The Painful Effects of Healthcare Reform

3 min read
First Published: 
May 2010

Key Learnings contained in this article:

I last wrote a couple of weeks ago about Obama’s vision of comparative effectiveness and the healthcare reform bill.  Since that report, the end of April saw a raft of first quarter financial results issued by pharmaceutical manufacturers.  Whilst some reported fairly buoyant figures, these were offset by one common theme; the emerging financial impact of this landmark change in US legislation.

Over time, the healthcare reform bill is expected to have a positive impact on the pharmaceutical companies, as the coverage of health insurance increases across the US population, thus increasing demand for their products.  However, this is not expected to come on-stream until at least 2014.

Although the healthcare reform bill was only passed at the end of March many pharmaceutical companies have revised their 2010 financial outlook downwards – and the blame has been firmly placed on the doorstep of the new legislation.

Lilly, as an example, ranked 11 amongst the pharmaceuticals in terms of turnover in 2009, reported “as a result of the new legislation, Lilly will incur substantial costs” in their 2010 1st quarter earnings reports.  Lilly expect these “substantial costs” to be in excess of $435 million during 2010 – which represents approximately 2% of 2009 turnover.  The company expects this negative impact to worsen to between $600m – $700m in 2011 – highlighting the further pain to come.

Another large US based pharma, Merck, anticipates that healthcare reform will adversely impact 2010 revenues by $170 million, rising to $300 – 350 million in 2011.

The world’s largest pharmaceutical company, Johnson & Johnson, estimates that the impact from the legislation will reduce sales by $400 – $500 million for the year, which represents less than 1% of 2009 turnover. Due to Johnson & Johnson’s diversified nature of the business, the impact is not as significant as in some of its competitors.

Whilst these three businesses reflect what is happening in the larger manufacturers, it demonstrates what is happening across the pharmaceutical industry.  The large companies appear to be able to accommodate the loss in revenue, but how the smaller companies will cope with the reduction in revenue remains to be seen.

At the heart of the healthcare reform bill lies Obama’s vision of the role comparative effectiveness will play in sculpting the landscape of the future healthcare markets.

The financial losses discussed in this article clearly demonstrate the critical importance of comparative effectiveness across the board.  This concept is not something that can be dismissed and swept under the carpet!  All players in the healthcare industry – whether they be the drug suppliers, the healthcare providers or the insurers – must have a firm grasp on the basic concepts and language of comparative effectiveness as it WILL influence every pricing, marketing and purchasing decision the company makes.  And it is not enough that only a selected few individuals within businesses hold this knowledge, cross-company training is vital.

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Kinza Sutton
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