Top 5 HC Reform Action Steps for Pharmaceuticals

Healthcare Reform has passed (as predicted here in January).  It's time for action.  Wait you say... many aspects of reform won't take place for several years.  While that's true, seizing opportunity in the wake of reform requires immediate attentive action.  Some of what's in the legislation will require careful analysis driving well constructed plans both of which will take some time to do well.  Other opportunities created by the legislation have a distinct first mover advantage.  Those who take action now will win the day.  Other aspects will demand years of hard work to accumulate a winning position.

So let's have a look at my top five action steps pharmaceutical companies can and should take now to  take advantage of opportunities presented by Healthcare Reform.  Here they are in no particular order. 

1) Get ready to add sales representatives in targeted areas in 2014 to capture more than your fair share of incremental volume.  As controversial as this thought might seem, consider this... healthcare reform means 35 million additional people will have coverage in 2014.  Most of them are young (under 65).  Some areas of the country will be adding 20% to the population of covered lives.  Pharmaceutical companies with product lines geared to younger populations should start analysis and plans now to consider adding representatives in geographic specific areas to expand reach.  Companies thinking about adding reps but not wishing to add fixed costs might consider chatting with a favorite CSO about variable cost options.  (more here from an earlier blog!). Consider running pilots now to test promotional response.

2) Ramp up comparative effectiveness studies.  Ever see a comparative effectiveness study from RAND or AHRQ?  Often the winner is the product which has not just favorable evidence but the most evidence. Classic first mover advantage.  These studies take time.  Start planning and investing in studies.  Pick your studies carefully though.  Running additional studies is not without risk.

3) Design and pilot programs to help busy practitioners.  Your customers are overloaded already particularly primary care physicians.  Imagine when their practice volume increases by 10% to 20% in 2014.  Pharmaceutical companies who can help their busy practitioner customers will have enhanced relationship and access (more here from an earlier blog).  One simple idea which can be accomplished immediately, and at low cost, is to make sure marketing and reps understand the impact of healthcare reform on their brands and customers.  In fact, I'm already in discussions regarding this capability with a number of interested companies.

4) Review your R&D pipeline and make sure you have the right portfolio and right clinical trials and endpoints to succeed in the future.  Increasingly products will need to not only show efficacy and safety for market acceptance but also superiority vis-a-vis competition.  This is obviously not without risk.  A smart way to do this is to conduct clinicals in a narrower patient population a where a product is likely to come out on top.  In other words ..segment to win....mass market to lose.  Also make sure you cover off the economic side of the picture.  A product that shows economic benefit and clinical superiority will have a field day within a targeted segment.

5) Conduct pilots with large customers to learn how to win in tomorrow's markets.  Large managed care customers will be under some pressure.  Pressure to not only drive revenue above medical costs but to demonstrate quality outcomes.  Pressure to better service customers.  Some aspects of recent legislation mandate pharmaceutical counseling and treatment plans.  Anything pharmaceutical companies can do to help it's large managed care customers succeed and meet their customers needs will be a win-win. Merck is already experimenting with Junuvia.  Don't be left behind.

Why the Dems did the BIG %$^ Deal

Some of you are still wondering why the Dems proceeded with Healthcare Reform.  Political suicide you might say.  Well... not exactly.  A Monday CNN poll shows that the Dems actually might have voters on their side.  What? .... What?

Have a look at the numbers from this CNN Opinion Poll Release Monday, March 22nd.  Go to the link for the actual questions.

When asked if respondents favored or opposed healthcare reform...

Favor                            39%
Oppose                         59%
No Opinion                     2%

So most oppose healthcare reform... but...

When those opposed where asked why...

Favor                                       39%
Oppose, not liberal enough        13%
Oppose, too liberal                    43%
No opinion                                 5%

So.....

Favor + oppose not liberal enough        52%
Oppose, too liberal                             43%

How many folks who oppose healthcare reform as it is not liberal enough would vote Republican?

That's what I thought.  Dems have the voters on their side.

Healthcare Reform - Pharma's Big Win

Game over.  Dems will enact sweeping healthcare reform.  President Obama to ink the Senate version of the legislation into law today.  The Senate will then go through the reconciliation process to make the tweaks desired by the House.

In part, due to a masterful body of public policy work by Billy Tuazin (PhRMA) and Pfizer's Kindler, the legislation will be beneficial for Pharma over the next few decades.  Beyond that, however the jury is out.  Pharma succeeded in avoiding the big fear of Medicare price negotiation, parallel imports into the US and walked away from the "evil empire" label that pasted insurers through out the debate.  Of very significant impact, the legislation will fill the proverbial Donut Hole and insure more than a few previously uninsured Americans. It's this later point which will be the focus of this blog.

Insurance for the uninsured will kick into play in 2014.   The CBO has projected that Obama's plan will insure 32 million, largely younger individuals,  previously uninsured and further more mandate a pharma benefit.  The key to understanding the lift for pharma that will come from this aspect of the legislation is understanding the "insurance effect", a well known economic phenomena where individuals consume more healthcare when coverage is extended thereby lowering out of pocket costs.  Working the numbers (see earlier post for details, although here I used the higher CBO number for those obtaining insurance) I estimate insuring the uninsured could lift Pharma revenue by $10 billion per year or about a 3% revenue lift for the overall market. 

Call your broker.... while the impact on Pharma's top line seems minor, the impact on the bottom line will be substantial. Upwards of 14% will flow to gross profit and in turn flow to net income as companies take on little additional cost to capture the incremental revenue.  It's a freebie.  

Take Pfizer for example, a 3% lift in revenue to the roughly $50 billion in top line revenue in 2009 will mean a $1.5 billion revenue lift (actual lift will depend upon Pfizer's drug portfolio mix).  Assuming a 20% dost of goods sold, that brings $1.2 to the bottom line (assuming HC Reform simply expands the size of the US market which results in little to no increase in cost structure).  Pfizer reported $8.6 billion in net income.  So adding $1.2 billion increases this to $9.8 billion or a whopping 14% increase in earnings.   (of course this will be offset by the other "contributions" Pharma agreed to... reported to be $90 billion over the next 10 years, although my figures are a bit different, lower, more on this later).

Now be careful.  The impact will vary significantly by company.  Those companies whose portfolio of currently marketed drugs leans toward treating the elderly will have a significantly lower impact. Those companies whose portfolio leans toward the young will have a significantly greater impact. 

Healthcare Reform Likely to Pass

CNN reporting at 4:15 PM on Sunday the 21st that Obama executive order brings Stupak holdouts into fold.  Dem Healthcare reform Likely to pass.

4:21PM on CNN... Stupak says "we are well past the 216 votes we need" (to pass Healthcare Reform).  Believes they had the votes before even bringing the Stupak group into the fold.

10:45PM.  Healthcare Reform Passes as Historic Vote Count Reaches 216 votes.  

More details later this week.

Obma's Bill Update

The CBO today released it's estimate of the latest "reconciliation" version of the sweeping Healthcare Refrom Bill.  My view is that the odds of it's passage have tipped over 50%.  The CBO score has plenty in it for those Dems on the margins.  Strong coverage of the uninsured and more deficit reduction than prior versions. 

As far as Pharma is concerned, fees or taxes have jumped from $23 billion to $28 billion over the ten year tome horizon.  Pharma has appeared to dodge a bullet in the filling of the Donut Hole.  The bill still demands a 50% discount for drugs in the Donut Hole from manufacturers instead of a worried 75% discount.  In fact the discount for seniors will be 75% but the incremental 25% will be paid for by the government.  It also appears the legislation around the prohibition of pay for delay provisions has been dropped.

So it would appear that the $80 billion dollar pact remains largely in place.  Good news indeed as Pharma stands to gain from the expanded coverage of the uninsured and the long-term closure of the Donut Hole.  PhRMA apparently agrees with my assessment.  They are said to be spending $6 million in advertising in support of the legislation.

Check back for more analysis and perspective as things really heat up over the next few days!

In the Wake of the Healthcare Summit

Yesterday's Healthcare Summit held few surprises.  As widely speculated, the 7 and 1/2 hour session largely turned into a Capital Hill version of a TV reality show.  Obama opened laying out an agenda to consider the various objectives of Healthcare Reform.  Alexander for the GOP followed forcefully urging the Democrats to scrap their plans and start anew citing backing of the American people.  He further requested that the Democrats pledge not to take the bills through Congress utilizing the reconciliation process and warned them of the consequences of it.

The opening comments set the stage for the remainder of the meeting.  Sure there were some agreement on various objectives but not on form and substance of how to make it happen.  For example, all agreed that Americans should not be denied coverage due to pre-existing conditions.  The GOP  agreed that some regulation on the insurance industry would make sense.  Coburn (R) put forth an idea to send investigators as fake patients into MDs offices in an attempt to root out Medicare fraud and abuse.  Both sides agreed that this was a good idea.  But that was as far as agreement really got. Agreement on some objectives and some minor points.

Huge positional gaps exist over coverage of the uninsured. Dems want to spend up to 3/4 of a trillion dollars over next 10 years to cover 30 million. The GOP covers about 3 million (Boehner bill as reviewed by the CBO).  In terms of approach, Dems want exchanges, many Repub proposals want to open up state regulations so that insurance companies can more easily enter other state markets (easier said than done due to large market entry barriers).  Some Repub proposals do include exchanges.  Republicans tend not to favor pay or play schemes nor do they want government mandated benefit packages. Repubs also favor establishing high risk pools.  There was also a big discussion on budget impact of the plan.  Dems say it will reduce the budget (due to increased taxes and large cuts in the Medicare Advantage programs).  Repubs point to the huge cost of the current Dem proposals.  Nothing new here.  This posturing has been ongoing ever since the COB released the financials around the House and Senate bills.

An interesting area for the Pharma industry was the filling of the Donut Hole.  Dems want it filled.  The GOP appeared to come out against it due to the additional costs of the benefit.


What happens next?  It will depend on the polls.  The spin machines are already churning with soundbites filling big media channels.  If we see a favorable tick toward approval of comprehensive healthcare reform, the Democrats will be emboldened and pursue reconciliation.  Obama did not mention the R word (reconciliation), but it was pretty clear that he implied that it was an option for the Democrats and hence a threat. Don't be surprised if Obama takes a couple of minor republican ideas and amend his proposal with them for window dressing.  

If public opinion does not tick upward toward the Dems, we still will see movement forward but perhaps less aggressive as the Democrats have little political capital left to lose and can roll the dice hoping that they can spin whatever gets passed as good for the voting public.

Obama's Plan Good News for Pharma

My first take on what's in Obama's plan for Pharma...Looks a lot like merged House and Senate Plans more toward the Senate plan.  Good news for Pharma in the short-run as it appears that a significant number of the uninsured would be covered and in the long-term the Medicare Donut Hole would be closed.