Editor’s Note: From swelling Medicaid ranks to unprecedented numbers of hospital mergers to soaring growth of Accountable Care Organizations (ACOs), powerful forces are converging to reinvent healthcare. But which of the trends making headlines will be the true game changers for pharma? In a recent webinar, “The Five Megatrends Shaping Pharma’s Next Decade,” Manatt Health revealed the answer, analyzing the five major forces pharma leaders need to watch and respond to in the volatile years ahead. If you missed the program, click to view it free on demand: www.pharmavoice.com/megatrends. We also have created a new white paper, “Five Megatrends Driving the Seismic Shift in Healthcare,” summarized below. Click to download a free copy of the full paper or a free PDF of the webinar presentation.

Disruptive trends in the healthcare system will force companies to change their strategies. With new care models emerging, breakthrough technologies launching and value taking center stage, “business as usual” is no longer an option. Five of the megatrends coming together to remap the healthcare landscape will be particularly impactful for life sciences companies:

  • 1. From volume to value
  • 2. Centrality of the states
  • 3. Mega health systems
  • 4. Employer recalibration
  • 5. Healthcare everywhere

1. More with Less: From Volume to Value

New technologies, including pharmaceuticals, offer patients improved health but at greater costs. These higher prices increasingly are shifting to patients through higher premiums and cost sharing. Seeking to drive down costs, payers are transitioning from volume-based to value-based payment methods. Since most health systems remain reliant on volume-based constructs, however, pharmaceutical companies, for the foreseeable future, must balance success across two concurrent paradigms:

  • The volume-based model, which is still in play, and
  • The emerging value-based environment, which consists of new payment methodologies that are either being formally tested in demonstration projects or are spreading through the market as they are adopted by payers, providers and integrated delivery networks.1

Abandoning the volume-based system too quickly can reduce sales and profits. At the same time, failing to explore new value-based options puts companies at risk of being left behind by competitors and alienating key stakeholders.

A key element of success in the value-based system is understanding what value means to specific market segments. For every product line, companies need to identify the aspects of value that are most important to different healthcare stakeholders.

For example, 51% of ACO customers are led by physicians, and 33% are jointly led by physicians and hospitals.2 Physicians can be expected to ask different value questions than pharmacy directors or pharmacy benefit manager (PBM) executives. In bundled payment initiatives, several customers may emerge, as entities compete for control of the payment bundle.3

As the market shifts to more value-based paradigms, it will be important to identify which products are good candidates for value-based pricing or risk-share strategies. Value-based pricing:

  • Opens the door to greater product adoption, even when there is uncertainty among the payer and provider community about the value of the technology.
  • Provides protection from loss while offering positive health benefits to a population.
  • Presents opportunities to link clinical evidence and outcomes to coverage and payment.

In building a case to demonstrate value for a specialty drug, a risk-share arrangement may provide a mechanism to address resource constraints and engage one or more utilization management tools to target these drugs appropriately to the patients who need them. Products that are major determinants of health outcomes and have costs that justify the effort—e.g., treatments for chronic conditions—are potentially good candidates for risk-sharing.

Integrated Delivery Systems (IDS) and ACOs are still early in the learning curve for building value-based partnerships.4 For these players, manufacturers may want to support programs that identify high-risk patients and improve their medication adherence, leading to better outcomes.5

Key takeaways for manufacturers as they face the “volume to value” megatrend include:

  • Manufacturers must maintain expertise in volume-based requirements, while developing business and legal expertise in value-based paradigms.
  • For certain products, risk-sharing arrangements will be key to driving adoption of products with high costs and uncertain outcomes.
  • Developing appropriate metrics is critical for offering ways to share the risks of participating in the market and decrease the probability of access issues.
  • For organizations early in the value-based learning curve, manufacturers may want to consider providing medication-related program delivery support services.

2. New Sheriff in Town: Centrality of the States

The Affordable Care Act (ACA) has transformed the role of states in healthcare. The impact of the increasing state role in healthcare delivery, financing and regulation on pharmaceutical access is still unfolding. Medicaid is undergoing its most substantial transformation since its inception, moving out of the welfare space and into the health insurance market. The interest in expanding Medicaid is being fueled by several factors, including:

  • The potential expansion of Medicaid coverage to an additional 16 million people.6
  • Concerns about the sustainability of the Medicaid program in the wake of growing state and federal budget deficits, Medicaid’s countercyclical spending cycles and the aging of the population with its associated long-term care needs.

Given expected increases in pharmaceutical spending and the central role pharmaceuticals play in managing patient health, Medicaid formularies will be a critical component of reform efforts. Following are key developments for pharmaceutical companies to monitor:

  • With the recent expansion of Medicaid, growth in managed care, and increasing focus on managing the care of dual eligible populations, manufacturers can no longer assume that entering into rebate agreements will ensure access for Medicaid beneficiaries.7
  • Adults who are enrolled in expanded Medicaid are entitled to coverage under Alternative Benefit Plans (ABPs). Unlike standard Medicaid benefits, ABPs must cover the greater number of drugs, either one drug in every United States Pharmacopeia (USP) category and class or the number of drugs per category and class in the drug benefit of a designated essential health benefit base benchmark plan. Manufacturers will need to monitor states as they submit their ABPs to determine possible changes to pharmaceutical access.
  • Patients enrolled in Medicaid MCOs also will experience differential formulary coverage. Consequently, traditional MCO utilization mechanisms, such as prior authorization and generic dispensing requirements, will be leveraged to manage budgets more aggressively than Medicaid fee-for-service programs.8
  • Dual eligibles—those eligible for both Medicaid and Medicare—constitute 15% of Medicaid beneficiaries, but account for almost 35% of Medicaid spending.9 The ACA contains initiatives to enable and encourage coordinated service delivery to mitigate differences in Medicare and Medicaid rules and misaligned payment incentives. Implementation of dual eligible demonstration projects are underway, and interest in the program is strong. Going forward, we can expect efforts to blur the lines between Medicare and Medicaid with the goal of accessing Medicaid’s drug price savings. Manufacturers will need to understand the factors that are driving the increased influence of the states and the possible impact of blended benefit structures.

Growing state influence is not limited to public insurance constructs. Through Medicaid expansion and the emergence of marketplaces, states are experiencing a growing alignment between public coverage and private insurance. Premium assistance—or private option strategies—is a prime example of the convergence of public and private insurance markets. Under premium assistance programs, Medicaid coverage is provided through enrollment in marketplace qualified health plans (QHPs), and commercial-level reimbursement rates are paid to providers.

Rollout of the private option program in Arkansas was followed by similar proposals in Iowa, New Hampshire and Pennsylvania. We anticipate interest in the private option will continue to grow as states seek alternative approaches to expand coverage.10

Important takeaways for manufacturers planning for the “centrality of the states” megatrend are:

  • State reimbursement of drug costs under Medicaid is changing due to the implementation of ABPs for newly eligible adults, the extension of drug rebates in Medicaid Managed Care and new efforts to manage high-need Medicaid and dually-eligible populations.
  • The increasing convergence of public and private markets will drive efforts to reduce pharmaceutical expenditures.

3. Big Is Bigger: Mega Health Systems

Between 2007 – 2009 and 2010 – 2012, hospital mergers increased by 25%.11 Larger systems offer the potential for greater resource efficiency, consistency in delivering services to patients and transparency regarding health outcomes. Conversely, they make it difficult to provide personalized service to patients.

Unchecked, future healthcare systems might consist of a few players with immense market influence, which may have consequences for market access and product pricing. Large health systems will seek to manage pharmaceutical use more aggressively, as the pharmaceutical supply chain is a visible area of interest for reducing costs. Pressure from large health systems will:

  • Impact the structure of contracts with wholesalers, retail pharmacies and PBMs, disrupting already thin margins.
  • Make it difficult for manufacturers selling directly to health systems to preserve pricing without demonstrating product value or risk-sharing based on clinical outcomes.

A significant upside to large health systems is the ability for system participants to align their electronic health records to manage medications, decreasing adverse reactions while monitoring adherence. More efficient systems may mean increased use of utilization management mechanisms, therefore channeling patients to preferred drugs. Further, consolidating pricing data may present challenges to manufacturers in preserving product pricing due to greater transparency of prices across all products, including the competition.

In addition, clinical integration has the potential to increase the market power of large healthcare providers. Evidence suggests that hospital mergers in concentrated markets generally lead to price increases of almost 20%.12 There are multiple ways, however, for payers to counteract higher prices. For example, through integrated information systems, payers can better estimate patient out-of-pocket costs. Therefore, they can identify opportunities to lower patient liabilities by creating limited networks that do not include high-cost providers.13

For many of these mega health systems, the future of the 340B drug discount program is critical. The 340B drug pricing program requires pharmaceutical manufacturers to provide outpatient drugs at discounted prices to eligible healthcare providers. One-third of hospitals currently participate.14 In addition, the ACA expanded 340B eligibility to five new categories: critical access hospitals, sole community hospitals, rural referral centers, freestanding children’s hospitals and freestanding cancer hospitals.

340B pricing provides an approximate 51% discount off average wholesale prices. In addition, reimbursement levels for drug administration costs in hospital outpatient facilities are on average an incremental 189% of the physician office-reimbursed costs for commercially insured patients under the age of 65.15 Accordingly, some healthcare systems have moved drug administration services from physician clinics to outpatient settings.16

Major takeaways for manufacturers working with mega health systems include:

  • Downward pressure on drug pricing will emerge as a result of the growing negotiating power of mega health systems and pressures on these systems from payers to improve quality while saving costs. Mega health systems will want to be included in preferred provider networks, remain competitive under reference pricing and earned shared savings under ACO arrangements.
  • Mega health systems are likely to be interested in delivery support programs to improve appropriate medication use and adherence. Non-branded support programs can be important components of value-based partnerships.
  • The future of 340B may create additional bottom-line pressures for mega health systems.

4. Change in the HR Office: Employers Recalibrate

Consumer choice marketplaces—public and private—are the future of health insurance for most employers and employees. Employers will find it appealing to step away from their traditional role as health insurance purchasers, as the marketplaces mature and grow. Where competitive situations won’t allow them to abandon their role in healthcare completely, they will seek to control costs and improve their employees’ choices by creating defined contribution plans and outsourcing health insurance procurement to marketplaces.

Private marketplaces are already being created to serve this need. Aon Hewitt reports growth in private exchanges from 150,000 members in 2013 to 600,000 in 2014. Of these enrollees, 75% feel they chose the plan that offered the best value, and 87% like being able to choose among multiple carriers.17

Marketplace plans may have drug benefits that differ greatly from those that employers traditionally offered. Recent formulary analysis of the exchanges indicates that:

  • Individuals are twice as likely to experience utilization management controls on prescription drugs, compared to people enrolled in employer-sponsored plans.18
  • Silver plans, the most commonly selected, are nearly four times as likely to have a combined deductible for pharmacy and medical benefits.
  • Enrollee cost sharing is 38% higher than employer plans.19
  • Combined deductibles impose a much higher member cost-sharing burden for pharmacy benefits than other benefits.20

State legislatures are responding to low marketplace premiums that mask high out-of-pocket expenses by considering legislation to limit out-of-pocket spending on drugs. These efforts are not likely to impact the largest employers, whose plans are protected from state legislative oversight by the federal ERISA law. It is unlikely for the time being that government will attempt to regulate private marketplaces.

Key takeaways for manufacturers as employers recalibrate include:

  • Marketplace formularies will grow in importance, as employers choose to delegate the insurance role to them.
  • The number of employers providing generous drug benefits with low cost sharing will decline over time.
  • State efforts to rein in cost sharing may have limited impact. Manufacturers should actively monitor developing state laws to understand how states are working to serve the needs of the marketplace population.
  • Marketplaces are a new customer for drug makers.

5. The Doctor’s Not in the Office Now: Healthcare Everywhere

Driven by the rise of new technologies, experts predict that, over the next decade, as much as 50% of healthcare will move from hospitals and clinics to homes and communities. Ubiquitous dissemination of powerful and affordable technology will put the power of connectivity, health information and healthcare applications into everyone’s hands, enabling patient and consumer engagement (also known as m-health).

Handheld technologies, such as smartphones and the Internet of Things (IoT), a network of everyday objects embedded with sensors and communication capabilities, hold the potential to transform any place into a doctor’s office. Devices will be used for remote monitoring of vital signs, conditions and compliance with treatment plans, and providing alerts to providers just a subscription away.

The technological transformation also will:

  • Capture and allow the de-identified aggregation of enormous amounts of data on treatments and their real-world effectiveness. Everyone, everywhere has the potential to form a patient registry with sophisticated data mining and analysis, yielding real-time, regularly updateable data on clinical effectiveness.
  • Transform the distribution of care delivery. Care sites will move out of acute settings and into ambulatory settings and retail clinics, where treatment will be delivered by lower-cost care providers, such as pharmacists, nurses and physician assistants.
  • Drive the development of systems of care, which will aim to optimize the allocation of care delivery across the care continuum.

These changes have huge implications for pharmaceutical companies:

  • Clinical and real-world trial costs could, potentially, drop dramatically, as the opportunities to study patient medicine use expand to new locations using cheaper data collection modes.
  • Information dominance will shift from manufacturers to customers with up-to-the-minute insights into utilization and effectiveness.
  • Consumers will become even more important players in drug selection.

Critical takeaways for companies as they adapt to “healthcare everywhere” include:

  • The doctor’s office and hospital will lose their primacy as the locus of care delivery.
  • Understanding the changing places and modes of delivery will be a core competency of all healthcare organizations.
  • Partnering with m-health and other connected healthcare technology providers will provide pharmaceutical manufacturers with a leg up in understanding these changes and staying ahead of them.
  • Expanding pharmaceutical manufacturers’ ability to use social media will be critical to ensuring that they can continue to reach patients and providers.

Conclusions

For the next five to ten years, manufacturers must maintain and build expertise in both volume-based and value-based paradigms. In addition, as health systems assume more risk under value-based payment reforms, manufacturers will need to participate in risk sharing and build partnerships with payers and providers around product solutions, rather than just products.

All of the five megatrends embed pricing pressures of some sort that manufacturers will need to build into their strategies. Companies also will need to communicate with many new customers in addition to the traditional physician decision makers, including ACOs, IDS, managed care entities, private marketplace benefit managers, and patients.