2018 outlook: Life sciences firms could see some legislative headwinds, regulatory momentum | Deloitte US has been added to your bookmarks.
2018 outlook: Life sciences firms could see some legislative headwinds, regulatory momentum
Health Care Current | November 21, 2017
This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.
2018 outlook: Life sciences firms could see some legislative headwinds, regulatory momentum
By Greg Reh, Vice Chairman and Life Sciences Sector Leader, Deloitte LLP
For many US life sciences and health care companies, 2017 was a year of market and legislative uncertainty. Much of the year was dominated by on-again-off-again efforts to repeal and replace the Affordable Care Act (ACA), which has now turned to discussions about reforming the tax code. For some life sciences companies, this uncertainty created a wait-and-see approach to investments – particularly mergers and acquisitions (M&A).
However, 2017 was also a year of regulatory, scientific, and technological progress, which I expect will continue to create some favorable tailwinds for life sciences companies in 2018. The year-old 21st Century Cures law, for example, is already helping to further innovate drug-approval processes. We also saw regulatory approval for a first-of-its kind CAR-T (Chimeric Antigen Receptor T-cell) therapy. The treatment, for certain children and young adults with leukemia, uses a patient’s own T cells, which are extracted, cryopreserved, transported and modified before being returned back to the patient through infusion. A second therapy was approved two months later.1 Moreover, an advisory committee from the Food and Drug Administration (FDA) recently recommended approval for the first gene therapy in the US.
As life sciences companies look ahead to 2018, it can be important for them to determine how to effectively monitor and manage strategic risk – and hedge their bets – particularly across these four key areas:
- Regulatory enhancements: The FDA has indicated its intention to update the regulatory framework to accelerate research and development (R&D) – a positive sign for the industry. Continued investments around curative therapies – especially drugs that treat or cure rare diseases – could result in additional approvals in 2018. There is an even more favorable outlook when it comes to how much faster therapies can move from the clinic to patients. The FDA’s Innovation Initiative aims to build upon Cures to modernize the drug development process. One example is the use of computer models and simulations to support the evaluation of new therapies. Another is the potential use of real-world evidence, which could be gathered through natural history databases (i.e., a collection of data from people who have a rare disease), as the control arm for clinical trials.2
- Value-based contracting: Pricing, along with securing market access, will continue to be a top priority for life sciences companies in 2018. Both biopharma and medtech companies are likely to expand efforts around value-based contracting. As a result, we could see more examples of manufacturers that enter into deals with health plans, providers, or government payers. Value-based contracting allows risk-sharing between companies and health plans or providers, making payment contingent upon evidence that a product works in a specific patient population. I think there will continue to be an interest and a need to design these kinds of contracts.
A big challenge for drug manufacturers may be in determining what their curative therapies will cost and how to pay for them. Curative treatments are given as a short course of therapy, typically only once during a patient’s lifetime, and have the potential to not just treat disease but eradicate it. For these high-value, high-cost treatments, some value-based contracting models could amortize costs over a longer timeline. We are likely to see more experimentation with alternative funding models, such as performance-based annuity payments for treatments. Public payers are beginning to experiment with these payment models. The manufacturer of a novel immunotherapy recently inked a risk-based arrangement with the US Centers for Medicare and Medicaid Services (CMS) where the agency will tie payments to the drug’s performance. If the product does not work for a patient, CMS will not pay the drug manufacturer. Medtech companies are also in the early stages of value-based contracting.
- Emerging technologies: Life sciences companies will likely continue to take advantage of emerging technologies such as artificial intelligence (AI), robotic process automation (RPA), and predictive analytics to speed innovation, enable precision medicine, support the development of new therapies, and address productivity challenges. Consider this: In November, our colleagues in the United Kingdom released a paper that looked at some of the technologies life sciences firms could be relying on by 2022. Life sciences companies could use predictive analytics, for example, for market research to help improve the consistency and impact of product launches. The report also suggests that leading life sciences firms will have automated up to 95 percent of regulatory filing by then, which could reduce launch-cycle time by about 12 months. The transformative opportunity created by emerging technologies is significant, and companies should consider investing now to take advantage.
- Policy changes: Legislative efforts to reform the health care system, and discussions on how to curb rising health care costs, will likely continue well into 2018. M&A activity in 2017 was tempered in part by last summer’s efforts to undo the ACA and, more recently, an attempt to reform the tax code. If enacted, tax reform could create some tailwinds for life sciences companies by stimulating M&A activity.
Specifically, life sciences companies could see changes in the following areas:
Repatriation of overseas cash: Proposed changes could let life sciences companies repatriate cash held overseas at a lower tax rate
New taxes on foreign income: Proposals also include new taxes on the foreign income that US companies generate from patents and other intellectual property, regardless of where that IP is held
Reduction in orphan-drug credits: Proposals call for reductions in the orphan-drug credit that was originally created as an incentive for rare disease research
Repeal of the medical device excise tax: This 2.3 percent tax, a provision in the ACA, is set to be reinstated on January 1, 2018. Eliminating the tax has been part of repeal and replace discussions, but recent tax-reform proposals do not specify any changes.
Strategic risk management can help counter uncertainty
There are many unknowns as we head into a new year. During such periods of uncertainty, we advise our life sciences clients to focus on effectively managing strategic risk. Strategic risk management is how a company identifies and prepares for a variety of possible scenarios relative to its business objectives. Being aware of legislative, technological, scientific or regulatory risks is different than being prepared to respond to them, and the best prepared companies could wind up with a competitive advantage.
Within a life sciences company, people in regulatory affairs, business development, product development, R&D, or manufacturing may not necessarily work together or share information. But they should – particularly when it comes to improving a company’s strategic positioning. That is strategic risk management.
No one knows which way the political and regulatory winds will blow in 2018. While I expect political uncertainty will continue to be a headwind for 2018, some of the tailwinds we experienced this year could blow stronger in 2018.
In the news
Tax reform: Senate holds markup; House passes its bill
Both chambers of Congress are working on comprehensive tax reform, which includes many provisions affecting health care. Notably, Senate Republicans have proposed repealing the ACA’s individual mandate under its amended tax reform bill. Repealing the individual mandate would generate $338 billion in savings over 10 years and help offset the $1.5 trillion in tax cuts (see the November 14, 2017 Health Care Current). Under Senate budget rules, no section of the bill can increase deficits under conventional scoring after the first 10 years.
The Senate and House proposals differ. Below we highlight some of the provisions with implications for health care.
The Senate plan also preserves tax exemption for private activity bonds, which are used by municipalities to help finance infrastructure projects, including hospitals (see the Deloitte Tax News & Views for more details).
If approved, differences between the two proposals likely will be reconciled by a conference committee or private GOP negotiations.
CMS proposes changes to Medicare Advantage and Part D to increase flexibility for plans and address opioid use
On November 16, CMS announced proposed changes to Medicare Advantage (MA) and the Prescription Drug Program (Part D) as a part of an effort to increase plan choices and reduce costs in the program. The agency said that the proposed changes result in roughly $195 million in Medicare savings per year over 5 years (2019 through 2023) and would reduce costs for beneficiaries.
Key proposed changes include:
Allowing greater benefit variation. CMS said that limits on MA plans offered by the same organization in the same county may limit consumer choice. Thus the agency is proposing to eliminate “meaningful difference” requirements, allowing plans to offer a more varied set of benefit packages in the same geographic area. Additionally, CMS said that it is proposing to change requirements of uniformity of benefits offered to MA enrollees to allow MA organizations to reduce cost sharing for certain benefits, offer supplemental benefits and different deductibles.
Allowing electronic delivery of plan materials to beneficiaries. CMS proposed allowing plans to provide certain materials, such as the Evidence of Coverage document, electronically as long as they also provide beneficiaries with easy access to hardcopy materials, if they prefer.
Changing Part D to prevent prescription drug abuse. To comply with the Comprehensive Addiction and Recovery Act of 2016 (CARA), CMS proposed designating opioids (with limited exceptions) as frequently abused drugs. It would tie the definition of at-risk beneficiaries to the criteria used to identify potential opioid overutilizers under CMS’s existing Part D Opioid Drug Utilization Review program and allow plans to limit at-risk beneficiaries’ access to opioids.
Considering biosimilars generics for Part D benefit design purposes. To encourage the use of lower-cost alternatives, CMS proposed classifying follow-on biological products as generics for the purposes of cost-sharing in Part D.
Request comment on manufacturer rebates for consumers. The proposed rule includes a Request for Information on ways to apply some manufacturer rebates and all pharmacy price concessions to the price of a drug to consumers at the point of sale.
Updating the definition of marketing. CMS proposed limiting the definition of marketing to materials that are most likely to lead to an enrollment decision so that the agency will have fewer documents to review.
Proposing a seamless re-enrollment. CMS proposed codifying an optional enrollment mechanism allowing MA issuers to transfer newly MA-eligible beneficiaries from other plans (such as commercial or Medicaid plans) into MA plans provided by the same issuer.
Restoring the MA open enrollment period (OEP). The new OEP would allow individuals enrolled in an MA plan to make a one-time change to enroll in another MA plan or transfer to traditional Medicare. Beneficiaries will also be able to make a coordinating change Part D coverage.
Comments on the proposed rule are due by 5:00 PM on January 16, 2018.
White House nominates Alex Azar for HHS secretary
On November 13, the White House announced that it would nominate former Eli Lilly and Company executive Alex M. Azar, II to be the next Secretary of the US Department of Health and Human Services (HHS).
If confirmed, this will not be Azar’s first time working at HHS – he served as general counsel from 2001 to 2005, and deputy secretary from 2005 to 2007 before joining Eli Lilly. After graduating from Yale Law School, Azar worked as a clerk on the Fourth Circuit Court of Appeals and for former Supreme Court Justice Antonin Scalia.
The Senate Health Education Labor and Pensions (HELP) Committee will hold a hearing on his nomination November 29.
Several hospital groups are suing HHS over changes to the Medicare 340B Drug Discount Program (see the November 7, 2017 Health Care Current). They want the court to direct the administration to continue the (higher) 2017 rates until the lawsuit is resolved. The 340B program allows hospitals that serve a large number of low-income patients to purchase certain drugs at discounted rates.
The groups argue that paying hospitals for drugs at the average sales price (ASP) minus 22.5 percent extends beyond HHS’s statutory authority. Medicare typically pays hospitals ASP plus 6 percent. They also argue that the differences between the purchase price and Medicare reimbursement is supposed to help hospitals cover the cost of low-income patients. However, many drug companies contend that hospitals profit from the program and that the program is poorly targeted to helping low income patients.
The American Hospital Association, Association of American Medical Colleges, America's Essential Hospitals, Eastern Maine Healthcare Systems, Henry Ford Health System, and Fletcher Hospital, Inc. have all signed onto the lawsuit.
Payment cuts are scheduled to go into effect January 1, 2018. CMS says it based the policy on a Medicare Payment and Advisory Commission (MedPAC) recommendation. The policy is budget neutral, and funding will be distributed among all providers, with hospitals that do not get 340B prices expected to benefit somewhat from the change.
Ways and Means Committee agrees on bipartisan Medicare extenders
The House Ways and Means Committee announced that it reached an agreement to extend Medicare programs that have expired or will expire soon. The agreement aligns with House Energy and Commerce Committee and Senate Finance proposal, although those proposals do not include policies that will offset the costs of extending the programs.
Congress will likely attach the extensions to a year-end spending bill package.
26 percent of exchange enrollees have just one insurance company
Nearly half of enrollees who purchase small-group or individual health coverage through a public insurance exchange will have access to three or more insurers in 2018 and in every county at least one insurer will sell individual and small-group coverage, according to a new report from the Kaiser Family Foundation. However, 26 percent of Americans live in a county with only one insurer – up from 21 percent in 2017.
The analysis noted that metropolitan counties have an average of two participating insurers in 2018, compared to an average of 1.6 in non-metropolitan counties.
Kaiser used CMS, state-based exchange, and insurer rate filings for the analysis.
Related: As of November 15, more than 1.5 million Americans had signed up for health insurance through the federally run insurance exchange. The signups include about 345,000 individuals who were new to the marketplaces. However, the administration reduced the duration of this year’s open-enrollment period – from three months to six weeks – for the federally run HealthCare.gov. Some state-run exchanges have extended their open-enrollment dates.
(Source: Ashley Semanskee et al., “Insurer Participation on ACA Marketplaces, 2014-2018,“ Kaiser Family Foundation, November 10, 2017)
Only a third of seniors review their Medicare plan annually
Seniors generally do not comparison shop for Medicare plans, despite concerns about health care costs, according to a study from WellCare Health Plans. Seniors are more likely to comparison shop for most other household expenses – from home and auto insurance to groceries and gasoline – than Medicare plans, according to the study.
Researchers surveyed 1,026 Medicare-eligible seniors to assess how the perceived burden of household expenses, including health care, affects how they shop (the sample was nationally representative). They found that, although 40 percent of respondents said they consider health care costs to be more burdensome than other expenses, 62 percent of surveyed seniors said they did not review their Medicare plan annually.
Some seniors reported that they did not know they could switch to a more affordable plan, and others said their current plan is satisfactory (63 percent). However, some respondents admitted that the shopping process is so unpleasant, they intentionally avoid it. One in five seniors said shopping for a Medicare plan is “awful.”
Women were more likely than men to feel burdened by the cost of coverage (44 percent vs. 35 percent) and frustrated when shopping for deals (22 percent vs. 17 percent). However, women were also more likely to consider prescription drug coverage, provider networks, and pharmacy networks – all of which could save them money – when they did comparison shop.
(Source: “The Cost of Complacency: Are Seniors At Risk When It Comes To Healthcare Coverage?” WellCare Health Plans, Inc., November 2017)
CMS owes health insurers $12.3 billion for risk-corridors
The risk-corridor program was created as part of the ACA to help stabilize the new individual and small-group exchange markets. The program collects payments from health plans that exceed a profit threshold, and those funds are transferred to insurers that exceed a loss threshold.
The program was not intended to be budget neutral. However, starting in 2014, Congress made the program revenue neutral, meaning that it could only pay out as much funding as the program received in from insurers that exceeded the profit threshold. This caused a shortfall in the program (see the September 12, 2017 Health Care Current). Of the $12.3 billion the federal government still owes, $5.8 billion was from 2016.
Many insurers have sued the federal government for the payments, including a class-action lawsuit of 150 insurers (see the August 15, 2017 Health Care Current).
The risk-corridors program was modeled after the Medicare Part D drug benefit, which also includes risk corridors for insurance companies.
(Source: Timothy Jost, “While litigation proceeds, outstanding risk corridor payments mount,” Health Affairs, November 14, 2017)
Health care continues to attract innovators willing to navigate a complex system
Entrepreneurs and innovators, often from outside the health care system, are working to move expensive medical equipment from the hospital and into the hands and homes of consumers. The underlying goal for many of these innovators is to take costly, complex, and large machines (often the ones we associate with lots of beeps and wires in a hospital room) and make them portable, less expensive, wireless, and simple enough for consumers to use.
University of California, Berkeley students raised $5 million for their digital stethoscope. They took a digital stethoscope used in hospitals and created the Duo, a digital stethoscope for home use. They expect to bring it to the market, available by prescription, this fall. The product fits in a hand and combines electrocardiogram (EKG) readings and heart sounds into a device. This allows patients to monitor their health at home and send the data to their physicians, who in turn can alert patients if the device senses an impending medical crisis. The team relies on guidance from its board of cardiologists, who represent some of the country’s leading hospitals. The product has competition. The Kardia Mobile is a small device that attaches to a smartphone and can take an EKG reading in 30 seconds. Consumers can order it online.
A classmate of the Duo founders set out to work on developing a device for patients with asthma. Her startup, Knox Medical Diagnostics, developed the Aeris device to replace the peak flow meter and to get a better picture of what is going on inside the lungs. This device is a portable spirometer that connects to a smartphone and measures airway obstructions and the severity of inflammation in the lungs, and alerts the patient (or parent) before an asthma attack. The app comes with a video game to engage children and teach them how to use it correctly. This month, the device became available for research purposes, and sells for $99 plus a $10 monthly subscription.
Analysis: Innovators face many obstacles in digital health. The technology not only has to be useful, but easy for a consumer to use. Even if consumers like the devices, long-term use could depend on whether physicians find them useful and actionable. Getting health plans or government payers to see the value of new devices, and agree to pay for them, is another hurdle.
These challenges are clearly not deterring both traditional health care companies and non-traditional entrants from continually innovating and developing new products. According to a report from IQVIA Institute for Human Data Science, the number of digital health apps doubled in recent years, to more than 3000,000. Most of these are focused on wellness, though a growing number of them are focusing on chronic-condition management. The ones that can demonstrate evidence-based outcomes and clinical validation are getting wider adoption. Pharmaceutical companies are increasingly using digital apps in clinical trials to improve the collection of patient experience data, and large research universities such as Duke, the University of California, San Francisco, and the University of Pennsylvania are doing many of the studies.