Washington Outlook for 2016

By John McManus, president and founder, The McManus Group

A few weeks ago the GOP Leadership revealed that the House of Representatives will be in session for a mere 111 days in 2016, meaning it will be closed more weekdays than open. It will be in recess for seven consecutive weeks next summer. With so little time to legislate, virtually no must-pass legislation looming, and the focus turning to the 2016 elections, it is hard to see Congress enacting any significant health legislation next year.

However, it is not hard to envision that the focus on pharmaceutical pricing will intensify and, if not effectively countered, could cause a substantially negative perception to become engrained and lead to deleterious legislation in 2017, particularly if the Democrats win the White House and take control of the U.S. Senate.

This November, the Senate Aging Committee (an otherwise backwater, but for its subpoena power) announced a bipartisan investigation into pharmaceutical pricing. Ranking Member Claire McCaskill, Democrat from St. Louis, MO (the notable home of Express Scripts) said, “We need to get to the bottom of why we’re seeing huge spikes in drug prices that seemingly have no relationship to research and development costs.”

The Committee requested a massive number of documents related to marketing decisions and price spikes of specific products from Valeant Pharmaceuticals, Turing Pharmaceuticals, Retrophin Inc., and Rodelis Therapeutics. While the Aging Committee does not have jurisdiction to move legislation, it can certainly fan the flames on the matter.

In addition, all 18 Democratic Members of the House Committee on Oversight and Government Reform sent a detailed letter to Chairman Chaffetz (R-UT) requesting that he schedule a vote to subpoena Valeant and Turing CEOs regarding pricing of their drugs.

The immediate Congressional focus, for now, has been on a few companies. But there are now indications that the Obama Administration would like to broaden the debate to specialty drugs as well. The Department of Health and Human Services is convening a “public” (read: invite only) forum to examine the high costs of new drugs for grievous illnesses, noting, “Specialty medications represent only 1 percent of all prescriptions, but in 2014, these medications resulted in 31 percent of all drug spending.”

While most Republicans are philosophically opposed to price controls, budget hawks are beginning to take notice of the allegations of increased drug spending. Earlier this year, Medicare’s actuary disclosed that total spending on Medicare’s Part D drug benefit will grow by 7.9 percent in 2015.

If the pharmaceutical industry is to head off deleterious legislation in 2017, it must effectively convey three key points in 2016:

1. The reality of drug economics; the sky is not falling — pharmaceuticals still comprise about 10 cents on the dollar as they have for years.
2. Pharmaceuticals have made real-world patient-care transformations possible. Hepatitis C can be now be cured in a matter of weeks with virtually no side effects. Since 1980, life expectancy for cancer patients has increased by about three years, and 83 percent of those gains are attributable to new treatments.
3. The long-term value of innovation. For example, a new treatment that delayed the onset of Alzheimer’s by five years could save $100 billion annually in Medicare and Medicaid spending on Alzheimer’s patients by 2030.

The real risk to the industry is a budget reconciliation bill in 2017, which seeks to curb federal spending and perhaps reform the tax code. A newly elected president who campaigns on addressing “price gouging” of pharmaceuticals will try to team up with fiscal hawks in the Republican Party who may be more focused on trimming budget deficits than supporting pharmaceutical innovation.

The industry’s challenge in 2016 is to change the current populist narrative on drug pricing and educate policymakers that preserving the U.S. free market is the world’s best hope to curing grievous illnesses that still afflict millions.

Implementation Of Physician Payment Reform And ACA Will Impact Life Sciences Sector
While Congress is unlikely to advance significant health legislation in 2016, there will be significant regulatory activity in implementing the recently enacted physician payment reform legislation that can have substantial ramifications on the life-science sector.

This spring, Congress enacted the Medicare Access and CHIP Reauthorization Act (MACRA), which repealed the dysfunctional Medicare physician payment formula which penalized physicians when their spending exceeded arbitrary targets and replaced it with a program that ties physician reimbursement, in part, to quality and resource use across all health sectors. Within a few years, nine percent of physician reimbursement will be based on physician practices’ comparative success in delivering higher quality care and restraining total healthcare resources under the new Merit-Based Incentive Program (MIP).

The pharmaceutical and medical device industries are naturally anxious about a new payment scheme that utilizes metrics that could potentially penalize or reward physicians for prescribing their products. Physicians community, pharmaceutical manufacturers, patient groups, and other stakeholders will engage with CMS in a rulemaking process throughout the next several years to hash out quality and resource measures that will be used under the new payment system.

Initial measures are based on consensus group metrics endorsed by the National Quality Forum and the like, but stakeholders have the opportunity this year to point out gaps in measures and to develop additional measures that have the support of physician specialty societies and other expert groups. For example, the industry will want to ensure that prescribing certain expensive products or class of products, which are the standard of care, are accurately captured in quality metrics used to judge physician practices.

Even more transformative will be the new alternative payment models (APMs), where physician practices enter into capitated contracts with CMS for providing an entire episode of care. Most policy makers view this pay-for-value rather than “fee-for-service” approach as the future for Medicare. Think of the implications of a physician practice receiving a set payment for all cancer care delivered to a cohort of patients! Pharmaceutical manufacturers must engage creatively and demonstrate the value their therapies deliver.

Meanwhile, Obamacare staggers into its third year of implementation. Though it has been effective in reducing the number of uninsured, the increased coverage has been almost exclusively through expansion of the Medicaid program for the poor.

A recent report by Ed Haislmaier of the Heritage Foundation found that the number of Americans with health insurance increased by 9.25 million during 2014. However, the vast majority of the increase was the result of 9 million individuals being added to the Medicaid rolls. While enrollment in private individual-market plans increased by almost 4.8 million, most of that gain was offset by a reduction of 4.5 million in the number of people with employment-based group coverage. Thus, the net increase in private health insurance in 2014 was just 260,000 people. In all, Medicaid, not private health insurance coverage, accomplished 97 percent of the net increase in newly insured people, according to the study.

The Obama administration has dramatically lowered projections of the number of individuals enrolled in its exchanges. It is now predicting that 10 million will enroll in its exchanges in 2016 — 10 percent more than 2015. But that is 11 million, or over 50 percent lower than the Congressional Budget Office projected a few years ago. More than 80 percent of those enrolled qualify for income-tested subsidies.

This means the exchanges remain vulnerable to adverse selection whereby mostly sick and expensive individuals enroll and younger and healthier individuals remain outside the insurance pool. This can result in a death spiral of insurance premiums and, subsequently, enrollment.

Notwithstanding these troubling figures, the administration appears uninterested in making fundamental changes to the program. Therefore, bipartisan coalitions are focused on chipping away at the more offensive tax provisions of the sprawling law. Unions and businesses have formed an unusual partnership in repealing the so-called “Cadillac tax,” which imposes a 40 percent tax on high-cost health plans. And the medical device industry has gained bipartisan traction in repealing the 2.3 percent excise tax on medical device sales. Repeal or modification of these two taxes is likely the only change to Obamacare that could get across the finish line in the next 12 months.