Analysts worry about U.S. reforms' real costs

One common thread has been running through pharma's latest round of earnings reports: costs associated with healthcare reform. Every pharma analyst worthy of the label has trotted out various theories about how much the legislation will hit pharma results over the next couple of years--and long term, too.

Where some analysts are emphasizing the long-term benefits of reform--namely, the 31 million or so potential new customers--and how they'll tend to outweigh these upfront costs, others aren't so sure. Take Scott Gottlieb, a former chief of the Centers for Medicare and Medicaid Services. He's zeroing in on some of reform's potential pitfalls.

In a commentary for Forbes, Gottlieb outlines one way the higher Medicaid rebates instituted by healthcare reform could take a bigger bite out of drugmakers: the "inflation adjustment" that comes along in some cases. When a drug's price is on the rise, Medicaid will lop an additional penalty off of a drug's net Medicaid sales, on top of the regular Medicaid rebates.

Another potential problem: Private payers will get to pick up on Medicaid's pricing. Plans that participate in state insurance exchanges could be allowed to price their drugs off the Medicaid price schedules, Gottlieb says.

But as Investor's Business Daily points out--based on interviews with several analysts--the cost of healthcare reform over the next five years will be dwarfed by the patent expirations hitting the industry over the same time period. An annual revenue loss of $8 billion to $10 billion to subsidize the health plan over 10 years is a lot of money, but hardly a disaster, says Damien Conover, senior medical stock analyst at rating firm Morningstar (as quoted by IBD). "It's really rather small compared to the offsetting positives that will help the industry," he said. What do you think?

- see the IBD story
- check out Gottlieb's Forbes commentary

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