The Medicare prescription drug benefit that begins in 2006 will fundamentally change the mission of pharmaceutical companies, former Centers for Medicare & Medicaid Services Administrator Tom Scully told the Washington Research Group's annual symposium in Washington, D.C. Nov. 5.

"I don't think the future is necessarily bad for the drug companies," Scully said. "I just think that their entire mission is going to change." Scully is now with the Washington D.C. law firm Alston & Bird.

Following the Republican victories in the national elections Nov. 2, the Medicare Rx implementation process should proceed uninterrupted (¹ Also see "Medicare Rx Course Is Clearer Following Bush Victory" - Pink Sheet, 8 November, 2004., p. 9).

Scully was one of the key architects of the Medicare law within the Bush Administration. Since leaving CMS, he has been one of the most visible figures arguing that the new benefit will have a dramatic impact on the shape of the U.S. prescription drug market (² Also see "Medicare Rx Means “Dramatic” Change For Pharma; CMS Is New FDA – Scully" - Pink Sheet, 19 January, 2004., p. 3).

Scully believes that most in industry still do not appreciate the significance of the changes coming next year.

"I don't believe anybody in the drug industry, or anybody in the [pharmacy benefit management] industry, or anybody in the health care sector has any idea how massive the changes that are coming for prescription drugs are," Scully declared. "Their life on Jan. 1, 2006 is going to be turned upside down."

For manufacturers, the transformation in the business model will reflect the new role of Medicare plans as a gatekeeper in the market, Scully said.

"The current test" for drug development "is, is it safe and efficacious? Is it one-millionth of 1% better than something else so that FDA will allow me to put it on the market? Once you get to the market, you sell as much as you can."

"The new test is going to be, maybe it's safe and efficacious to get on the market, but what's Medicare going to pay for it? What's the formulary going to do?"

"Drug companies do as they are incentivized to do, and I don't blame them for doing what they're incentivized to do. The government incentivized you to go out and basically crank out a lot of marginal products," Scully said of the current model.

"If the government incentivizes you to come up with innovative things, they're going to pay you appropriately for it. I think that's great," he said. Scully predicted that cancer drugs, for example, will continue to command extremely high prices - when they have a clearly demonstrated clinical benefit (see ³ Also see "Cancer Drugs Will Continue To Command High Prices, Scully Predicts" - Pink Sheet, 15 November, 2004.).

"It's a much healthier thing: you create a good drug that helps patients, you sell the hell out of it, the government is going to pay for it, and hopefully you'll get a very healthy return for it."

"If you're selling a drug that's of marginal benefit, you're not going to have much fun because...you're going to have a very high co-payment, and it will probably get approved, but the government is not going to be willing to pay much for it," Scully said.

Scully also sees a fundamental transformation in the PBM sector as a result of the new benefit. Instead of the current model, with three large national PBMs and a handful of much smaller players, Scully sees 7 to 10 "very big" companies emerging.

The "PBM business will...transform from a commercial business into a very large, very powerful, fairly regulated, very high volume, probably slim to lower margin business. It's going to look a lot different in four to five years than it does today," he said.

"There are three dominant PBMs today: Medco, Caremark and Express Scripts. There are a bunch of other small ones," Scully noted. In the future, he predicted, "there are going to be probably seven to 10 very big, very dominant massively empowered PBMs that are going to basically dominate the pharmaceutical market."

"Medco and Caremark and Express Scripts and Prime Therapeutics are going to do a lot more to control drug costs than" the CMS administrator, Scully stated. "We very consciously took this bill, took 50% of the drug market and split it up by regions...took PBMs and made those guys our proxies to negotiate for the government."

Rx Industry Must Change “Mission” To Prepare For Medicare – Scully

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