Please login to the form below

Not currently logged in

A fair share

Obama's goal is to improve access to healthcare and widen coverage

A cake divided into portions with hands taking each sliceThe 2008 US election results have now sunk in – President Barack Obama will bring a new approach to national policy across a range of issues, and he will enjoy Democratic Party majorities in both houses of Congress. Democrats will control the Presidency and Congress for the first time since the 1992 elections brought Bill Clinton to power.

Then, as now, equity in access to healthcare was a burning issue. In the four presidential terms since then much has changed and great advances have been made in the potential of biopharmaceutical management of a myriad of diseases and conditions. Yet – with the notable exception of Medicare Part D, the outpatient prescription drug programme for seniors – fundamental questions about lack of insurance, underinsurance, and the federal government's role in ensuring healthcare still loom large. Will the US intervene more heavily in price determination or negotiation? Can a national plan to improve the status of uninsured Americans (whose numbers could swell to 67 million if no action is taken) be wrought and implemented? How will the pitfalls of the Clintonian healthcare reform plan – which went down in flames a decade and a half ago – be navigated?

Given Obama's goal of increasing and improving access while controlling costs, government under his direction is likely to play a major role in establishing policies that encourage coverage. Obama's proposals technically mandate coverage only for those 25 years old and younger. They require employers to provide insurance or else pay the government but, the Urban Institute notes, Obama's proposals do maintain current tax treatment of insurance premiums and provide subsidies to ensure affordability. The result being that, according to independent analysis, they will cover 47 per cent of the currently projected uninsured over 10 years. Because of his belief of a failure by markets to operate on the scale necessary to provide broad coverage, tens of millions of individuals would be able to seek coverage through a new national insurance scheme.

"The market alone cannot solve the problem – in part because the market has proven incapable of creating large enough insurance pools to keep costs to individuals affordable," states Barack Obama in The Audacity of Hope.

The totality of this proposed new programme is expected to cost $1.6 trillion over 10 years, with costs continuing to rise every year. To put that cost in proportion, government figures put federal spending on the Medicare and Medicaid programmes in fiscal 2008 at over $660bn. Most of that goes to non-drug costs; for example, Medicare Part D – one of several federally supported programmes that have a drug budget – came in under budget in 2008 at less than $40bn. However, drug prices remain a relatively easy and politically attractive target for management – in comparison to areas such as hospital costs (although the federal and state governments already pay for more than half of hospital spending), notoriously difficult to control issues like fraudulent claims, and so on.

The Obama proposals contain numerous important means by which to achieve cost savings, such as general improvements in efficiency and greater use of technology, but there are two that should create significant pause within the biopharmaceutical industry. The first is the potential for the federal government to negotiate prices directly with manufacturers for drugs paid for within the Medicare programme. The second is the potential creation of a national cost-effectiveness evaluation body, a controversial and likely costly step.

Uncertainty in the markets
Unpredictable forces will continue to be at play in the US economy as the new government takes office in January. On the one hand, it is entirely possible that turmoil in financial markets, economic recession, and growing unemployment will distract policymakers from seeking a solution to the nation's lack of insurance or under-insurance and ballooning healthcare budgets. On the other, the same forces may result in an even worse coverage situation and a heightened sense of urgency, as individuals lose jobs and companies scale back on benefits for employees.

In addition, healthcare equality features prominently in the Democratic Party's platform, and has been a pillar of Obama's campaign. Like other key areas targeted for change, the President-elect will seek to maintain momentum on this critical issue. At the same time, it is likely that there will be a desire to reconcile political differences with the disparate Democratic Party and even to reach across the aisle for some degree of Republican support. In an environment in which federal bailouts are expanding and the government is taking ownership stakes in financial institutions, there is a possibility of even greater government intervention in free markets through direct price negotiations. With the purchasing power of the government behind them, these could easily become price controls and may hit a sour note among the more non-interventionist members of Congress.However, the questions of government-led price negotiations and cost-effectiveness evaluations are also linked to the long-term sustainability of advances in healthcare.

Risk Abounds
History points to the flight of R&D from Europe following the advent of state price controls, but the proposals still need to be considered in the light of current pressures. Continuing on the present path of healthcare coverage in the US is not realistic. The worsening economic crisis creates tremendous new risks for individual insurance, and may have ramifications in insurance companies' ability to offer best-in-class benefits.

Continued use of products already available, many of which represent major advancements in therapy, will provide on-going clinical benefits and eventually lead to cost savings because of the generic competition already provided for under US law. However, the future of drugs' role in healthcare does not consist solely of products that are currently on the market. The other major value offered is those products housed in the industry's pipeline now and those that will emerge from tomorrow's research. Of course, the sustainability of the industry's ability to deliver new benefits and breakthroughs depends upon the health of that pipeline. It is well recognised that many of these future advances will originate not in the labs of big pharma, but in smaller specialty companies that have no product revenue stream.

Given these dynamics, government intervention in drug pricing may have unintended but serious long-term ramifications. Major pharma companies will, indeed, view price controls negatively because of the direct impact on profitability, at a time when the industry has already been battered. However, the engine of future development – the small biotechs and specialty pharma companies – face an even more dire situation. Many companies have only 6–12 months' cash on hand. Nearly 200 publicly traded US biotechs trade at nearly no multiple to cash and, with market capitalisations under $100m, face delisting. Considering the current risk avoidance in capital markets, the near-term shakeout in biotech may be startling, as new financing rounds and the opportunities to float new shares have, at least temporarily for many companies, nearly dried up.

This creates an attractive buying opportunity for larger biotech and pharma companies, who may be able to pick up valuable assets at a low cost, but the resulting lack of development activity could create a hole in the future pipeline. Government pricing intervention in the world's largest and most valuable biopharmaceutical market could have even more worse implications for asset valuation and funding of R&D through both private and public markets. According to Scott Gottlieb, former deputy and acting chairman of the FDA and current Forbes columnist, this is not a spurious argument. He writes in the Wall Street Journal:
"The last time policymakers waged a concerted effort to control the price of and the access to the most innovative, but expensive, new drugs as part of broader healthcare reform in the mid 1990s, the percent of venture capital going into biotech fell by almost half in a single year. A lot of that money shifted into internet companies."

The question of how to offer healthcare to the entire US population has been characterised as much by agreement on the necessity of finding a solution as by disagreement on the means by which to accomplish the goal. For instance, many in big pharma had concerns about Medicare Part D, which were in part resolved by a prohibition on government price intervention. As a result, since its inception, the programme has proven to be a significant contributor to many companies' growth.

Much of the contention hinges on philosophical differences around government's role. It is clear that national policy shifts will be instrumental in causing change. What is unclear is the position the new administration and Congress will take on the question of value. Steps toward price control and imposed metrics of cost-effectiveness create enormous risks for the biopharmaceutical industry, the research and development of which serves as a leading indicator of the nation's long-term health.

The Author:
Ted Sweeney is partner of PriceSpective LLC, a global value strategy consultancy .
To comment on this article, email:

13th January 2009


Featured jobs

Subscribe to our email news alerts


Add my company
Life Healthcare Communications

Life is a creative communications agency offering multi-channel solutions for the healthcare industry. We use a storytelling approach to turn...

Latest intelligence

Unlocking the potential of science and technology in the UK
Greater collaboration is vital in post-Brexit UK, says Alderley Park leader...
NHS regional footprints
What to expect from 2019...
Not another weight-loss ad
Christmas is over and the gyms are packed, it’s a never-ending tale. But why do we do it to ourselves every year?...