Health Care Reform: New Challenges and Opportunities for Life Sciences Companies

On March 25, 2010, the House and Senate gave final approval to HR 4872, the "Health Care and Education Reconciliation Act of 2010," (the Act) thereby enacting comprehensive health care reform. This legislation will significantly impact life sciences companies.

The Act passed the House 220-207 after having passed the Senate 56-43. Republicans were unanimously opposed in both chambers. Earlier in the week, HR 3950, the "Patient Protection and Affordable Care Act" was signed into law by President Obama after being passed by the House. This bill was passed by the Senate in late December.

The Act makes a few modifications to HR 3950, mostly regarding taxes, the elimination of some of the state-specific provisions that were originally included during Senate debate on the bill and in provisions affecting student loan programs. President Obama will sign the legislation shortly.

Key provisions of the legislation include:

Insurance Exchanges – The bill creates state-based exchanges and cooperatives to provide insurance in the individual and small business markets with premium and cost-sharing credits available to individuals/families with income between 133-400 percent of the federal poverty level (the poverty level is $18,310 for a family of three in 2009). There is no public option or new government-run plan.

Individual Mandate – All individuals are required to have health insurance and will pay a fine if they do not. Individuals below the tax filing income threshold are exempted. Federal subsidies are provided to individuals that do not qualify for Medicaid and have incomes below 400 percent of the federal poverty level.

Employer Mandate – Employers with more than 50 full-time employees must provide insurance and pay penalties if any of their employees receive a federal subsidy. Employers pay penalties for employees who receive tax credits for health insurance through an exchange, with exemptions for small employers.

The bill requires employers that offer coverage to their employees to provide a free choice voucher to employees with incomes less than 400 percent of the federal poverty level whose share of the premium exceeds 8 percent but is less than 9.8 percent of their income and who choose to enroll in a plan in the exchange. The voucher amount is equal to what the employer would have paid to provide coverage to the employee under the employer’s plan and will be used to offset the premium costs for the plan in which the employee is enrolled. Employers providing free choice vouchers will not be subject to penalties for employees that receive premium credits in the exchange. Employers with more than 200 employees must automatically enroll employees into health insurance plans offered by the employer. Employees may opt out of coverage.

Private Insurance Market Reforms – Immediately prohibits or restricts private insurers from rescinding policies, setting lifetime or annual limits and setting excessive waiting periods. It also requires plans to cover dependents up to age 26. Additional requirements starting in 2014 include: the elimination of pre-existing conditions exclusions; implementation of modified community rating; guaranteed issue and renewal; and institution of minimum benefit requirements to ensure that plans are adequate.

Taxes and Industry Fees – To raise revenues, the bill expands the Medicare payroll tax for individuals earning more than $200,000 and couples earning more than $250,000 and as of 2018 establishes an excise tax on high-valued insurance plans. In addition, there is a tax on pharmaceutical and biotech companies as follows: starting in 2011, all drug and biotech makers will be assessed an annual excise tax, based on market share of annual sales to federal programs.

There is also a tax of 2.3 percent on the sale of most medical devices for sales after December 31, 2012. Certain devices are exempt if they are sold retail to consumers.

Tax Credit for Small Biotech Companies – Companies of less than 250 people can receive a tax credit in the amount of 50 percent of a qualified investment in clinical trials, pre-clinical research, and other activities that are designed to develop a treatment or diagnostic for an unmet medical need, acute or chronic disease, or for cancer. The program has an aggregate limit of $1 billion over two years.

Comparative Effectiveness – The bill establishes a nonprofit Patient-Centered Outcomes Research Institute to identify research priorities and conduct research that compares the clinical effectiveness of medical treatments. The Institute will be overseen by an appointed multi-stakeholder Board of Governors and will be assisted by expert advisory panels. A special advisory board will be created to oversee research on rare diseases. Findings from comparative effectiveness research may not be construed as mandates, guidelines, or recommendations for insurance payment, coverage, or treatment or used to deny coverage.

340B Discount Program – The proposed expansion of the 340B to inpatient drugs was not included in the final bill. Also, the bill explicitly exempts orphan drugs from the discount program for new entities in the program such as certain children's hospitals, free-standing cancer hospitals, critical access hospitals and rural referral centers.

Biosimilars – The bill creates a regulatory approval pathway for biosimilars. It provides 12 years of exclusivity for innovators. It also imposes a requirement that the biosimilar manufacturer perform clinical trials prior to approval and prohibits automatic interchangeability of products.

Sunshine Act – The bill creates new reporting requirements for drug, device, and biologic manufacturers to document and report all payments and "transfers of value" to physicians, teaching hospitals, and other providers that are greater than $100 during the previous year (including meals, gifts, consulting fees, research grants, etc.).

CURES Accelerator Network – The legislation creates a $500 million fund to support research and product development activities for "high need cures," defined as diseases or conditions for which there is little commercial incentive to develop products. The program will be operated by the NIH. Eligible grantees include research institutions, medical schools, biotechnology/pharmaceutical companies and others.

Medicaid Expansions and Rebates – Requires states to cover individuals with incomes up to 133 percent of the federal poverty level and provides for 100 percent federal funding for this expansion. It increases rebates for brand-name drugs to 23.1 percent (except the rebate for clotting factors and drugs approved exclusively for pediatric use that increases to 17.1 percent); it increases the Medicaid rebate for non-innovator, multiple source drugs to 13 percent of average manufacturer price; and extends the drug rebate to Medicaid managed care plans.

Medicare Reforms:

• Medicare Advantage – Reduces payments to Medicare managed care plans bringing them more in line with fee-for-service payments.
• Part D: Drug Coverage – Eliminates the Part D "donut hole" by 2020 by requiring manufacturers to contribute 50 percent discounts while beneficiaries are in the coverage gap and reducing co-insurance.

Here is a chart containing implementation dates for many of the key provisions in the Patient Protection and Affordable Care Act as amended by the Reconciliation Bill.

Federal agencies will be implementing these programs and developing new regulations over the next several months. Companies should closely monitor agency activities and seek input as program details are being developed.