11 Oct 2011  Working Papers

US Healthcare Reform and the Pharmaceutical Industry

Executive Summary — The 2010 Patient Protection and Affordable Care Act (ACA) will restructure the US health care market in the coming years. For the pharmaceutical industry, the ACA is likely to prove a mixed blessing. In this paper, Assistant Professor Arthur Daemmrich analyzes the political economy of health care, specifically concerning health care reform. He then considers how the ACA will affect the pharmaceutical sector, both quantitatively in terms of the size of the prescription drug market and qualitatively in terms of industry structure and competitive dynamics. Daemmrich also places the current reforms into historical context and describes the political negotiations that enabled passage of the ACA. Key concepts include:

  • Since the United States is the world's largest prescription drug market and has among the fewest price control mechanisms, the ACA holds significance to pharmaceutical firms internationally.
  • Over the course of its implementation in coming years, the ACA will significantly expand prescription drug use, including at the relative expense of other health services.
  • In 2015, Daemmrich projects pharmaceutical spending between $435 and $440 billion (12.5 percent of total health care spending) and in 2020 it will near $700 billion (14 percent of total health care spending).
  • Congress and the Department of Health and Human Services will be hard pressed to explain increased drug spending to consumers, especially compared to Europe and Japan where reference pricing (capping prices at an average within a therapeutic category or among peer countries) has become the norm.
  • The ACA nevertheless holds the potential for the United States to be the first country to break out of the silo framework that dominates health budgeting in countries using reference price systems and to instead set budgets at the disease (or patient) level, linked to health outcomes.


Author Abstract

Fiercely contested before, during, and since its passage, the 2010 Patient Protection and Affordable Care Act (ACA) will restructure the US health care market if fully implemented in coming years. This article describes the institutional and political context in which the ACA was passed, and develops estimates of its likely impact on the biopharmaceutical industry. Universal insurance, either through a government-run system or by mandated purchase of private insurance, has been controversial in the United States since it was first proposed in the mid-1930s. Even in the absence of national health coverage, the United States became the world's largest prescription drug market and emerged as the global leader in new drug research and testing. With health benefits globally from the availability of new drugs, albeit for poorer populations only after patent terms expire, changes to the US health care system are also of significance to patients and the pharmaceutical industry internationally. This article evaluates how the ACA will affect the size of the biopharmaceutical market and competitive dynamics within the industry. Estimates are developed for healthcare spending in 2015 and 2020, especially for expenditures on prescription drugs in nominal terms and as a percentage of overall health spending. The article concludes with a discussion of the political economy of insurance and the sustainability of largely free-pricing of pharmaceuticals in the United States.

Paper Information