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New dawn or beginning of the end? Medicare D comes of age

Published on 12/01/06 at 01:17pm

Millions of Americans woke up on 1 January 2006 and found themselves in an unfamiliar position  having their prescription medicine costs paid for by somebody else.

Medicare D (with D standing for Drug) is the most significant reform of the US health insurance scheme since its inception in 1965, for the first time shifting payment away from millions of pensioners to their health insurers.

The reforms were sorely needed, with around 10 million of Medicare's 40 million beneficiaries without any insurance coverage for prescription costs.

The new system should provide medicines to at least 12 million extra people for the first time, which is expected to increase drug use and could in turn provide a lift to pharma companies' sales.

But in the long-term, the implications for the industry could be quite different.

Most significantly, the new system makes the federal government the country's biggest purchaser of pharmaceuticals, if indirectly, through a highly convoluted insurance system.

Intensive lobbying by the pharmaceutical industry helped ensure that the bill passed in 2003 would not allow the federal government to directly negotiate prices, fearful that prices would only head downwards.

Even if government keeps out of pricing negotiations, the industry, patient groups and individual states are all taking a hard look at costs.

A recent note from analysts Moody's commented: "We expect the implications will become negative, as greater leverage of payers may require drug companies to offer larger discounts and rebates or face steerage away from their products towards lower cost drugs on the formulary."

Now the system is in place, Congress could revisit the legislation and remove restrictions on centralised price negotiations, or even lift the ban on re-importation of cheaper medicines from abroad.

Even without these moves, the government's Centre for Medicare and Medicaid Services forecasts cost savings of 15% in 2006, rising to 23% by 2010.

Against this background, the industry knows it must argue the case for medicines more strongly than ever - by generating more compelling 'real life' data and, in the US at least, by winning over public opinion.

One senior US executive told the Financial Times: "There's no doubt that the ability to understand your value proposition not only from a clinical perspective but from a buyer's perspective is vitally important."

If in the long-term the US can no longer be relied on to be the driver for growth, the effects could be felt by pharma around the world.





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