by Kim Monk Senior Health-Care-Policy Analyst Prudential Equity Research

We expect 2007 to be an extraordinarily busy year for healthcare industries in Washington. Campaign promises, budget issues, and expiring statutes should dictate healthcare priorities for the 110th Congress. However, the dynamics of a Democratic Congress and a Republican White House and their competing agendas promise to make for an unpredictable environment for all stakeholders in 2007.
The Democratic Congress Will Face A Dilemma Next Year In Pursuing Its Healthcare Priorities.
Many of its policy goals, such as closing the Medicare Part D “doughnut hole” and expanding coverage for the uninsured, would come with a hefty price tag. However, Democrats have also pledged to adhere to budget “paygo” rules, meaning that they must offset any new spending that affects the federal budget. These rules do not constrain legislation that would increase costs for the private sector. As a result, we expect Democrats to focus their activities in two areas: increased oversight and regulation.
Primed For The Most Attention Next Year, Whether They Like It Or Not, Will Be The Companies In The Pharmaceutical Industry.
Democrats are promising to legislate lower drug prices and the Prescription Drug User Fee Act (PDUFA), which is up for renewal. The issue of government negotiated drug prices under Medicare Part D could be crafted in such as way that it does not have a budget impact, and thus could move through the legislative process on its own. In addition, the perpetual issue of remedying cuts to Medicare physician fees and discussions on how to address out-of-control Medicare spending will garner much attention, likely putting pressure on Medicare providers and managed care. Compounding these pressures, we also expect the 2007 Medicare Trustees report (normally issued in late March) to include an “excess general revenue Medicare funding” warning. If the trustees project that general revenues will finance 45% or more of total Medicare spending in any of the next seven fiscal years, which they first did in 2006, they must issue a determination of “excess general revenue Medicare funding.” If such a determination is made in consecutive years, a funding warning is issued. Once a funding warning is issued, the Medicare Modernization Act (MMA) requires the President to submit legislation, as part of his next budget proposal (2008), to Congress to address this situation. Congress is then expected, though not required, to act to eliminate the “excess general revenue Medicare funding.” We think the Trustees report, combined with general budgetary demands, will create added pressure on Congress and the Administration to act to curtail the rapid growth of Medicare spending.
Large Numbers Of Congressional Democrats Campaigned On The Theme OfLowering Drug Prices For Seniors.
We think that Democrats will follow through with their commitment to give the government the authority to negotiate Medicare drug prices. Ultimately, how successful they’ll be will depend on how badly they want to change the thus far successful Part D structure or whether they would prefer to retain it as a 2008 campaign issue. House Speaker Nancy Pelosi (D-CA) has said that in the first 100 hours of the 110th Congress, she will bring up for a vote legislation that would allow the government to negotiate drug prices for Medicare. We think such legislation will pass handily. Progress in the Senate on the issue will likely be more deliberate, where, by our count, there are at least 59 votes in support (60 are required to break a filibuster). However, any legislation mandating that the government become involved as a price negotiator and/or pharmacy benefit manager (PBM) would probably not save money and could even cost money and wouldn’t pass muster in the current budget environment.
We Continue To Challenge The Conventional Wisdom That President Bush Will Simply Veto Any Changes To The Medicare Part D Program.
Remember that since Democrats control Congress, they have the ability to send a bill to the President in a form that he may veto, but they also have the ability to offer a scaled-down compromise or an amendment attached to another legislative priority that would be difficult for him to veto. While we would expect the President to veto any stand-alone legislation that requires the government to negotiate drug prices on behalf of Medicare, we think compromise (whether in 2007 or 2008) is probably inevitable. We believe a compromise would most likely give the government the discretion to negotiate drug prices, but we are confident that the Bush Administration would not exercise such authority. Such a compromise would likely involve either striking the non-interference clause in MMA or granting the government some discretionary authority to negotiate prices in another way.
We Think Passage Of A Compromise Could Lead To Pricing Pressure, Even If This Administration Doesn’t Exercise Such Negotiating Authority.
Drug company pricing tactics have clearly gained an increased level of attention over time, including actions as simple as annual price increases. It may be that drug companies start to self-limit the amount of future annual increases, which would help prove that drug price inflation can be kept under control through a private-sector Medicare model. Ultimately, it’s important to keep in mind that the last thing Democrats would want to do is completely dismantle the popular new drug benefit that they worked so long to create. However, there are some Democrats, some of whom will be returning to key leadership positions, who would like nothing more than to revisit the structure of Medicare Part D, increasing the government’s role in the program while diminishing the role of private-sector entities, such as plans and PBMs. We don’t think this will happen in the near future (2007-08), but we are concerned that granting the government discretionary authority to negotiate drug prices could be the wedge in the statute that a future Administration may use to fundamentally restructure the drug benefit.
The Reauthorization Of The Prescription Drug User Fee Act (PDUFA) Will Take Center Stage, As The Legislation Expires October 1, 2007.
Without an agreement on PDUFA, which funds nearly half of the FDA’s Center for Drug Evaluation and Research, the FDA would have to lay off a significant amount of staff and drug approvals would likely grind to a near standstill. While we don’t think the situation will come to this, we believe an agreement on PDUFA will have to include new drug safety measures. More specifically, with Senator Ted Kennedy (D-MA) and John Dingell (D-MI) in charge of the committees of jurisdiction, we think a PDUFA/drug safety package will incorporate provisions of the Enzi-Kennedy drug safety bill along with the drug safety report recently issued by the Institute of Medicine, both of which advocated the strengthening of post-market surveillance, mandatory participation in a clinical trials database, the granting of new authorities to the FDA to impose civil monetary penalties for non-compliance, and the implementation of certain restrictions on direct-to-consumer advertising. It should be noted that the Medical Device User Fee and Modernization Act (MDUFMA) will expire at the same time as PDUFA. We expect that the two will move together and that the MDUFMA portion will also likely include new safety measures, such as stronger post-market surveillance requirements.
The Physician Fee Fix And Medicare Spending Reform Will Also Be Subjects Of Considerable Debate.
When the President releases his 2008 budget proposal on February 5, 2007, we think it will closely mirror and could potentially exceed last year’s proposal, where the President proposed cutting Medicare spending by $36 billion over five years. The major targets were hospitals, nursing homes, home health, durable medical equipment, and oxygen providers. Regardless of whether there is a budget bill or not (chances are that partisan gridlock will rule the day), we think that some Medicare providers will have to endure cuts due to the need to resolve and offset the 5% cut in Medicare Part B payments to physicians. The cost of a one year fix (which would eliminate the cut) is approximately $11 billion while a permanent fix would cost $218 billion over 10 years, according to the Congressional Budget Office. With Democrats in power, the cuts will likely be focused on managed care and the Medicare Advantage (MA) program (Part C), while hospitals (though not necessarily specialty hospitals), nursing homes, and other Part A services are more likely to be spared. Cutting reimbursement for services in Medicare Part B, such as imaging and lab services, could be tempting for lawmakers on both sides of the aisle as it would allow for a decrease in monthly premiums that would benefit seniors directly.