Eight for 2008	January 2008

PricewaterhouseCoopers’ Health Research Institute foresees eight issues that will dominate health industry discussions in 2008, but the big uncertainty comes from the U.S. presidential election, as the candidates unveil very different approaches to reform the U.S. healthcare system.

The health industries face a pivotal year ahead as they anticipate the outcome of the 2008 presidential election and adjust to a new Medicare payment system, additional reporting requirements, pressure on big pharma to cut costs and innovate, the rise of retail health services, and the ongoing evolution of consumer-directed healthcare. The implications of these issues are addressed in the “Top Eight Health Industry Issues in 2008,” released by PricewaterhouseCoopers’ Health Research Institute.

According to PricewaterhouseCoopers analysts, retirees will play a greater role in funding their healthcare coverage this year. Three-quarters of executives at multi-national companies surveyed by PricewaterhouseCoopers in 2007 said that, while employers should help provide access to affordable retiree health benefits, they no longer should be expected to pay for it. PricewaterhouseCoopers’ report suggests that in 2008 employers may reexamine their approach to retiree healthcare by capping and/or eliminating traditional retiree benefits from their balance sheets and shifting toward defined-contribution or no-contribution approaches.

The second major issue is the new Medicare payment system. The Centers for Medicare & Medicaid Services has changed the way it pays hospitals, adding 200 diagnosis codes that more precisely recognize the severity of illness among patients. As a result, hospitals that treat sicker patients will be reimbursed more for doing so, potentially leveling the playing field between general and specialty hospitals and between rural and urban hospitals. That, combined with CMS’s new stance to not pay for certain conditions resulting from medical errors, infections, and other maladies acquired in a hospital, mean some hospitals may see a decline in revenue. In 2008, watch for commercial payers to follow in CMS’s footsteps and an increased demand for medical coding staff.

In 2008, retail health clinics will challenge primary care models. driven by consumer demand for convenient and lower-cost medical care, the number of retail clinics in discount chain stores, grocery stores, and drugstores throughout the United States is expected to quadruple, from 700 today to more than 3,000 in five years. In the year ahead, U.S. states, payers, and policymakers will be crafting legislation and policies applicable to this new breed of healthcare provider, which lacks uniform regulation and quality controls. The growth of retail healthcare could create opportunities for providers, or it could threaten the primary care delivery model. Pharmaceutical companies may choose to step up marketing directly to nurse practitioners who staff the clinics.

Individual health insurance could take off in 2008, according to PricewaterhouseCoopers analysts. Typically more expensive than group health insurance, individual health insurance could see market growth as more states mandate health insurance such as Massachusetts has done, and if an individual mandate or additional tax incentives come to fruition from proposals by Republican and Democratic presidential candidates. Hospitals and other providers may suffer if these plans offer limited benefits, but in the long run would benefit from fewer uninsured Americans. Look for insurers to tailor products and distribution strategies to individuals in the year ahead.

PricewaterhouseCoopers analysts anticipate increased merger and acquisition activity between pharmaceutical and life sciences companies. Revenue growth is down for the major pharmaceutical companies. The pipeline of new drugs coming to market is thinning, big money-making brand drugs are coming off patent, and the cost of bringing new, innovative drugs to market is increasing. To address these woes, major companies are joining forces with life sciences companies. In the first quarter of 2007, life sciences companies recorded the most deal activity and the highest dollar amounts for mergers and acquisition deals than any quarter in their history. With these collaborations, life sciences companies are now driving the industry whereas big pharmaceutical companies once had a significant advantage. To fill the pipeline and accelerate innovation, look for greater collaboration between pharmaceutical and life sciences companies through mergers, collaborative risk-sharing, joint ventures and other co-development and co-promotion arrangements. An unknown is whether regulators will clear a path for generic versions of newer biologic drugs, which could cause disruption to pharmaceutical companies’ future revenue streams.

Asia is poised to become one of the world’s largest pharmaceutical consumers and producers. The rising cost of drug discovery has led pharmaceutical companies to look outside the United States for a less expensive work force and to outsource both clinical development and manufacturing operations overseas. Yet there are significant concerns regarding Asia’s uneven protection of intellectual property rights and Asian drug safety. If a large portion of fundamental intellectual property creation moves to Asia, the West’s dominance and ownership in medical scientific breakthroughs may rapidly decline.

In the United States, FDA is tightening drug and medical device safety standards. Congress granted FDA increased authority to require, not just request, increased safety standards from drug companies, and it gave the FDA increased authority over post-market drug safety. Under new FDA guidance, the pharmaceutical industry will face even more regulatory burdens, which could be costly. Physicians and hospitals will need to adhere to new restrictions in prescribing and dispensing certain prescriptions. Look for payers to track and report to the FDA insurance claims data that identify patterns of adverse reactions to certain medications, such as off-label drugs prescribed for use in ways not approved by the FDA, PricewaterhouseCoopers analysts say.

The Internal Revenue Service wants hospitals to submit a full accounting of the benefits they provide to the community, reported in a uniform manner, as part of their annual tax return to the IRS, submitted on the proposed 2008 Form 990 and available for public inspection. Many hospitals document their community benefit, but have done so inconsistently. In 2008, tax-exempt hospitals will need to start tracking community benefit efforts so that, when and if required, they can accurately report their activities for the year.

Goals similar, but solutions vary among candidates

The U.S. presidential election is an additional major source of uncertainty. The leading Republican and Democratic presidential candidates are proposing two very different approaches to reform the U.S. healthcare system. According to an analysis released by PricewaterhouseCoopers, Democrats promise broader and more immediate changes to decrease costs, improve quality, and mandate coverage for the uninsured. The Republicans have similar goals but less detailed proposals that mostly rely on tax credits or incentives for individuals to purchase insurance without federal mandates.

Both parties’ plans will expand the federal government’s role in healthcare, drive growth in the private insurance market, and affect consumer pocketbooks and business bottom lines in significantly different ways.

“Healthcare will change in the next administration, and the implications will be enormous,” says Sandy Lutz, managing director, PricewaterhouseCoopers’ Health Research Institute (pwc.com). “But this is an incredibly complex issue. No plan is perfect and there will be trade-offs. The Republicans have chosen a different set of trade offs than the Democrats have. With this report, we sought to better understand the plans so that all stakeholders can plan accordingly and to urge the candidates to give more than sound bites.”

Changes in direction and policy could dramatically alter the government’s role and clout. The government’s share of health spending has been steadily increasing, and the government now pays for just less than 50% of all healthcare in the United States. Current estimates indicate that more than half of all health spending will be government funded by 2017, but according to PricewaterhouseCoopers, the spending increase may be even earlier, due to expansions of government programs. For example, spending an estimated $100 billion to expand universal access would make 2011 the year when the United States will have a primarily government funded healthcare system.

Although all the candidates have formal health proposals, they differ in how much they emphasize the issue on the campaign trail. A quantitative survey of candidates’ public remarks found that Senators Clinton, Edwards, and Obama and Governor Romney are speaking about healthcare issues about twice as frequently as the other candidates.

According to PricewaterhouseCoopers, both parties’ approaches may have far reaching consequences for the insurance market with a huge boost to the individual market and some of the first cracks at the historically employer-dominated insurance system. Republicans want to grow the individual market through tax incentives and deemphasize the employer sponsored insurance market, while Democrats want to mandate individual and employer insurance. Either approach is likely to expand the existing private insurance market, which has seen minimal growth recently despite the introduction of tax-advantaged health savings accounts.

All of the candidates are talking about decreasing cost and improving quality, PricewaterhouseCoopers analysts say. Many health industry leaders believe that programs and tools such as comparative effectiveness, information technology, and wellness programs are the best hope for improving the efficiency of our current system. None of the candidates, however, wants to mandate the use of information technology, and only Senators Obama and Clinton have proposed additional government funding to accelerate adoption by hospitals.

Democratic candidates’ proposals to control the cost of drugs, such as direct negotiation for Medicare drugs, reimportation, and bio-generics, have the potential to significantly affect the pharmaceutical industry, which currently accounts for about 10% of overall healthcare spending. Taking a cue from the 1994 health reform debate, no candidate is talking seriously about reimbursement changes to hospitals and doctors.

All of the candidates have proposed tax law changes to pay for care of the uninsured, equalize the tax benefits of buying health insurance coverage or encourage consumers to purchase healthcare more appropriate to their needs. The crux of their differences is the candidates’ positions on the Bush tax cuts set to expire in 2010: The Republicans want to extend the tax cuts while the Democrats want to preserve some of them, and spend the rest on healthcare.

“The Democrats are talking and writing about healthcare far more than the Republican candidates,” Ms. Lutz says. “But more talk does not necessarily mean more substance. There are still many unanswered questions about the downstream impact of each plan. Both parties have similar cost, quality, and access goals, but different paths for achieving them.  We think all stakeholders of healthcare, and certainly all our clients, need to know how those differences will affect them.”