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Pharma’s Reform Bounce: How Big A Boost Will $80 Bil. Buy?
By Lauren SmithThe introduction of the Senate Finance Committee's health care proposal turns the focus from what the pharmaceutical industry will contribute to reform efforts toward what manufacturers stand to gain.
The introduction of the Senate Finance Committee's health care proposal turns the focus from what the pharmaceutical industry will contribute to reform efforts toward what manufacturers stand to gain.
The pharmaceutical industry could see an increase of approximately $115 billion over 10 years in U.S. drug sales as a direct result of the Senate Finance Committee's health reform legislation - at least by one way of slicing up the numbers used in economic analyses underlying the bill.
That calculation is based on how the Senate Finance Committee explained the rationale for the specific fees due from each health care business sector that stands to benefit from expanded health coverage.
Senate Finance Committee Chairman Max Baucus, D-Mont., unveiled details of the legislation, America's Healthy Futures Act of 2009, in the form of a "chairman's mark" on Sept. 16.
According to Democratic Finance Committee staff, members believe three major industries will experience "significant expansion" in the form of "new customers" that will be created by the committee's health reform bill: insurers, pharmaceutical companies, and hospitals.
Staffers say that they conducted an economic analysis of how much each industry stood to profit from the impact of the committee's health reform legislation over the 10 years.
Market expansion would stem primarily from picking up millions of new customers with drug coverage who previously did not because they were not insured, Medicaid expansions, and a shift toward use of more brand drugs in Medicare Part D because of the diminished deterrent of the self-pay donut hole coverage gap.
The committee agreed to look at recovering "15 to 20 percent" of the estimated new business through the specific industry segment fees. The pharmaceutical industry fee is set at $2.3 billion annually or $23 billion over 10 years.
If that $23 billion fee is calculated from a 20-percent fee assessment, then it suggests that the Finance Committee analysts estimate that pharma's market should grow by $115 billion in new business over the next 10 years as a result of the legislation.
In that vein, the industry would net $35 billion over the same period, or $3.5 billion annually, after subtracting pharma's $80 billion pledge to help pay for health reform.
If the $2.3 billion per year fee is based on an estimate of 15 percent of new business, then that suggests a projection of new business as high as $153 billion for the drug industry over 10 years.
No Simple Answers To Size Of Bounce
After explaining the rough formula for calculating the fees at the unveiling of the bill, the Finance Committee staff cautioned in follow-up comments against trying to calculate the new business figure directly from the percentage fees.Specifically, the staff said, "in determining allocations, an economic analysis was done on a range of factors, including long-term industry revenues, profitability, benefit from reform, the contribution of government revenues, as well as a number of other factors. The $23 billion fee was a portion of the overall $80 billion contribution agreed to by the pharmaceutical industry, which came about as a result of the analysis and negotiations with the industry. Other contributions focused on the donut hole, as well as increases in rebates to Medicaid," Further, "the fee is not a tax rate on the new business expected to be generated from reform, and the committee believes that the contribution from the industry will outweigh any benefit from expansion."
The staff statement recognizes the political sensitivity of large estimates of the positive impact of new business on different industries. A big new pool of money for an industry could stimulate further attempts to seek payments from that sector to pay for the cost of added coverage and upset some of the fundamental agreements on which the bill is advancing.
People familiar with the Finance Committee drafting process note that pharma's contributions were calculated differently, to take into account the industry's early offer to make a total package of contributions up to $80 billion. The $80 billion represents the total pharma contribution: the fee was added to help reach that commitment.
By comparison, the special fee on medical device manufacturers is higher, $40 billion over 10 years. The medical device industry is smaller than the drug business so it would seem that the fee should be smaller. However, the $40 billion number presumably reflects the total hit to medical devices - half of pharma's overall contribution.
Estimates of new business for pharma resulting from reform legislation run the gamut from no gain to $200 billion over the same period of time.
An analysis of House health reform legislation by Avalere Health, for example, found the changes would have minimal positive impact on the pharmaceutical industry. Working off the House Energy and Commerce Committee bill in mid-summer, Avalere found a 0.1 percent increase in net revenues to the drug industry, disputing estimates that "health reform legislation would generate a windfall of revenues" from the "millions of newly covered patients into the health care system."
Apportioning The Fees To Individual Companies
The chairman's mark would require heads of Medicare, Medicaid, the Department of Veterans Affairs and TRICARE to report domestic sales of branded prescription drugs for each drug manufacturer for the prior calendar year to the Secretary of the Treasury.The Treasury secretary would then establish individual assessments by determining the relative market share for each company. A company's relative market share would be its total covered U.S. sales from all government programs as a percentage of the total covered U.S. sales from all government programs for all companies.
In determining each company's relative market share, covered domestic sales will be taken into account as follows: 0 percent of sales up to $5 million; 10 percent of sales over $5 million and up to $125 million; 40 percent of sales over $125 million and up to $225 million; 75 percent of sales over $225 million and up to $400 million; and 100 percent of sales over $400 million.
The fee assessed is determined by the firm's market share in the preceding calendar year and would be a surcharge not deductible for U.S. income tax purposes.
Baucus Alone For Now; Hopes For GOP Support
Baucus formally introduced the proposal standing alone in front of a banner that read "Health Care Reform." No other members, Republican or Democrat, were present at the historic unveiling."No Republican has offered his or her support at this moment, but I think by the time we get the final passage in this committee it will have bipartisan support," he said.
Baucus has delayed introduction of a formal legislative proposal for months in hopes of putting together a truly bipartisan bill. The committee chairman, along with two fellow Democrats, has been negotiating with three Republicans in an attempt to craft a bill that would be attractive enough to gain some support from the other side of the political aisle. The group of negotiators on the Finance Committee is dubbed the "Gang of Six."
"I've worked very hard to get that bipartisan support and I think we will get it," he continued. "I think that certainly by the time the committee in this room votes on passing health care reform, there will be bipartisan support."
Sen. Olympia Snowe, R-Maine, thought to be Democrats' best shot at gaining Republican support, did offer some hope of bipartisanship: "As one of three Republicans in the Group of Six, I have appreciated the chairman's leadership of the only bipartisan effort in any committee in either the House or Senate, which has laid real and substantial groundwork for bipartisan cooperation during this ongoing process."
She said that this bill was only a "first step in the process" and that members of the Gang of Six will keep meeting in order to craft a bill that she and other Republican members of the committee can support.
"I believe the chairman's legislation moves in the right direction away from a government-run system contained in bills that have passed other Congressional committees, but a number of issues still need to be addressed - including cost assumptions and ultimate affordability to both consumers and the government as well as ensuring appropriate competition in the health insurance exchange," she added.
The Congressional Budget Office scored the Baucus proposal as costing $774 billion over 10 years. However, CBO concluded the bill would reduce the federal deficit by $49 billion over the same period.
While Baucus hopes to get Republicans on board, he made clear that he does not need them.
"I know this bill will pass," asserted Baucus. "The choice now is now is up to those on the other side of the aisle."
The RPM Report
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