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Press Release

Medicare Prescription Drug Benefit: How Will Pharmaceutical Companies Be Affected?

Frost & Sullivan
Posted on: 22 Oct 04
Medicare Prescription Drug Benefit: How Will Pharmaceutical Companies Be Affected?

By Patrick Rajan, Research Analyst, Pharmaceuticals and Biotechnology Practice

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is expected to impact the estimated 43 percent of pharmaceutical industry revenues that are derived from Medicare beneficiaries.  Although the legislation has gotten mixed reviews, it is projected to have an inflationary effect on pharmaceutical revenues in the immediate future due to induced demand and increased prescription spending.  Still, greater government involvement and the continuously mounting pressure to lower prices make it difficult to assess what exactly will be the law’s eventual impact on the pharmaceutical industry.

The Act has several wide-ranging provisions that will affect pharmaceutical companies.  Medicare-sponsored prescription discount cards, which will be used until January 2006, should reduce drug prices by 10 to 15 percent in part because of rebates from pharmaceutical companies that will be used to support the cards.  Starting in 2006, the Congressional Budget Office estimates that up to 85 percent of all Medicare beneficiaries will have prescription drug coverage due to plans subsidized by the federal government, including catastrophic coverage that will significantly diminish out-of-pocket costs for seniors suffering from conditions such as cancer, osteoporosis, and multiple sclerosis.  Pharmaceutical and biotechnology companies would benefit from this increased prescription drug coverage since it would stabilize reimbursement for many high-priced products that seniors utilize.  Although the full prescription drug benefit does not take effect until 2006, the impact on total Medicare spending on prescription drugs for the elderly and overall U.S. prescription volume could be significant due to increased demand resulting from the people who are not able to afford drugs and those people for whom a slight discount would facilitate greater medication compliance.

The important repercussions may occur in the long term with regards to pricing.  The MMA adds another group of definitions and a new manufacturer government price reporting requirement to an already complex government price reporting process. The HHS Secretary may set reimbursement of certain Medicare Part B drugs at 106 percent of average sales price. Manufacturers will be required to report average sales price data four times a year, and the Secretary has the discretion to completely disregard average sales price if it exceeds the available market price or average wholesale price of a drug.  Although the law reforming Medicare does not contain explicit drug price controls, future measures that could impose them are a source of great concern for many pharmaceutical companies.

Generics could see their presence in many different markets amplify and further put pressure on major pharmaceutical companies to cut prices now that the reforms introduced by the Medicare law allow branded companies only one 30-month stay on a patent challenge.  In the past a loophole in the Hatch-Waxman Act enabled branded drug companies to file multiple patents for their products that could be used to create multiple 30-month stays of approval of generic products and extend product exclusivity for years.

Many in the pharmaceutical industry are working to comprehend the new legislation and how their companies will be affected.  The Medicare legislation will affect sales volume and rebates for several profitable therapeutic categories, altering corporate strategies and the manner in which pharmaceutical companies conduct business.

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Editor's Details

Katja Feick
Frost & Sullivan
+44 (0) 207 915 7856

Last updated on: 27/08/2010

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