Governments are straining under fiscal restrictions while demands on the healthcare system grow. The number of elderly Americans will continue to increase for the next 30 years, and the government is stretching its resources to respond to those who cannot afford private health insurance. As a result, both public and private payment systems are changing to meet these challenges.

The market is shifting to a senior drug market paid by the public sector, and you are selling in a system that is being renovated to respond. Your managed care sales skills will become even more important as you find yourself selling in markets where doctors and institutions are locked into contracts negotiated by large public payers that control ever-larger market shares. Sometimes those contracts will favor your products; sometimes they will not.

The approaches you take with your physicians can make you a valuable partner in providing your products to patients. Ultimately, understanding the issues facing the pharmaceutical industry will help you become a part of the long-term solution.

The leading edge of the Baby Boomers, the 76 million people born between 1946 and 1964, will reach age 65 in 2010. Medicare-eligible Boomers will continue to march into the public healthcare system until it has absorbed the last one in 2030. This means in the next 30 years, the elderly population will nearly double from 40 million today to 77 million.

As the Baby Boomers make the transition from taxpayers to Social Security beneficiaries, the cost of the Medicare program will increase significantly. Much of the current concern around cost control is not only to address present spending, but anticipates the expenditures the government will make to meet its obligations to this huge group of beneficiaries. In this context, it is helpful to understand the public health system, the role it plays in the care of the elderly and indigent, and why cost pressures on physicians will only increase in the coming years.

Differences between Medicare and Medicaid

Medicare provides health insurance to seniors, and Medicaid provides medical assistance to low-income people. Medicaid meets the medical needs of those living at or near poverty, including young, elderly and disabled people who cannot afford to meet basic co-payments and other medical care not provided by standard Medicare. Low-income Medicare beneficiaries who also qualify for Medicaid are known as "dual eligibles" and are the costliest beneficiaries in the system. As we talk about how changes in these systems impact your business, we will look at some background on Medicare and Medicaid so you can see how and why current trends are affecting your physicians.

Medicare is public health insurance

In the early years of Medicare, the program was a uniform fee-for-service insurance plan for those over age 65. Today, Medicare offers many coverage options to its beneficiaries. Some Medicare HMO plans offer a prescription drug benefit, but most Medicare payments for pharmaceuticals are limited to physician-administered drugs, orally administered cancer drugs, and medications included in the cost of a covered inpatient hospital or skilled nursing facility stay, known in the language of Medicare as medications "incident to physician services."

The current plan structure includes:

• Original Medicare plan: A fee-for-service insurance plan available nationwide and open to everyone with Medicare coverage.

• Medigap: Supplemental insurance coverage that picks up healthcare costs not covered by the original Medicare plan, usually provided by a former employer or purchased privately. Medicaid serves this purpose for the indigent. Prescription drugs are frequently part of this benefit package.

• Medicare+Choice: Private insurance companies contract with Medicare to offer HMO or fee-for-service plans that meet basic Medicare requirements plus providing additional benefits such as coordination of care and prescription drug benefits.

Doctors and Medicare

When selling a product to physicians who administer products in the office, be aware that they are concerned about the price as part of their reimbursement for its administration from Medicare. Because the cost of newer and more effective drugs has risen five times faster than the cost of physician services, the net effect has been a reduction in the amount of money left for physician payment. Some physicians are refusing new Medicare patients or leaving Medicare completely as a result of insufficient reimbursements. You can encourage physicians to continue to offer lifesaving products to these vulnerable patients by emphasizing the features and benefits of your products and stressing value-added programs provided by your company. Meanwhile, physician group lobbyists are working with the federal government to restructure payments to offset losses under the current arrangement.

Medicaid is public assistance

The primary role of Medicaid is to cover low-income people who cannot afford healthcare. In 1998, about 40 million people, or more than one in seven Americans, were covered by Medicaid. The Department of Health and Human Services reports it has expanded access to 1.8 million additional Americans and improved benefits for five million more since the beginning of the George W. Bush administration.

Medicaid is a joint federal-state medical assistance program under which the federal government provides broad guidance on program requirements and at least 50% funding to the states to operate the program. A federal agency within HHS, the Centers for Medicare and Medicaid Services, establishes regulations. Each state sets its own eligibility criteria and benefit package beyond the federal mandatory requirements, and funds its portion according to its ability to pay based on the per-capita income of its residents. Medicaid is the second highest expenditure for most states, exceeded only by education. Faced by these cost pressures, states in turn are placing more pressure on the pharmaceutical industry to lower prices.

Medicaid sales challenges

Federal law requires pharmaceutical companies to report their lowest prices to Medicaid and pay a rebate to the program if they sell drugs to any other customer at a lower discount than they reported. The government closely tracks contracts, and pharmaceutical companies have paid hundreds of millions of dollars in fines when state contracts have exceeded the price ceiling under this law. States are introducing further restrictions on drug sales, but it is beyond the scope of this article to detail those arrangements, since each state will be slightly different. However, be aware that you may encounter price restrictions, group purchasing arrangements, hard quantity limits and preferred drug lists (similar to formularies) at the state level. When you do, you will want to emphasize prior authorization techniques to your customers, who will need to invoke medical necessity to prescribe your products if they are not on the state-approved list of medications or face some other contractual restriction.

LTC under Medicare and Medicaid

Tension exists between the federal government's expansion of Medicaid and the additional financial burden this imposes on the states. This tension underlines reform efforts. The National Governor's Association passed a reform agenda that recommends a fundamental restructuring of Medicaid, including attempts to shift more financial responsibility for some eligible groups to the federal government. Primarily, the NGA wants to ensure that any changes to the Medicare program will be considered in the context of the impact they will have on Medicaid, since Medicaid is the largest single payer of long-term skilled nursing facility care for indigent Medicare recipients. The states would like the federal government to assume full responsibility for acute, primary, long-term and pharmaceutical care for many beneficiaries, especially dual-eligibles.

A shift from state responsibility toward federal responsibility for long-term care and the pharmaceutical benefit would affect your sales efforts, because price sensitivity would become even more acute, and you would be selling under contracts that would cover greater numbers of beneficiaries. Become familiar with the contracts that affect your large, institutional customers, and familiarize individual physicians and institutional administrators with the features and benefits of your products so they can become advocates for them within the system by recommending them to their formulary committees.

DRG reimbursement and hospitals

Medicare reimbursement is not keeping pace with rising costs. Historically, the Diagnostic Resource Group bundled payment to hospitals under Medicare has been sufficient to meet costs and allow hospitals to make a small profit. However, 2001 marked the first year that the highest volume of DRG cases averaged a net loss per case. Some of the reasons included increased pharmaceutical and medical/surgical supply costs and increased competition to attract nurses. A 6% Medicare reimbursement increase this year is expected to be offset by a rise of 5% to 6% in hospital costs, resulting in no real increase. These conditions present a sales opportunity to help your institutional customers live within their fixed reimbursement rates, because any time you concentrate your sales efforts on how your products may reduce the need for other goods and services, you enable your customers to cut overall costs under bundled payment rates.

Medicare prescription drug coverage

In the late 1970s, when Medicare was entirely fee-for-service, most outpatient drugs were paid for out of pocket by the patient. Drugs cost less than they do today, and fewer medications were available. Since then, prescription drug spending has risen from 5% to 10% of total health expenditures. These drug costs do not hit everyone equally. Depending on age or insurance status, some patients are more sensitive to drug costs than others. Here are some statistics (Source: CMS Healthcare Industry Market Update: Pharmaceuticals. January 10, 2003. Available at: www.cms.hhs.gov/ reports/hcimu/hcimu_01102003.pdf.):

• The average person spent about 0.9% of their income, or $449, for out-of-pocket drug costs in 2001.

• Senior citizens pay more. With age, average out-of-pocket spending rises in dollars and as a percentage of income. In 2001, the average senior citizen spent $884 out of pocket for drugs, or 3.2% of their income, compared with $444 or 2.2% of their income in 1991.

• Those without insurance pay nearly 15% more than those with prescription drug insurance. Furthermore, cash customers pay about 20% more for the top 25% of the most commonly prescribed drugs.

A pharma response

President Bush and Congress have vowed to find a political solution to the high cost of drugs for seniors, but their solutions straddle both sides of the ideological fence. Political and economic realities indicate the answers are not likely to come before the next presidential election.

Major pharmaceutical companies are responding with interim relief. Many have introduced their own prescription drug discount card programs for Medicare beneficiaries that offer either drug discounts on a flat cost-per-prescription basis or a percent discount off the average wholesale price. The Federal District Court for Washington, D.C. has rejected a government request to establish a Medicare-Endorsed Prescription Drug Card Assistance Initiative, and the government is currently reviewing its options for supporting some kind of temporary prescription drug relief for seniors, including an appeal of the court's decision. When you talk to your physician and pharmacist customers, remind them to offer any private drug card program sponsored by your company to their patients while Congress searches for a permanent solution.

As you can see, selling in the world of Medicare and Medicaid presents the challenge of recognizing, understanding and being able to work within the processes in place for tighter cost control. Some of these processes are familiar to you through your managed care sales knowledge, but others are unique to Medicare and Medicaid. In the context of promotion, become familiar with your company's continuing education efforts, because they may provide another tool for you when speaking with customers. Some continuing medical education programs explain Medicare, Medicaid and their reimbursement mechanisms to physicians, nurses and pharmacists who must also navigate this ever-changing public system.

The government is a big customer. It oversees the expenditure of approximately $500 billion per year for Medicare and Medicaid, much of it spent on pharmaceuticals. Medicare and Medicaid formulary decisions impact the private sector due to the enormous size of the senior drug market. Eventually, a Medicare drug benefit acceptable to pharmaceutical manufacturers may be realized, although it could result in long-term pressure on profit margins within the pharmaceutical industry. Keep your eye on developments out of Washington, because new programs may soon be introduced that may offer more options and control to beneficiaries, and may replace some of the existing ones. In the meantime, the more you know about working within Medicare and Medicaid today, the better placed you will be for success tomorrow as these changes take place. PR