McCain Demand-Side Approach to Health Costs Threatens Drug Sales Growth

The proposal by Republican presidential nominee John McCain to eliminate the income tax deduction for employer-based insurance threatens to reduce total U.S. drug expenditures by about 3 percent to 4 percent per year, according to estimates by the Boston Consulting Group.

The lost sales would come from the brand name sector, which would lose from $11 billion to $16 billion as more cost-conscious individuals switch to lower cost drug products to save on insurance premiums or out-of-pocket co-pays.

Generic drug makers would pick up some of the lost sales, but at a lower dollar level because of their lower product prices. The brand losses would translate into a $3 billion to $5 billion jump in generic volume, according to BCG estimates.

BCG assumes that about 65 percent of the current employer-insured population would switch to less generous, individually purchased health care insurance policies.

If the switch to more stripped down coverage caused just a 10 percent increase in the generic use rate among the people leaving employer-based coverage, that would cause an $11 billion to $16 billion drop in branded sales. The decline in brand sales could be steeper if the demand-side pressures caused generic use to grow more rapidly.

Undercurrent Of Concern About McCain

BCG's picture of a difficult environment for brand name companies under the McCain demand-side approach to controlling health costs reflects a strong undercurrent of concern about the program among pharma execs.

A BCG survey of 1,200 heath care executives found that the McCain proposal offered the least attraction as a revenue-generator for pharma execs. Only 38 percent of pharma execs participating in the survey felt that the McCain approach would offer revenue expansion opportunities for drug companies. Nine percent felt it would decrease drug sales.

[Editors' Note: The BCG survey was conducted in conjunction with FDC Reports and Windhover Information, the publishers of "The Pink Sheet." A BCG analysis of the survey is available in the September issue of The RPM Report, an affiliated publication.]

By contrast, a higher percentage of pharma execs - nearly half of the survey respondents - see a positive effect on revenues from the proposals associated with Democratic presidential candidate Barack Obama.

BCG found that "50 percent of pharma respondents expect revenue growth from expansion of public insurance programs and 51 percent expect it from the mandate-based approach."

The concern uncovered by BCG among pharma execs about the potential negative effects from the McCain proposal was also evident in recent comments on health care reform by the head of a major pharmacy benefit manager.

David Snow, chairman of Medco Health Solutions, told a Sept. 9 briefing on health reform that he is "very frightened of the conversations that involve trying to shift the responsibility for funding health care away from the employer to the individual."

Snow said he is less worried about the Obama proposals. "The Obama campaign primarily talks about the uninsured population," Snow observed.

Picking up coverage would "be a good thing because, make no mistake about it, the uninsured spend health care dollars and all of us employers and tax payers pay those bills," Snow said. The Medco exec, however, believes that government's number one priority should be to cut excess and inefficient health care spending out of the system (see ¹ (Also see "Appeals Court Reinstates Vioxx Securities Class Action Against Merck" - Pink Sheet, 15 Sep, 2008.)).

Individual Insurance Would Drive More DTC

BCG notes, however, that there may be a silver lining for pharma in the proposals to push insurance choices and costs more directly onto individuals. Pharma companies may be able to stimulate more interest in drug coverage by reaching out to consumers through more advertising.

"There is an interesting wild card for branded pharma," BCG points out. "An energized and activated patient/consumer would likely be even more responsive to direct-to-consumer advertising."

With the positive bump in drug volume experienced from the first years of Part D fresh in their memories, pharma execs express a generally positive view of extending medical coverage to the uninsured.

BCG found that pharmaceutical executives "remain optimistic that proposals to increase access will have a positive impact on pharma revenue."

BCG calculates that expanded access through State Children's Health Insurance Plans and Medicaid could provide coverage to about 11 million of the 47 million uninsured.

Expanded government benefits are likely to target more individuals (15 million). Experience shows that not all eligible individuals actually sign up for new benefits. BCG estimates that about three-quarters of the people who qualify for the new benefits will take advantage of them.

Picking up coverage for 11 million newly enrolled would convert about $12 billion of currently uncompensated care into "system revenues." That would benefit hospitals primarily, adding $11 billion to their revenues.

The newly insured would also use health care services more, bringing in "about $7 billion" of incremental overall health care income through increased utilization. Pharma would get a small but substantial piece of that spending by BCG's calculations: $500 million.

Medicare Price Negotiations Worry Pharma Execs

Not surprisingly, changes to Medicare's authority to control prices in Part D are high among the concerns of pharma execs.

Two-thirds of the pharma execs surveyed (67 percent) believe that enabling Medicare to negotiate prices would have an adverse effect on drug revenues. Nine percent said that negotiations could increase drug volume.

BCG suggests that price negotiation authority could cut total U.S. drug expenditures by 3 percent to 10 percent ($9 billion to $29 billion).

BCG calculates that range of lost sales using three ballpark assumptions:

Medicare achieves 25 percent savings on half of its total drug spend ($9 billion decline in total U.S. drug spending).

Medicare achieves 37 percent savings on half of its total drug spend ($15 billion decline in total U.S. drug spending).

Medicare achieves 37 percent savings on its total drug spend ($29 billion decline in total U.S. drug spending).

The consulting firm observes that if the government begins to negotiate prices, the effort will not affect all drug sectors equally.

BCG believes Medicare would focus selectively, using a screen to find those drugs with the largest savings potential. BCG suggests, for example, that the government might look first at those drugs with the highest differences to a reference drug price, such as the Department of Veterans Affairs price.

Products with Part D prices that exceed the median price differential between Medicare and VA prices are the most likely to stand out as the first targets for government negotiation, BCG predicts.

"Pharmaceutical companies can and should be tightening the international and domestic price bands at which their products are sold," BCG advises.

Narrowing the price ranges, BCG says, "will not insulate products from negotiating pressure, and it may be of little consequence if cheaper substitutes are freely available. At the very least, tighter pricing bands will bolster the company's opening bargaining position with a firmer price platform."

Re-importation and efforts to increase the use of generic drugs also are high among the post-election worries for the pharma execs surveyed by BCG: 62 percent believe re-importation will hurt industry revenues; 61 percent feel that further encouragement of generic use in public plans will lower revenues. Re-importation is favored by both Obama and McCain.

There is a widespread expectation that post-marketing costs are going to continue to go up. "Almost three quarters, 74 percent, expect post-market R&D requirements to increase costs," BCG found.

- Cole Werble ([email protected])