As promised during his election campaign, President Obama seems to be swiftly acting on the US healthcare reform. Last week (February 27), his $3.1 trillion budget proposed to establish a reserve fund in excess of $630 billion over 10 years to finance fundamental reform of health care system. The reform seeks to bring down healthcare costs and expand coverage. The reserve is to be funded half by new revenue and half by savings proposals that promote efficiency and accountability, align incentives toward quality, and encourage shared responsibility. In addition, the Budget called for an effort beyond this down payment, to put the Nation on a path to health insurance coverage for all Americans. The healthcare reform is likely to provide health-care insurance coverage for some 46 million uninsured Americans (15% of the total population). The reform, in all probability, is likely to expand the revenue basket for providers of medical products and services, including pharmaceutical companies. In addition, this is likely to provide substantial opportunities for life insurers in the US. As a result, life insurance industry’s revenue pie is expected to go up from 46.6% of total insurance industry in 2007 to 48% by 2012.
Does this paint rosy picture for players throughout the length and breadth of the value chain? If you say yes, then think again.
The Obama program also calls for significant cost reductions, which would adversely affect the branded pharmaceutical industry in terms of both discounted pricing and contracted use of branded drugs.
Change in Medicare Part D is likely to become the key issue for the branded pharmaceutical industry. Medicare Part D, which relates to Prescription Drug plans, went into effect on January 1, 2006. Obama’s new legislation is likely to lead to the planned elimination of the noninterference clause in the Medicare Part D prescription drug program, which funds drug coverage for some 44 million elderly Americans. Under the present system, the government is prohibited from engaging in Medicare drug pricing negotiations with pharmaceutical manufacturers. Negotiations are handled strictly by private-sector managed care and pharmacy benefit management firms.
President Obama and congressional Democrats favor changing the program to allow or possibly require direct government negotiations with drug manufacturers, which is expected to sharply lower the program's cost. Another likely money-saving tactic will be greater use of inexpensive generics through new incentives.
These changes are likely to favorably impact companies such as Abbott Laboratories and Johnson&Johnson. These companies seem to be well-positioned in growing pharmaceutical, device, and consumer health-care markets. In the domestic pure play pharma segment, Bristol-Myers and Schering-Plough are likely to be benefited as compared to their peers.
