Impact of Health Reform on a Pharmaceutical Company

Case Study

Aaron Vandervelde contributed to the first edition of BRG Review.

Health reform is driving significant change in the healthcare industry and will continue to do so over the next five to ten years. Pharmaceutical companies in particular are experiencing the immediate impact of health reform, and there are several key components of the legislation that the pharmaceutical industry is monitoring closely. This article describes a model of the financial impact of five components of health reform on a pharmaceutical company’s product portfolio and interprets the strategic and operational implications of the model results.

In March 2010 Congress passed the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 (HCERA), collectively “the Acts” and commonly referred to as “health reform.” These Acts are substantially changing how healthcare is paid for and delivered in the United States. In particular, the legislation immediately impacted the pharmaceutical industry by expanding the Medicaid Drug Rebate Program and increasing the statutory Medicaid rebate amounts. Other changes, including the imposition of a penalty on individuals without healthcare coverage, will phase in over the next few years and, as a result, the pharmaceutical industry will continue to experience significant transformation.

In June 2010, we studied the impact of the Acts on the sales and profitability of a pharmaceutical product portfolio. Specifically, we estimated and quantified the impact of five key aspects of health reform:

• 50% Discount on Part D Drugs Purchased in the “Donut Hole”
• Expansion of the 340B Program
• Creation of an Annual Excise Tax on Brand Pharmaceutical Manufacturers
• Elimination of the Retiree Drug Subsidy Tax Advantage to Employers
• Expansion of Medicaid Eligibility and Creation of Health Exchanges

Using a combination of product sales forecasts and third-party data (e.g., National Health Expenditure Estimates, MedPAC surveys, and IMS Health data), our team developed a set of predictive financial models to estimate the effect of these five changes on the sales and profitability of each product in a company’s portfolio through 2015. Each model was designed to be flexible enough to account for various scenarios of health reform implementation. The resulting estimates can be used to inform important strategic and operational decisions such as how to design and implement future pricing strategies, the effectiveness of potential changes in contracting and how to properly accrue for tax and rebate liabilities.