How Healthcare Reform Helps Savvy Pharmaceutical Companies Gain Access to Hospital Formularies

Abstract

One of the provisions of the new Healthcare Reform officially known as the Patient Protection and Affordable Care Act (PPACA) is that Medicare will no longer reimburse a significant portion of the charges associated with readmissions that occur within 30 days of discharge for the same condition. The intent is to have hospitals find ways to cut back on readmissions. That opens up an opportunity for savvy pharmaceutical companies to step in and have their drug put on the hospital formulary in a bid to pare down the hospital’s liability. In an interesting twist, this is a windfall for drug companies not so much for the additional sales that will be garnered in the hospital (drugs are heavily discounted in the hospital), but rather due to what is known as hospital-retail spillover. Spillover takes place when the patient continues on with the therapy initiated in the hospital long after discharge.

Healthcare Reform Takes Aim at Hospital Readmissions

Extending healthcare coverage to 32 million people undoubtedly runs a high bill. The Healthcare Reform is estimated to cost an eye-popping $1 trillion over the next decade. Little wonder then that funding and cost containment are central issues. On the funding side, one significant measure is the requirement that everyone have insurance. That’s because premiums collected from sick enrollees alone are not enough to pay the bills, so healthy people need to contribute as well. On the cost containment front, the Reform includes a raft of measures, and one of them is the Hospital Readmissions Reduction Program.

This program takes aim at strengthening the causal relationship between reimbursement and quality of care, through a stick-only, no carrot strategy. The basics: 1 out of every 5 Medicare patients discharged from the hospital is readmitted within 30 days, costing Medicare upward of $17 billion annually. What’s amazing is that as much as 80% of those readmissions are, according to experts, preventable. The conclusion then is that hospitals are dishing out low quality of care and Medicare is being shortchanged. To that end, Medicare will reduce payments to hospitals that continue to show high readmission rates. Needless to say, special considerations will be extended to Disproportionate Share Hospitals (DSH), low-volume hospitals that are located in rural areas, and the like. Starting in Fiscal Year 2013 (October 1, 2012),  Medicare payments will be lowered for hospital readmissions related to Heart Failure, Heart Attack and Pneumonia and in 2015, that list will be expanded to include COPD (Chronic Obstructive Pulmonary Disease), PTCA (Percutaneous Transluminary Coronary Angioplasty) , CABG (Coronary Artery Bypass Graft) and Vascular Diseases. Those are the conditions the Department of Health and Human Services has identified as the critical ones to focus on.

How The Penalty is Computed

Here is how the penalty works. Say the ideal readmission rate is 20% for a given condition and the current readmission rate of the fictitious hospital is 30%. In that case, the excess readmission rate is 10% (30% - 20%), which amounts to an excess of 50% (10% ÷ 20%) over the ideal. It is important to note that 50% is used as the multiplier as opposed to 10%, resulting in a much steeper penalty. Say the cost of a readmission is $10,000 for that condition and the hospital sees 1,000 such patients.  In that case, the excess cost amounts to $5 million ($10,000 x 1,000 x 50%). That excess is the amount of money Medicare would not pay if the hospital’s readmission rate matched the ideal readmission rate.  The same calculation is run for all 3 conditions (heart attack, heart failure, and pneumonia) and the results are added up. Say the excess payments are $5m, $6m, and $7m respectively. In that case, the total excess payment is $18 million.  To soften the blow, the cut in payment is capped. In 2013, the maximum cut in payment stands at 1% of the overall Medicare payment. Say the hospital receives a total of $800 million from Medicare. In that case, the hospital will see its reimbursement cut by $8 million (1% of $800 m = $8 m), not $18 million. In 2014, the cap is raised to 2%, then 3% in 2015 and thereafter. Note that in 2015, the odds of hitting the cap are higher since four more conditions are thrown into the equation.

Long Island Jewish Medical Center in New York Is used in Figure 1 to illustrate how the penalty calculation is carried out on a real-life example. It also conveys a sense of the dollar amount of the liability. Figure 2 takes some perspective on the question and offers 2015 estimates of the potential penalty (potential means before the cap kicks in) per bed. It also takes a stab at the size of the liability for small, medium size, and large hospitals assuming the hospital is currently at the average national rate for readmissions.

Lending a Helping Hand

What is the hospital to do? Beef up follow-up and communication. That will be heeding the findings of a recent study conducted by AcademyHealth that chalks up high readmissions to “poor quality care” and “problems with transitions between providers and care settings” among other things. With aggressive follow-up and communication, potential issues are identified and resolved early on, decreasing the need for readmissions. Not so fast, rebuke a raft of studies. Although follow-up and communication are beneficial, they can go so far. A 2010 study of 30,136 Medicare patients treated for heart failure showed no significant difference in 30-day readmission rates between patients that are treated in hospitals that implemented an aggressive early follow-up policy and patients treated in hospitals where no such policies were available. While some follow-up was necessary, even with increased communication readmission rates hovered around 20%. This means hospitals still have to search for an answer.

This is where savvy pharmaceutical companies can lend a helping hand. By having the hospital enforce usage of clinically superior drugs (achieved by putting those drugs on the hospital formulary), pharmaceutical companies are in essence equipping the hospital with the firepower to win the war on readmissions. Of course, usage of superior drugs alone will not stop readmission in its tracks, but that would be to misunderstand the purpose of the help. Rather, the role of pharmaceutical companies is to show early on that readmissions can be pared down, which in turn will reinforce the resolve of hospitals to tame readmissions. Indeed, with its newfound determination, the hospital will be less reluctant to embrace fundamental change initiatives that may face resistance at first but will end up containing readmissions.

When should the pharmaceutical company move in, given that policing of readmission rates will not be enforced until October 2012? The answer is right now, and that’s because any initiative the hospital takes on needs time to bear its fruits.

Pharmaceutical companies should not shy away from stepping in just because their drugs do not eradicate readmissions altogether. As discussed earlier, the drug needs only make a dent in readmissions. From the hospital standpoint, doing nothing, which includes turning down the pharmaceutical company’s offer, is tantamount to refusal to rein in costs. Since no hospital can afford such a luxury, odds are in favor of the articulate pharmaceutical company that moves in early.

Spillover is the Reward

What’s in it for the pharmaceutical company? It must be the satisfaction of well-being for extending a helping hand to a friend in need. Indeed, it cannot be the profits that come from larger sales in the  hospital. After all, there is little or no money to be made in the hospital. Drugs are by and large heavily discounted and patients stay in the hospital only a few days, pressured by their  health insurance to keep the inpatient stay as brief as possible because of the staggering costs.

Interestingly, there is a very real benefit besides altruism for the pharmaceutical company and it is spillover. It turns out that therapies initiated in the hospital tend to be pursued for a long time in retail since the treating Primary Care Physician (PCP) will keep on writing prescriptions for the same drug initiated in the hospital so long as the patient is doing fine and the co-pay in the pharmacy is not out of line.  Indeed, a drug consumed for a few days in the hospital may kick off a long string of refills in retail. Based on our experience, one additional dollar in the hospital can generate anywhere between 2 to 10 dollars in retail depending on the therapeutic area. What’s more, those numbers look even better when the respective profit margins are factored in.

Time is of the Essence

Whether a stick-only, no carrot strategy is the best way to tackle the high readmission rate problem or not, is at the end of the day, moot. No matter what, the Readmission Reduction Program is closing in soon, in 2012 actually, and hospitals that have not figured out a way to fight off high readmission rates by then will simply get whacked.

What makes the search for a fix challenging for the hospital is the absence of reliable answers. Aggressive follow-up and communication, which common sense points to, isn’t proven to reduce readmissions. That is where a savvy pharmaceutical company can make a difference. By jumping in now and having the drug placed on the formulary of major hospitals and Integrated Delivery Networks (IDN’s) today, the savvy manufacturer stands to rise as a readmissions slashing hero. The reward for such a move is indeed no less than the humongous spillover sales and profits. Once again, the name of the game is speed and, yes, the race has already begun. Tick-tock. Tick-tock.

About The Authors

Jean-Patrick Tsang is the Founder and President of Bayser, a Chicago-based consulting firm dedicated to pharmaceuticals sales and marketing. JP is an expert in patient-level data and related analyses ranging from longitudinal analyses to hospital-retail spillover, KOL identification, influence mapping, referral networks, molecular targeting, promotion response, and the like. JP is also an expert in managed care and has worked on numerous managed care projects. JP publishes and talks on a regular basis and runs one-day tutorials several times a year. In a previous life, JP deployed Artificial Intelligence to automate the design of payloads for satellites, methaners, ethaners, and cruise-liners.  JP earned a Ph.D. in Artificial Intelligence from Grenoble University and an MBA from INSEAD in France. He can be reached at (847) 920-1000 or bayser@bayser.com.

Andrew Lang is a Market Research Consultant with Bayser Consulting. Andrew works to decipher the provisions of healthcare reform and, more importantly, to gauge the ramifications for all stakeholders, with an emphasis on pharmaceutical companies. Andrew‘s goal is to provide crisp explanations of these provisions, map out the shifting and evolving dynamics, and lay out the new roadmap for healthcare. Prior to joining Bayser, Andrew earned a Bachelor of Science degree in Biomedical Engineering from the McCormick School of Engineering and Applied Science at Northwestern University. He can be reached at (847) 679-8276 or andrew@bayser.com.