It has been a long haul to get to the final iteration of proposed health care reform legislation released March 18, and it appears that the pharmaceutical industry's patience and lobbying efforts have garnered an overall positive result.

Even though brand-name drug manufacturers will pay $28 billion in new market-share-based fees over the next 10 years, the final package leaves out many provisions opposed by the industry and includes a number of others that will increase access to pharmaceutical products.

The final package came in the form of a budget reconciliation bill, H.R. 4872, which lists changes the House wants to make to the health bill as passed by the Senate, the "Patient Protection and Affordable Care Act," H.R.3590.

One surprise is a smaller than expected increase in the market-share fee the pharmaceutical industry had agreed to pay under the Senate bill, which set the figure at $23 billion over 10 years.

President Obama had recommended that the House boost that amount by $10 billion to help cover the cost of closing the Medicare Part D coverage gap (¹ Also see "White House Health Reform Proposal Pays For Closing Part D Gap With Pharma Industry Fees" - Pink Sheet, 22 February, 2010.). However, the House decided to up the fees by only $5 billion.

Under the Senate bill, the fees would have totaled $2.3 billion annually. With the House fixes, fees would begin in 2011 at $2.5 billion and gradually increase to $4.2 billion in 2018. However, in 2019, the amount drops back down to $2.8 billion, for total payments from 2010 to 2019 of $28 billion. The industry will pay only $2.8 billion per year every year thereafter.

The result is even more surprising given the strong opposition many House Democrats voiced about the deal struck between the pharmaceutical industry, the White House and Senate Finance Committee Chairman Max Baucus, D-Mont., to limit pharma's contribution to health care reform to $80 billion. That deal may have been breached with the higher fee, but only in a relatively limited way. That should be greeted as good news for the Pharmaceutical Research and Manufacturers of America, which was holding its annual meeting the same day just outside Washington, D.C. (see ² Also see "What Lies Beyond Health Reform: Pfizer's Kindler Talks Innovation, Jobs" - Pink Sheet, 22 March, 2010. ).

In addition, the final package does not contain many industry-opposed provisions championed by House Democratic leaders and included in the earlier House-passed reform bill. The House bill included such items as mandated rebates on drugs provided to low-income Part D beneficiaries, HHS negotiation of Medicare drug prices, a ban on brand companies compensating generic firms to delay launch of generics, and a public option plan - none of which have survived to reach the final package.

The Donut Hole Fix

Despite the smaller-than-expected market-share fees, the reconciliation package still manages to increase access to pharmaceuticals for Medicare Part D enrollees by nearly closing the drug benefit's donut hole.

The bill does so by building on the plan laid out in the Senate bill, which would require manufacturers to provide a 50 percent discount on drugs used by beneficiaries in the donut hole.

The reconciliation package adds to that discount by reducing the amount of coinsurance owed by beneficiaries, but the government will cover the additional cost beyond the manufacturers' discount. In 2011, beneficiaries' coinsurance for donut hole drugs will be a maximum of 47.5 percent and gradually decrease to 25 percent in 2020, as detailed in a ³ chart of Senate and reconciliation bill provisions prepared by Manatt Phelps & Phillips' Ian Spatz.

The government will also pay to cover a percentage of generic drugs in the donut hole, so that beneficiaries will pay coinsurance of no more than 93 percent in 2011, with the amount decreasing to 25 percent in 2020.

Beneficiaries who fall into the coverage gap in 2010, before the discounts take effect, will receive a $250 rebate from the government.

The authors of the reconciliation package consider the plan to effectively close the donut hole, since the 25 percent paid by beneficiaries in 2020 will be in line with the cost-sharing they normally have for drugs before they reach the donut hole.

While the House bill closed the gap entirely, the Senate bill did not. But even as they worked to pass their bill, Senate leaders were already promising to make sure closing the gap made it into final language (⁴ Also see "Sens. Baucus, Reid, Dodd Pledge To Close Part D Donut Hole In Conference With House" - Pink Sheet, 14 December, 2009.).

Manufacturers stand to benefit from closing the donut hole, since beneficiaries who may in the past have stopped using drugs when they became responsible for the full cost should now be able to stay on their medications. CBO scored the 10-year cost to the government of closing the donut hole at $56.3 billion.

Pay Now, Get Expanded Coverage Later

The final package will also expand access to drugs by mandating prescription drugs as a benefit in Medicaid and by expanding the number of individuals with health insurance by 32 million by 2019. While most states do provide Medicaid drug coverage, it is optional for them to do so.

One issue pharmaceutical manufacturers will need to get a handle on is that while they will start paying the market-share based fees starting in 2011, the number of insured individuals won't start to expand until 2014, so there will be three years initially where the fees will not be compensated with greater reform-induced prescription volume.

Another payment firms would begin to make immediately is a 50 percent hike in the basic Medicaid rebate amount, as contained in the Senate reform bill. The rebate would increase from 15.1 percent to 23.1 percent, effective as of the start of 2010, although rebates for drugs exclusively for pediatric indications and clotting factors would be raised to only 17.1 percent. Those rebates will also be extended for the first time to Medicaid benefits provided by managed care organizations and to new formulations of already marketed products.

The reconciliation bill does tweak the definition of what new formulations of drugs are eligible for the rebates. While the Senate wanted it to apply to new formulations of any single-source or innovator multiple-source drug, the new bill says it would apply only to oral solid dosage forms.

One provision related to 340B prescription drug discounts that the pharmaceutical industry opposed is also modified in the reconciliation bill.

The Senate wanted to extend 340B discounts, which currently are applied to outpatient drugs dispensed at certain safety net health care facilities, to drugs provided in inpatient settings as well. The new bill drops that provision. However, the expansion of the definition of 340B-eligible entities to include a number of new types of facilities will remain. In addition, new auditing and reporting requirements for HHS, drug manufacturers and covered entities remain in place (⁵ Also see "340B Expansion, Revisions Becoming Front-Burner Issues For Pharma" - Pink Sheet, 16 November, 2009.).

The reconciliation package did not make any changes to provisions related to follow-on biologics, leaving intact the innovator-friendly provisions passed by the Senate (and almost identical to the House), despite lobbying from a number of groups trying to get the 12 years of market exclusivity for innovators reduced.

Next Steps Before Enactment

A House vote on the reconciliation bill along with the Senate bill is anticipated for Sunday, March 21. The vote is expected to be very close, but a number of undecided Democrats appear to have been swayed by the Congressional Budget Office's scoring of the bill with reconciliation fixes.

In an analysis of the combined package released March 18, CBO claims the Senate bill plus reconciliation would result in a net reduction in federal deficits of $138 billion from 2010 to 2019. CBO further claimed that it would continue to reduce federal deficits in the following decade, on the order of one-half of a percent of the gross domestic product.

If the House passes the package, the president will then sign the Senate bill into law, and the reconciliation bill will go to the Senate for consideration under budget reconciliation rules, which means it cannot be subject to a filibuster.

However, under reconciliation rules, any provision not meeting certain standards may be challenged and removed, unless 60 senators agree to override the rule. In addition, Senators may offer amendments to the bill. As a result, the final outcome of the reconciliation fix remains in question.

[Editor's Note: "The Pink Sheet" will be co-hosting a panel on U.S. health care reform with the New York Pharma Forum March 25. To register, please visit ⁶ http://www.nypharmaforum.org .]

- Scott Steinke ( ⁷ s.steinke@elsevier.com )

Final Health Reform Bill Looks Positive For Pharma Firms

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