What the House Healthcare Bill Means for Pharma

Healthcare Reform

By Jon Hussey

President Obama’s health care initiative reached a major milestone this past weekend when the House voted 220 to 215 to advance legislation that could result in sweeping changes to the nation’s healthcare system. The legislation now moves to the Senate, where it faces merger with the Senate’s own healthcare bill, and an even tougher battle to attain the 60 votes needed for approval.

The legislation as it currently stands calls for a government-run insurance program, the goals of which are ostensibly to provide affordable healthcare coverage to individuals who are not covered through employer programs, and to promote competition in the marketplace that would reduce healthcare costs to everyone. The program would also expand Medicaid and subsidize insurance for individuals with low to moderate income levels. The program would carry a price tag of $1.1 trillion over 10 years and would be paid for with new taxes, fees and cuts in Medicare.

Critics fear that rather than reduce costs, government efforts to squeeze providers will force them to shift the burden to private insurers to maintain profitability. Over time increased costs could force private insurers to leave the market, resulting in a de facto nationalization of health insurance. However, the legislation as it now stands requires employers to provide private health insurance to their employees or face stiff fines, so as long as the cost of the insurance does not exceed the cost of the fines it is unlikely that such a shift will occur.

PhRMA expressed its disappointment with the current legislation in a public statement. For pharmaceutical manufacturers one of the main issues with the House legislation is that it requires $60B in additional rebates to the government over the next 10 years. This is in addition to the deal that industry struck with the White House in June to provide $80B in rebates over the next 10 years, bringing the total up to almost $140B. While the White House has indicated that it will honor its original deal, the fact that this piece of legislation has made it this far is worrisome to an industry that is struggling with patent expirations and consolidation.

That said, from a pharmaceutical industry perspective the news is not all bad. Increased healthcare coverage means a bigger market, and while margins may be lower because of increased price pressure, the additional volume may offset at least some of that. The legislation also provides biotech drugs protection from generics for 12 years. This is very welcome news given that the industry is already moving from small molecules to biologics. Finally, the legislation does not allow Medicare to create a formulary, which will limit its ability to negotiate prices.

At this point is it still not clear what the final legislation will look like once it is approved. Given the amount of negotiating and deal-making that will be required for it to pass the Senate, the current House bill likely represents the worst case scenario, and will probably be made much more business-friendly by the time it passes the Senate. Regardless of how the final bill looks, it is clear that we are standing at the edge of a major change to our health care system. Like any period of major change, it will present opportunities to those with the foresight and ability to capture them, and will be problematic to those that are unable to adapt.

Whats your take on the current House bill? How do you think the Senate will change the bill?

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