization.
Health care reform will have a substantial impact on the life sciences industry. But it doesn’t have to be all bad. By using reform as a catalyst to improve product effectiveness and cost efficiency – and by focusing closely on the new needs of their customers – life sciences companies can continue to thrive in the health care market of the future.
Related content:
Library: Deloitte Debates
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Overview: Total Rewards
Industries: Health Care Providers
Innovation Centers: Center for Health Solutions
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A life sciences industry stance on health care reform
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