Under Budget – The Good and the Bad

Yesterday, I had the opportunity to hear one of the Illinois Members of Congress talk about Medicare D and how proud the government is that the program is significantly under budget.  He claimed this was because the government allowed the free market and competition to work and that this should be the model for healthcare going forward.  What concerns me is what is behind the curtain and how this “free market” or rather “managed market” is impacting the branded pharmaceutical industry.

Most experts agree that Medicare D is significantly under budget because of a couple major factors.  First, there is an underutilization of the program.  Some would argue that this is because our seniors are healthier than expected and don’t really need that much medical care.  It seems odd that for some reason, since the budgets were established all of a sudden, with all the issues around obesity, diabetes, hypertension and other diseases, that our seniors are in need of less medical care.  A more plausible reason for the underutilization has to do with the economy and the fact that seniors, like everyone else in the country, have been going to the doctor less over the last couple years.

The second reason Medicare D is under budget is because of drug prices.  PBM’s argue this is because of their skill managing the formularies, but in reality, the overarching reason is the huge shift to generic drugs.  With generic utilization now at approximately 80%, this has helped tremendously with the budget issues.  It would seem that the higher than expected use of generics is being driven by payers, consumers and providers.  With blockbuster drugs falling off the “patent cliff” this trend will continue to accelerate.

These issues need to be considered closely by the branded pharmaceutical industry. The trend of underutilization shouldn’t be considered a positive in that it will most likely result in higher long-term costs.  Drugs work best when used at the right time.  Minor and preventable problems are obviously better dealt with sooner rather than later.  With the huge push for preventative care, the significant decrease in patient visits to doctors should be a big concern.  The increased use of generics is great if they are the best products to use for a disorder.  On the other hand, if the prescribing decision is a “compromise” based on economics then this should be a challenge to the industry.

AARP predicts that the number of seniors on Medicare will grow to 70 million over the next couple decades.  This will become an even more dominant part of the drug industry over this time.  Some might argue that the future of the industry will depend on how well we do with this patient segment.  I wonder how seriously the branded pharmaceutical industry is attacking this strategic challenge.  What percent of time or marketing head count is totally dedicated to this customer segment? Can anything be more important?

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