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Europe vs the US

Europe is facing cuts in healthcare spending and US reforms intend to check spiralling costs there, so which region will prove most attractive for pharma?
USA

Undoubtedly, the pharmaceutical industry is suffering in Europe as the financial crisis continues seemingly unabated and further cost containment measures hove into view, but it is worth examining how bad it is compared to the situation in the US. The European industry is asking for the torture to stop and feels that its governments should end downward pressure on prices. Indeed, in a recent interview, GlaxoSmithKline chief executive Andrew Witty argued that the financial crisis was being overstated in Europe.

He may well be right, but why waste the opportunities afforded by a crisis? Cuts do need to be made somewhere and national drug bills offer a large and easy target, plus the pharmaceutical industry is one target which is unlikely to upset the public, compared to the reaction there would be to cutting, say, school funding. To be fair to policymakers, it is worth pointing out that while pharmaceutical companies can focus on what they do best – making medicines – governments have a balancing act to perform. The demands of health need to be weighed against those of defence, education, infrastructure and so on. However, despite the fog of war, Mr Witty was making a salient point. Could things be better for the industry and should it look West for inspiration?

GDP figures
Healthcare expenditure in Europe averages around nine per cent of gross domestic product (GDP), a substantial amount by any reckoning. However, this is relatively low when set against the US, where the 2008 figures (the latest reliable data available) show healthcare expenditure weighing in at a mighty 16 per cent. This amounts to more than $2.3tn, higher than the whole of the EU in both absolute and percentage terms. The percentage of GDP also does not take into account the number of American citizens who do not have access to the insurance necessary to provide adequate health cover. It does, however, reflect the fact that the US has no real equivalent of health technology assessment (HTA) to assess the 'value' of therapies. Therefore, US citizens can access a number of new medicines which may be restricted or even unavailable in many European countries by the use of HTAs or other cost/benefit considerations.

Furthermore, for those who can afford it, there are few or no examples of the waiting lists for interventions, which routinely act to constrain costs in countries like the UK. Arguably, if these mechanisms were removed, then it is possible that European healthcare costs would rise as a result. Indeed, given the adoption of the Cross-Border Healthcare Directive, that process may already be under way; watch this space.

Leaving aside the shortfall in access to meaningful insurance experienced by many citizens, the US, with its free-market approach, would appear much more attractive to innovative manufacturers. Certainly, there are no countries seeking unilateral price cuts as is seen regularly in Europe and no reference pricing to act to multiply the impact of such cuts. However, it is more complicated than that. While medicine prices are certainly higher than those in Europe, they are only one of the myriad factors constituting total healthcare expenditure. Any meaningful comparisons between European and US markets are difficult to draw. Organisation for Economic Co-operation and Development (OECD) data suggests that major European countries spend around €2,250 per citizen per year for healthcare, including their social insurance. In the US, it is more than double that amount, at around €5,600.

One thing is clear: however, attractive the US market may appear at the moment, it will change, and sooner rather than later

Part of the problem is that a free market for healthcare is an attraction for more than pharmaceutical manufacturers alone. Healthcare is big business, and there are profits to be made in virtually all aspects of the US healthcare system. Doctors, particularly specialists, indeed, most healthcare professionals, earn much more in the US than they would in other countries. Meanwhile, private insurance companies are seeking decent returns for their shareholders. Furthermore, the fear of litigation leads, in turn, to a fear of medical errors generating higher numbers of investigative procedures, all of which add costs and reduce cost-effectiveness. In addition, the fragmented nature of healthcare supply makes the associated administration particularly cumbersome and expensive.

So all is not well in the US market. If European healthcare systems rail against nine per cent of GDP and upwards, then it should be no surprise that the US is beginning to baulk at the current level of expenditure. Indeed, the US Congressional Budget Office projects that, left unchecked, total national spending on healthcare could reach 31 per cent of GDP within 15 years.

This is in an economy that does not face the demographic challenges that Europe does. America has neither a population replacement rate issue nor a dependency rate issue, which is a combination most European economies would love to have, as it would reduce the funding challenges for their social insurance model. Yet, US healthcare expenditure continues to spiral upwards.

One thing is clear: however attractive the US market may appear at the moment, it will change, and sooner rather than later. The process has already started with the introduction of the Patient Protection and Affordable Care Act, which President Obama signed into law on March 23, 2010. This was followed a week later by the signing into law of the Health Care and Education Reconciliation Act, which made a number of significant changes to the Affordable Care Act. These reforms are likely to have many implications for the whole life science sector – pharmaceutical, biotech, medical device and diagnostic manufacturers alike. First and foremost, as many as 15-16 million people who are currently excluded from the system could gain private insurance coverage. This would almost certainly increase demand for all life science products.

Furthermore, the legislation envisages closing the so-called 'Part D Donut Hole'. This is a gap in medical insurance payments for prescription medicines, falling between the patient's initial insurance coverage limit and the so-called 'catastrophic coverage threshold'. Usually affecting retired people, it makes them liable to pay for all their medicines during this gap. In reality, many people simply elect not to do so or cannot afford to. The Affordable Care Act envisages phasing out the Donut Hole by 2020, which would be favourable for the industry.

The downside is that, while the act is supposed to make care affordable, spending more on medicines will not achieve it. Therefore, industry can expect a raft of new taxes, standardisation of pricing and additional rebates as part of the Medicaid programme. Industry will also face comparative effectiveness for potential market entrants; this is likely to have implications for identifying, testing and introducing target compounds and molecules, potentially increasing R&D risks and costs. Other adoption hurdles from the US Food and Drug Administration (FDA) seem likely to follow. Indeed, the pending overhaul of the FDA in itself is a potential concern.

Political compromise
So, which system is, or will be, better for the industry? As always, it is difficult to say. Healthcare expenditure is a political compromise and will always reflect, to an extent, the will of the population. Right now, the US is prepared to pay for a high-cost, often very high quality, standard of care with broad, but not universal, access. At the same time, European countries are trying to provide quality care at reasonable cost with the widest possible access. Yet the US model is not sustainable and will change, almost certainly to the detriment of the industry, when controlling measures are introduced. Once the taste for cost-containment is found, it is difficult to know where it may end. Yet Europe, with its need to balance a competitive workforce against the demands of an ageing population, may well be more dependent on medical science. It is possible that the compromise which balances these two conflicting needs may make Europe the better medium- to long-term prospect.

Colin Mackay
The Author

Colin Mackay is director of APCO Worldwide's healthcare practice in Brussels

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7th November 2011

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