Top regulatory trends for 2016 in life sciences and health care

A forward look

This publication is part of the Deloitte Center for Regulatory Strategies’ cross-industry series on the year’s top regulatory trends. This annual series provides a forward look at some of the regulatory issues we anticipate will have a significant impact on the market and our clients’ businesses in the year ahead.

A brief overview of the 2016 regulatory trends in life sciences and health care

The life sciences and health care sectors face a year full of activity in 2016, with the prospects of the election year spotlight once again being directed to the health care marketplace. This report looks at six key regulatory activities in life sciences and health care for 2016.

Download the full report to further examine these trends.

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ACA implementation

Implementation of the Affordable Care Act remains a top priority for President Obama, and his Administration is working to finalize regulations on critical components of the law before leaving office.

Having just completed the third open enrollment period for the ACA’s individual exchanges, qualified health plans (QHPs) sold on the exchanges have continued to draw scrutiny and spark debate over premium increases and benefit design features, such as provider networks and deductibles. Importantly, stakeholders will have to consider how any new requirements to limit cost-sharing on prescription drugs or expand plans’ networks might translate to higher premiums.

Elections for Congress and the presidency are sure to feature debate over the ACA, but stakeholders also should keep an eye on state-level elections. Governors and state legislatures play a critically important role in decisions related to operation of the ACA’s exchanges, as well as Medicaid expansion.

Another issue drawing attention from states is the possibility of pursuing other avenues to expand health coverage via waivers under Section 1332 of the ACA. Beginning in 2017, states could use the waivers to opt out of the individual and employer mandates and other components of the ACA. Relative to the ACA, alternative models would have to:

  • Provide coverage “at least as comprehensive”
  • Cover as many or more individuals
  • Include equal or greater affordability standards
  • Not increase the federal budget deficit

The Departments of the Treasury and of Health and Human Services in December provided guidance on the criteria the agencies will use to evaluate waiver applications. Notably, the guidance indicated that waiver proposals from states using the federally-facilitated Exchange might not be considered feasible at this time because “the Federal platform cannot accommodate different rules for different states.”

Of critical importance to health plans and organizations offering health benefits to employees, January 2016 will mark the first compliance deadlines for the ACA’s information reporting requirements. Employers will have to provide information returns to all full-time employees and the IRS, while health plans generally will have to provide information returns to members enrolled in fully insured products not purchased through the ACA exchanges. Implementation of the ACA will remain a critical business issue for health care stakeholders in the year ahead, raising the possibility of continued change into the future. Beyond the law’s impact on the health care marketplace, 2016 will mark the first time many organizations will have to operationalize some of the law’s administrative requirements for employers.

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Key takeaway:


Stakeholders will have to consider how any new requirements to limit cost-sharing on prescription drugs or expand plans’ networks might translate to higher premiums.

Excise tax on high-cost employer-sponsored coverage

As part of a bill to fund the federal government for 2016, Congress agreed to delay the so-called "Cadillac tax" on high-cost employer sponsored coverage for two years and repealed a provision that would have made the tax non-deductible for employers and plans.

As a result of the delay, the first year the tax will apply will be 2020, rather than 2018. The delay will give stakeholders additional time to assess their exposure to the tax and plan for it, but it remains a topline strategic issue given the scope of the tax and its potential to disrupt the US model of health care coverage offered in the commercial market. The 40 percent excise tax will be a strong disincentive for any employer to offer health benefits that exceed the taxes thresholds of $10,200 for self-only coverage and $27,500 for all other coverage. This new tax stands to upend the longstanding tax incentives for more generous employer-sponsored health benefits.

The tax will apply to all employer-sponsored coverage, whether self-funded or fully insured. The excise tax applies to coverage sponsored by:

  • Private businesses
  • Non-profit organizations
  • State and local governments
  • Labor unions
  • The federal government, via the Federal Employee Health Benefits Program (FEHBP)

Retiree coverage and employer-sponsored group health plans purchased through SHOP exchanges and private exchanges also are subject to the tax.

Employer-sponsored health coverage is a critical source of revenue for health plans, health care providers, and life sciences companies. As a result, any movement away from the historically generous health benefits that employers offer could ripple through the health care marketplace and have a significant effect on stakeholders’ commercial revenue and strategic priorities.

Many organizations will begin making changes to their employee health benefits offerings in the coming years as they work to mitigate any liabilities under the new tax. As such, health plans, health care providers, and life sciences companies could face greater pressure in negotiations as employers drive harder to keep the value of employee health benefits below the taxes thresholds.

The Cadillac tax is an issue of strategic importance for the C-suite of all companies because it could have major implications for their strategic partnerships, tax liabilities, compliance programs, consumer engagement initiatives, vendor relations, and talent recruitment and retention strategies.

Stakeholders should keep abreast of the critical regulations that the Administration is releasing in 2016 in order to prepare and plan for compliance with the Cadillac tax when it takes effect.

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Key takeaway:


This new tax stands to upend the longstanding tax incentives for more generous employer-sponsored health benefits.

Medicare payment reform

MACRA fundamentally changes how Medicare payments to health care professionals will be set in the future.

The law puts significant revenue at stake for hospitals and health plans that employ health care professionals, making it imperative for the C-suite to actively engage in their organizations’ response to the law and adjust their business strategies going forward.

When President Obama signed MACRA into law in April 2015, it repealed the Sustainable Growth Rate (SGR) formula for physician payments and set updates to the Medicare Physician Fee Schedule for all years in the future. The law provides significant financial incentives for health care providers to participate in risk-bearing coordinated care models (eligible alternative payment models, or APMs) and move away from the fee-for-service reimbursement system. Health care professionals who opt to stay out of the new risk-bearing coordinated care models will receive lower payment updates and will be subject to significant new reporting requirements under the Merit-based Incentive Payment System (MIPS).

Importantly, after MACRA was enacted, the CMS Actuary projected that payment updates set under the law will not keep pace with the average rate of physician cost increases. This can be expected to place more pressure on the revenue streams for health care providers and health systems that employ health care professionals. Because MACRA is expected to drive participation in APMs, the law could present strategic opportunities for organizations interested in employing or entering into other arrangements with health care professionals.

Organizations that currently participate in accountable care organizations (ACOs) and other types of APMs will need to evaluate how their ACOs or other APMs stack up against criteria that the Department of Health and Human Services is required to release by November 1, 2016.

In addition to the opportunities and risks presented by MACRA, the November 2015 budget agreement includes a provision on site-neutral payments that could affect Medicare reimbursements for hospitals and health systems that employ health care professionals. Beginning January 1, 2017, the provision would bar provider-based off-campus hospital outpatient departments (PBD HOPDs) that execute CMS provider agreements after November 2, 2015 (the date the Bipartisan Budget Agreement was enacted), from being reimbursed under the CMS Outpatient Prospective Payment System (PPS). Instead, such facilities are eligible for reimbursement under the Medicare Physician Fee Schedule (PFS) or the Ambulatory Surgical Center Prospective Payment System (ASC PPS). Reimbursements under the PFS or ASC PPS generally are lower than payments under the PPS.

Health care stakeholders would be well-advised to keep close tabs on regulations the Administration releases on MACRA next year.

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Key takeaway:


MACRA repealed the Sustainable Growth Rate (SGR) formula for physician payments and set updates to the Medicare Physician Fee Schedule for all years in the future.

Medicaid managed care

The Administration is in the process of rolling out the first changes to Medicaid managed care regulations since 2002, a time period during which enrollment in Medicaid managed care plans has increased significantly.

CMS has indicated that it aims to release a final rule on Medicaid managed care by April 2016. A proposed rule was published in the June 1, 2015, Federal Register. A key aim of the proposed rule was to align the rules governing Medicaid managed care and coverage under the Children’s Health Insurance Program (CHIP) delivered in managed care with rules for other major sources of coverage, including QHPs available through Medicare Advantage (MA) and exchanges under the ACA.

Notably, the proposed rule would apply medical loss ratio (MLR) requirements to Medicaid and CHIP managed care plans for the first time. If the proposed rules are finalized as drafted, Medicaid and CHIP managed care plans beginning January 1, 2017, would be subject to an 85 percent MLR standard (i.e., at least 85 percent of premiums would have to be spent on medical costs).

In addition, the Administration could further the move toward coordinated care models if it finalizes language from the proposed rule that would require Medicaid and CHIP managed care plans to include mechanisms to promote coordinated care and delivery system reform efforts.

Given the growth of Medicaid managed care in recent years, stakeholders should keep a close eye on final regulations from the Administration that could affect significant revenue from their government programs business line.

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Key takeaway:

The proposed rule would apply medical loss ratio (MLR) requirements to Medicaid and CHIP managed care plans for the first time.

340B drug pricing program

The Administration has said it will provide final updated guidance on the requirements of the 340B drug pricing program by September 2016, after releasing long-awaited draft guidance in August 2015.

Affected providers, who remember previous proposed guidance rollouts that were never finalized, may conclude that the new 340B guidance may be a similar fire drill. However, given the current Administration’s desire to finalize rulemaking in a number of important areas, this may not be the case this time. Over the past several years, Congress, the Administration, and health care stakeholders have been attempting to balance the program’s goals of providing drug discounts to entities that serve lower income populations with certain parameters to limit the expansion of the program. Some of the parameters relate to the definitions of qualified drugs patients, and entities eligible to participate in the 340B program.

The draft guidance did not change the overarching purpose of the program to provide drug discounts for certain patients in qualified entities, but it includes significant proposed changes relative to which drugs the program applies to and which provider entities are eligible to claim the discounts. The changes include new restrictions on entity eligibility, drug eligibility, and patient eligibility. The changes could limit the scope of 340B and could affect the savings realized by covered entities under the program.

The proposed guidance also will have implications for health plans participating in Medicaid managed care. Managed Medicaid prescriptions fi led in 340B contract pharmacies would not be eligible for the 340B program unless a covered entity provides the government a written agreement with its contract pharmacy and State Medicaid Agency or Managed Care Organization that describes a system to prevent duplicate discounts.

In addition, the Administration reiterated the requirement of routine audit and monitoring practices and indicated that a covered entity’s failure to maintain adequate records demonstrating compliance could result in program termination.

If the rules eventually go into effect without significant alteration, providers will need to understand the financial impact these changes could have. Further, providers will be required to begin to assess the administrative changes that will be required to comply with the updated guidance, including requirements related to employment or contractual arrangements for prescribing health care professionals.

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Key takeaway:

The changes include new restrictions on entity eligibility, drug eligibility, and patient eligibility.

Hot topics in life sciences

President Obama's Precision Medicine Initiative, scrutiny of drug prices, and debate over biosimilars will be some of the major issues facing the life sciences sector in 2016.

The White House is moving ahead with its Precision Medicine Initiative, a new biomedical research effort intended to facilitate the development of more targeted treatments based on individual differences in people’s genes, environments, and lifestyles. The initiative includes the development of a new voluntary research cohort by the National Institutes of Health (NIH) that will use information from patients’ electronic medical records. The initiative also includes a new regulatory approach to genomic technologies by the Food and Drug Administration and new cancer clinical trials by the National Cancer Institute at NIH.

The Obama Administration on November 20, 2015, convened a summit on “pharmaceutical innovation, access, affordability and better health.” At the summit, Acting CMS Administrator Andy Slavitt highlighted the Administration’s efforts to move toward value-based payments and called for more public information about the efficacy of drugs and more transparency about how drug prices are set. The summit came shortly after CMS sent letters to state Medicaid directors and five pharmaceutical firms about prices and access to Hepatitis C treatments, requesting that the companies’ CEOs provide information about challenges they have encountered when entering into discount or value-based purchasing arrangements with state Medicaid programs.

Also of interest to life sciences companies, the Bipartisan Budget Act of 2015 extended the inflation-based Medicaid rebate currently paid on brand drugs to also apply to generic drugs if the price of the drug has increased faster than inflation (CPI-U). Currently, only single source and innovator multiple source drugs pay an additional rebate. Drug makers are required to pay these rebates quarterly to state Medicaid programs.

Stakeholders are anxiously awaiting final guidance from the FDA for naming biosimilar drugs. The Administration released proposed guidance in August 2015 that suggested that reference products and biosimilars have proper names that share a core drug substance name. To help identify each product, the FDA would then designate a suffix of four lower case letters to biosimilars that would have no intrinsic meaning. An industry trade group suggested that the proposed suffixes have some meaning rather than be randomly assigned.

Life sciences companies will need to engage on multiple fronts in 2016 in order to take advantage of any new opportunities while mitigating exposure to emerging risks.

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Key takeaway:

Life sciences companies will need to engage on multiple fronts in 2016 in order to take advantage of any new opportunities while mitigating exposure to emerging risks.

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