Life Sciences and Health Reform: No Going Back
Deloitte Insights video
The 2010 Patient Protection and Affordable Care Act (PPACA) will likely have far-reaching consequences across the US health care industry. Yet as much as it has captured national attention, PPACA is only the most recent, galvanizing element of a more expansive transformation of the industry driven by other state and federal reforms and, perhaps more significantly, by broader trends in the marketplace.
For life sciences companies, the 2010 Patient Protection and Affordable Care Act brings direct impacts. However, indirect impacts related to the changing nature of their relationships to other sectors and the choice and consumption of their products could be an even greater catalyst for transformation.
Tune into the latest episode of Deloitte Insights to learn more about the impact of health care reform on the life sciences industry.
Terry Hisey, Vice Chairman, U.S. Life Sciences Leader, Deloitte LLP
Ralph Marcello, Principal, Deloitte Consulting LLP
Krithika Ramamoorthy, Manager, Deloitte Consulting LLP
Sean O’Grady: Hello and welcome to Insights. Today, we are examining the impact of health care reform on life sciences organizations. Joining the discussion here in New York are three guests. We have Terry Hisey, the Vice Chairman and Life Sciences Leader of Deloitte LLP. We also have Ralph Marcello, a Principal in the Life Sciences Consulting practice focused on R&D and health reform, and finally, we have Krithika Ramamoorthy, a Manager in Deloitte Consulting. Folks, thank you very much for being here today in New York. Terry, I would like to dive right into it though and how do you think health care reform is going to affect life sciences organizations?
Terry Hisey: That’s a great question. To start the answer, one of the things you really need to do is define what we would mean by life sciences companies. For us, its pharmaceutical companies, biopharmaceutical companies, medical technology companies, and service industries to that. As it relates to health reform, a lot of people today think about that as the things that are in the news from a legislation standpoint, such as the American Reinvestment and Recovery Act two years ago, the Patient Protection and Affordable Care Act last year, but for us, health reform is really a catalyst, it is not the forcing function. Our clients in life sciences are really being affected by a much broader transformation in terms of changes that are happening to providers, in health plans, and in government health, so it is really a bit more complex. As a result, there are going to be pretty significant changes in terms of reimbursement, access to products, and impacts to innovation.
Sean O’Grady: Ralph, same question over to you. How do you think reform is affecting these organizations?
Ralph Marcello: Life sciences organizations are really going to have to start to think long and hard about the capabilities that are going to be required across the transforming landscape. Reform has definitely impacted key stakeholders across the entire health care ecosystem, and life sciences companies have to really think through how they are going to react to each of those changes. So, when you think about it from a provider’s standpoint, as physicians move from being entrepreneurs to becoming employees of larger health care systems and larger private practices, life sciences companies really need to think about how they are going to be influencing that physician and their buying decision. The entire business model for life sciences companies is predicated on influencing a physician. So, life sciences companies have to now start selling to perhaps a hospital administrator that will have a lot more leverage in terms of what they say a hospital and a physician can prescribe to their patients.
Sean: Now, we have been talking about the impacts, but what do you think is driving these changes?
Ralph: A key factor driving these changes as I had mentioned briefly earlier is impacts to the stakeholders across the ecosystem. So, we talked briefly about the provider impacts and how life sciences companies have to sell and influence differently to providers, specifically physicians. When we look at health plans, perhaps the second biggest impact of reform is that we will start to see informal collaborations around comparative effectiveness. As a result, a formulary that is part of a large payor and provider system, what we call an integrated delivery network, we will start to see is that a formulary that is good enough for them may be good enough for a smaller plan that may be part of a state. There has been a lot of data analysis that has gone into developing that formulary for that large plan so states may just assume that they are good enough from them.
From an employer perspective, we will start to see segmentation based on the size of the employer, as well, as the population of folks that are being employed, while questions still remain as to what employers will be doing with their employee population. Therefore, small employers may move their employee population over to state exchanges while large employers may retain them and the question still is out there as to what they will do with their retire population.
And from a state government perspective, the question is really about how states can effectively set up health care exchanges. The states will bear the burden from an exchange perspective and it represents a new channel that life sciences companies have to sell into and one that they currently don’t have the capabilities to do that successfully. As a result, from a commercial model perspective, it will represent a significant shift to how life sciences companies operate.
Sean: And how about you, Terry? What do you see driving all these?
Terry: I think the basic premise for health reform or the health transformation really has to do with access, cost, and quality. I think the things that Ralph talked about are things that are really going to be the manifestation of that in the marketplace in terms of people wanting information that helps them to understand the effectiveness of a product, how safe is it really, how does it work in a broader population of people, what is an appropriate price for it based on the kind of value and use. I think balancing those is going to be key. For life science companies, it is really moving to a different type of conversion with a different set of people where is the emphasis is on the value in use and it is one where facts beat messaging in terms of the real adoption rate of products in the marketplace.
Sean: Now, you folks are predicting a pretty significant revenue reduction for the life sciences industry. I want to check my notes here; 12 percent to 14 percent reduction for biopharma and an estimated 10 percent for medical device and diagnostics. How did you arrive at that decrease?
Krithika Ramamoorthy: To understand the financial impact of health care reform on life sciences organizations our team analyzed both the direct impacts coming from direct provisions in the law as well as indirect impacts. The direct impacts come from four areas: increased volume because of increased coverage, increased Medicaid rebates, higher Medicaid discounts, and finally increased pharmaceutical industry fee. All of this combine to drive about a -2 percent impact on the industry, but more significant threat to revenue, to the tune of about -12 percent comes from indirect impacts, primarily formulary pressures and to a slightly lesser extent from the threat of biosimilar competition. To quantify the formulary pressures, we analyzed the top 315 drugs in the U.S. These drugs total up to $218 billion worth of the industry’s revenue. That is about 80 percent of the total U.S. drug industry. We looked at three formularies, a large commercial plan which is also associated with the IDN. We looked at UK and Germany and across all three formularies, we found a large number of drug markets had restrictions on them, primarily the more saturated markets. For instance, one of the formularies we looked at restricted 137 of the total 315 drugs we looked at and that is almost $94 billion worth of revenue, almost 40 percent of the U.S. drug market. We also did another analysis where we locked at areas of the portfolio that are at more risk for formulary pressure. Here we found that retail drugs which are serving morbid or life-threatening conditions were more restricted than other areas of the portfolio. We did a similar analysis for the medical devices sector and arrived at very similar conclusions.
Sean: Well, thank you very much for that. My last question for you folks is really understanding the timing around the implications and the impacts that we have been speaking about today, so Ralph, what is the timing of all this?
Ralph: Life sciences companies really need to act now. They need to be proactive about some of the items within the legislation that will not occur for the next few years. They need to be ready for it, for example, state exchanges will not come into play until 2014, but life sciences companies and specifically their commercial organizations need to start thinking about how to start selling to this new channel and what the different segments within that channel will begin to look like.
Sean: And Terry, final thoughts from you around timing.
Terry: I think I agree with everything Ralph said about timing standpoint in terms of companies needing to act now in order to be ready for the things that are yet to come. I also, believe they need to act now in order to adapt to the things that are already here today. For instance, the actions that are happening within large provider systems today, where they are trying to drive down cost and focus on appropriate use of products. They should focus on things required to leverage some of the opportunities around comparative effectiveness, to do a better job on asset and capital allocation decisions around development of products, while continuing to focus on innovation. Also, I think that they need to act today to really drive and establish a governance model and a set of individual and institutional skills and capabilities to recognize that they need to act in entirely new way across their entire value chain from corporate development through product discovery, development, getting things on market, and then to the sales and distribution of those products. So the time to act is now, based on today’s factors, as well as tomorrow factors.
Sean: So no hesitation. Folks, thank you very much for joining us.
Terry: It is pleasure to be here.
Sean: All right, we have been discussing the ramifications of health care reform on life sciences organizations with Terry Hisey, Ralph Marcello, and Krithika Ramamoorthy. If you would like to learn more about these individuals or any of the topics discussed on today’s broadcast, you could find that information and much more on our Web site. It’s www.deloitte.com/insights/us. For all the good folks here at Insights, I am Sean O’Grady, we will see you next time.
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