Health Reform Targets Costs and Coverage

The new administration, Congressional leaders, payers, and providers are eager to transform the nation's health care system to curb unnecessary spending and make coverage more fair and efficient. The main problem is that the U.S. health care bill keeps rising faster than the rest of the economy, with little to show in quality improvement. Spending on pharmaceuticals has slowed visibly but still is on the rise, drawing the attention of cost-cutters on all sides.

Jill Wechsler

Reducing outlays for health care 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 health care in 2009—17% of gross domestic product, which will rise to 20% of GDP by 2017. Federal expenditures for Medicare and Medicaid will grow from $720 billion in 2009 to about $1.4 trillion by 2019, and the number of uninsured will rise from 45 million today to about 54 million in 10 years, says CBO, as health insurance premiums increase faster than income [see "Key Issues in Analyzing Major Health Insurance Proposals," at www.cbo.gov].

Drop for drugs

One bright spot for budget analysts is a slowdown in outlays for prescription drugs. In 2007, the growth rate for drug spending hit a 45-year-low, according to the CMS Office of the Actuary. Expenditures on pharmaceuticals rose only 4.9% to $227.5 billion, nearly half the 8.6% increase in 2006 and the slowest rate of growth since 1963. And prescription drug prices rose a paltry 1.4% in 2007, even less than the modest 3.5% price hike in 2006.¹

This trend was "one of the major factors driving down overall health care spending in 2007," explained CMS statistician Micah Hartman: Outlays for health care grew only 6.1% in 2007 to $2.2 trillion, the smallest rate of increase since 1998. However, health care still consumes a larger portion of the overall economy, as expenditures for hospitals, physicians, and other health care products and services climb faster than inflation—a trend likely to be aggravated by the recession.

The spending slowdown for drugs, moreover, is not necessarily good news for innovator drug companies. Prices were held down primarily by increased utilization of generic drugs, which accounted for 67% of drug dispensing in 2007, up from 63% in 2006, CMS reported. That shift reflects more blockbuster drugs coming off patent, the expiration of six-month exclusivity periods, and the establishment of multi-tier drug formularies that set higher copays for branded products.

Utilization declined in some therapeutic areas, CMS noted, due to more visible concerns about drug safety. A proliferation of black-boxed warnings required by FDA discouraged patients and prescribers from using certain treatments. And fewer new blockbuster drugs coming to market reduced the number of products able to command premium prices.

Despite restrained growth in prescription drug spending, actual outlays for pharmaceuticals continue to rise, projected to total $264 billion this year. About $100 billion comes from government coffers, half of that involving the Medicare drug benefit, making pharmaceuticals a prime target for the budget analysts.

FOBs and rebates

A lead cost-cutting proposal is to extend the power of generics to drive down spending for biotech therapies. CBO supports such a move, estimating that the federal government could save $9.2 billion over 10 years by establishing an abbreviated pathway for FDA to approve follow-on biologics (FOBs) [see "CBO Budget Options Volume I, Health Care," December 2008, www.cbo.gov]. 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 government health programs also would gain from access to less expensive biotech treatments. The savings would be even greater (about $12 billion over 10 years) if the government also revised billing codes for biologics dispensed by physicians under Medicare Part B. Placing an FOB 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 based on a weighted average of the prices for all drugs with the same code.

Manufacturers object that such incentives might encourage the use of biosimilars that raise risks for patient safety or therapeutic efficacy. And FOBs could cut revenues to biotechs and reduce R&D in new products. But analysts point out that industry losses would be offset by larger gains for public and private health plans, which would 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 meds purchased for Medicare Part D enrollees. Rep. Henry Waxman (D-CA), newly named chairman of the House Energy and Commerce Committee, champions the idea. He believes that pharma companies have raked in big profits from Part D due to the elimination of rebates previously paid to state Medicaid programs for drugs delivered to low-income seniors 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 five years and $110 billion over 10 years (2011–2019). Pharma companies would have to pay the rebates or lose sales to Medicaid, the Veterans Health Administration, and other government health programs, as well as to Medicare Parts B and D.

The downside is that manufacturers would try to offset the added rebates by charging higher prices initially and developing new strengths and dosage forms for existing drugs that could command higher prices. And if companies cannot recoup some of the lost revenues, they might take it out of their research budgets.

Savings elusive

Other strategies for cutting expenditures are less promising, CBO explains. Prevention and disease management programs may lessen the need for expensive care for some patients, but such initiatives have costs, especially if provided for 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 impact on total health care expenditures.

Many policymakers support wider adoption of health information technology as key to establishing more efficient health care operations, but implementation will be costly upfront—more than $50 billion a year to establish a national health IT system.

Both public and private health officials further believe that comparative research on which drugs and medical procedures are most effective can avoid inappropriate care and unnecessary expenses. CBO calculates that such efforts could reduce total spending on health care by about $8 billion over 10 years (2010–2019), but upfront research costs would eat into most of those gains and would end up yielding limited savings.

Even so, there is growing support in Congress for establishing an independent comparative research organization, something like the quasi-governmental entity proposed last year by Senate Finance Committee chairman Max Baucus (D-MT). Insurers and payers maintain that effectiveness research has to weigh prices and expenditures to be useful to the health care system, as is done by the UK's National Institute for Clinical Excellence. But how costs would be evaluated and compared remains a thorny topic for the biopharmaceutical research community.

These issues will be addressed in coming months under a number of initiatives. Congress moved quickly to reauthorize the State Children's Health Insurance Program (SCHIP). Now the challenge is to gain consensus on a 2010 budget, tax changes, and additional economic stimulus proposals, which may include support for health IT implementation and comparative effectiveness research.

Many legislative experts believe that there's not enough time to address broad health issues in 2009, but reform advocates insist that American industry cannot compete globally unless the nation develops a more efficient and cost-effective health care system.

Jill Wechsler is the Washington editor of Applied Clinical Trials, (301) 656-4634 jwechsler@advanstar.com

References

M. Hartman, A. Martin, P. McDonnell et al., "National Health Spending in 2007," Health Affairs, 28 (1) (Jan/Feb 2008), http://content.healthaffairs.org.