ACOs and Their Impact on Pharma

Obamacare, officially known as the Patient Protection and Affordable Care Act (PPACA) was signed into law March 23, 2010. It’s now being challenged in the Supreme Court by the Department of Justice and 26 states on constitutional grounds, namely, that the federal government has no basis to mandate individual purchase of particular products or face financial penalties. Regardless of what happens in the courts, PPACA has set a new standard for bureaucracy (approximately 2700 pages worth), adding only complexity and cost to a system desperately needing radical reform.

One centerpiece of the law, the Accountable Care Organization (ACO), exemplifies this issue. An ACO is, more or less, a healthcare provider organization that agrees to provide services to insured populations, including Medicare, Medicaid, commercial health plans and employers. Unlike the typical healthcare provider, however, reimbursement will be handled by a variety of “pay for performance” arrangements, involving potential incentives for cost savings, or shared risk for financial losses. ACOs are also supposed to provide “clinical integration”—addressing patients’ needs in a holistic manner, with coordination among providers.

On October 20, CMS released final regulations for the Shared Savings Program. Industry organizations like AMA, AHA and AMGA (American Medical Group Assn.), who had been full-throated in their critiques of the proposed preliminary rules six months earlier, dashed out statements supporting elements of the program almost immediately, praising CMS’s willingness to adjust the rules, offer greater incentives for participation and actually listen to those providing the service.

Regardless of whether or not ACOs actually gain momentum, physicians and hospital/system management have been working together more closely to give financial impact a larger role in treatment decisions. Against the backdrop of bundled pricing, increasing numbers of physicians in employment models, and continued downward pressure on reimbursement, building a robust economic and clinical value (ECV) case for your products is more important than ever. This has implications for every part of the business, from R&D to strategy, marketing and reimbursement.

Increased collaboration between physicians and hospital management means that pharmaceutical companies will need to have ECV data tailored to a broader set of stakeholders. Through systematic, segmentation-based market research, pharmaceutical companies can identify what components of the ECV case resonate with each of their target stakeholders.

Pharmaceutical companies also need to ensure that requirements for the ECV case are a consideration in acquisition, early development and designed into clinical trials so that compelling data is available at the time of market introduction and throughout a product’s lifecycle.

In addition to demanding a strong ECV case, stakeholders across the healthcare industry are increasingly interested in outcomes-based contracts as a way to share some of the risks with manufacturers. These agreements are already in the nascent stage with payers like CIGNA, which entered into an agreement with Merck in 2009 to provide discounted pricing of Merck products (regardless of which drugs the patients are prescribed) based on positive outcomes for diabetes patients.

Further consolidation of healthcare delivery systems forming ACOs will lead to the creation of oligopolies within the US. Once systems have consolidated and command significantly greater market share than the largest ones do today, they will then be in a more powerful position to leverage their purchasing clout. With ACOs and providers in general under pressure to reduce costs, they will seek ways to redirect that pressure elsewhere. Pharmaceutical manufacturers will make a good target.

One thing is for certain—change is the only constant in the healthcare industry right now as all sectors face stiffer regulatory requirements and enforcement, changes in competition, technology and market expectations. At these times of transition, innovative companies able to challenge base assumptions about their business—their customers, the products and services they offer and how they go to market—will be the winners.

ABOUT THE AUTHOR

Rita Numerof , PhD, is co-founder and president of Numerof & Associates, Inc. (St. Louis, MO; nai-consulting.com), a strategic consulting firm that specializes in healthcare and life sciences, and other dynamically changing industries. She has degrees from Syracuse University and Bryn Mawr College, and is an adjunct faculty member of the Olin School of Business at Washington University in St. Louis. In April, her policy paper, Why Accountable Care Organizations Won’t Deliver Better Health Care—and Market Innovation Will,” was published by the Heritage Foundation (www.heritage.org).

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