Addressing the U.S. Long-Term Budget and Health Care Challenges Through the Power of Innovation

Andrew Klips |

Addressing the U.S. Long-Term Budget and Health Care Challenges Through the Power of InnovationIt’s no secret that as a nation, we are facing some serious economic challenges, both now and in the years ahead.  If we are to successfully address these challenges, we need to confront some harsh realities.  Or perhaps more importantly, we need to demand that our political leadership confront these realities – openly, honestly, and quickly.

The first reality is that we already have a huge national debt, which is now approaching $16 trillion dollars.  That equates to more than $50,000 in debt for every man, woman and child in the country (and if you only count people that can work and pay taxes, it’s even worse – more than $100,000 per worker).  It’s also getting bigger every day – in the immediate term, the accumulated debt is projected to grow by more than $1.1 trillion dollars over the next year according to the Congressional Budget Office. Furthermore, once the economy begins to improve and interest rates rise, the cost of servicing the debt we already have is going to go up – right now interest rates are at historically low levels, but they won’t stay there forever. It’s not too difficult to imagine a scenario in which we keep spending money we don’t have, the debt gets larger and more expensive, and as a consequence the U.S. has a financial problem comparable to, or worse than, what is now being faced by various European countries.  Some would argue we’re nearly there already.  Just to put things in perspective, the value of ALL goods and services produced in the U.S. in 2011 (GDP) was only $15.3 trillion dollars – less than what we currently owe in debt.  In fact, our accumulated debt to GDP ratio is already more than 100% - which is nearly the same on a percentage basis as some European countries like Spain and Portugal.

The second reality is that two components of the federal budget make up the largest categories of non-defense related federal spending – Medicare and Social Security.  According to the Social Security Administration, Medicare and Social Security combine to account for approximately 36% of the federal budget in 2011 (roughly $1.3 trillion of a total federal budget of $3.63 trillion).  If we include Medicaid and other related programs, the combined total exceeds 40%. However, according to U.S. Census data, with the aging of the “baby boomer” generation, the number of individuals over the age of 65 (i.e. people covered under Medicare and that receive Social Security) will dramatically increase from 40 million individuals in 2010, to more than 72 million people in 2030 – an increase of 80%.  If nothing is done, both Medicare and Social Security are expected to go bankrupt in the next few years.

Medicare in particular is worrisome, because its impact will grow disproportionately as the population continues to get older. This is because as we age, we become more susceptible to various diseases and conditions that are very expensive to deal with.  In fact, according to data from the National Center for Health Statistics (i.e. the federal government), once we hit the age of 65, on average we spend several times the amount on healthcare each year that we do when we are young and healthy.  As we get older, we become more prone to heart disease, stroke, and a range of chronic and debilitating conditions that current medical treatments are not well equipped to fully address.  Unfortunately, these conditions tend to be chronic, or have a long term impact, and that makes them very expensive, in addition to eroding our quality of life.  So the impact of an aging population on Medicare expenses will actually be even greater than the impact of Social Security, since these costs will rise faster.

The political debate is getting into full swing with the Republicans and Democrats taking-off their gloves and launching predictable attacks at each other. Somewhat lost in the heated rhetoric and bickering about tax filings and who’s to blame for the fiscal cliff is the idea of real reform that the candidates bring to the table that have the potential to benefit the citizens of the United States in the long-term. Discussing the situation on CNBC’s Squawk Box recently, co-anchor Joe Kernan offered his ideas on spending and taxes by saying that, “The first thing that we have to do is cut and then we’ll figure out tax from there.” Easier said than done, as this would clearly require some coordinated bipartisan action.  In most instances, the concept of bipartisan decisions have gone by the wayside as politicians frequently  leverage votes for the benefits of parties or candidates rather than the good of the country; a sad truth that was echoed by New York Senator Charles Schumer in his commentary during last month’s testimony by Fed Chairman Ben Bernanke to the Senate Banking Committee.

So leaving aside Social Security for the moment, what can we do about Medicare? One approach would be to simply cut back on what we spend--an across the board reduction. However, in addition to being politically unpopular, this type of action would have other undesirable consequences.  Simply reducing expenses while the number of people on Medicare increases substantially amounts to healthcare rationing – meaning the actual amount of healthcare each individual will receive will become less and less over time.  That definitely won’t lead to better medical outcomes, or healthier, happier patients.

Those that are not caught-up in the politics can see the forest through the trees and recognize that there are a few options available to policy makers in Washington D.C. that can have lasting, positive impacts on the country, its debt and, importantly, its citizens. One of the keys to containing healthcare costs over time is emphasizing and harnessing the power of technology and medical innovation--developing new therapies that have the power to improve medical outcomes, enhance patient quality of life, and reduce overall costs.

To truly unleash the power of innovation, and maximize the beneficial impact on healthcare and our fiscal deficit, it will require coordinated action by both sides of Congress, and the executive branch. Recently, in a rare display of bipartisan consensus, Congress recently passed, and President Obama signed into legislation, the Food and Drug Administration Safety and Innovation Act (FDASIA). This legislation, which passed in the House and Senate by overwhelming majorities, included the fifth five-year authorization of the Prescription Drug User Fee Act (PDUFA 5).  As with prior iterations, PDUFA 5 gives the FDA authority to collect user fees from the industry to fund reviews of innovative drugs, medical devices, generic drugs and biologics.  The prior version, PDUFA 4 was scheduled to expire at the end of September 2012.

Largely experimental and garnering razor-thin support when first initiated more than two decades ago, “user fees” were primarily contested until cooperative efforts between the drug industry and the FDA, partially because of concerns to develop HIV treatments, led to President George H. Bush signing PDUFA 1 in 1992. Now in its fifth iteration, PDUFA is widely supported and has become crucial to fostering innovation and helping to expedite the drug approval process. Importantly, the act requires re-examination and renewal every five years, which typically entails looking for ways to improve the overall regulatory landscape.

The most recent version of PDUFA was no exception, and includes several key provisions that could better ensure patient safety, while also helping to foster innovation and the development of new medicines.  Among other things, the current iteration includes provisions designed to expand the categories of drugs for which the FDA will allow faster reviews and decisions, specifically in those areas that represent potential medical breakthroughs, or that are designed to address significant areas of unmet medical needs.

PDUFA 5 could benefit many areas of research and clinical development, but perhaps none more than the promising field of regenerative medicine. This promising area of innovation includes tissue engineering, stem cells, and other approaches that are designed to dramatically enhance the body’s ability to recover from aging, disease and injury. Regenerative medicine is increasingly hailed for its tremendous potential for transforming medical practices, and reducing the fiscal stresses associated with the long-term care required for many diseases.

Specifically, the PUDFA 5 framework broadens the so-called Accelerated Approval pathway, which “will help expedite the development of modern, targeted, and personalized therapies for patients suffering from serious and life-threatening diseases while preserving the FDA’s robust standards for safety and effectiveness,” according to Biotechnology Industry Organization (BIO) President and CEO Jim Greenwood.  BIO is one of the two largest biopharma industry organizations in the world, along with Pharmaceutical Research Manufacturers of America, and was instrumental in working with the FDA and Congress to fashion key components of FDASIA and PDUFA 5.

For many people, new cancer drugs certainly spring to mind as candidates for the enhanced Accelerated Approval route due to the magnitude of deaths associated with cancer.  While true that cancer is a leading killer, the FDA has always had a focus on shepherding new cancer drugs to commercialization.  PUDFA 5 made additions that offer explicit accommodations to expedite new treatments outside of oncology.

For example, stroke, the leading cause of serious, long-term disability in the United States (affecting more than 700,000 people each year) is recognized as an area of serious medical need.  Ischemic strokes account for 87 percent of all strokes annually, and patients are frequently left with permanent disability, or even require full time institutional care.  According to the Centers for Disease Control and Prevention, the direct and indirect costs of stroke patients in 2010 totaled $53.9 billion, and some estimates have put aggregate costs in excess of $73 billion per year. Unfortunately, the only currently available medicine must be given to stroke victims within several hours, which means few people receive it – only about 5% of all patients.  A similar lack of treatments exist for chronic heart disease, and a range of neurological conditions, which are far more abundant among the elderly, and therefore are driving up Medicare costs.

Leaders in the industry that focused on developing innovative new approaches to treating unmet medical needs understand the potential impact of a streamlined regulatory environment--it could speed development and encourage more investment.

“The passage of FDASIA and the reauthorization of PDUFA are extremely important events, both for the country and the biotechnology industry, which is committed to developing innovative new medicines that can help, or possibly even cure patients,” commented Dr. Gil Van Bokkelen, Chairman and CEO at Athersys (ATHX) and Chairman of the international Alliance for Regenerative Medicine (ARM), based in Washington D.C.  “A broadened accelerated approval pathway and the creation of a ‘breakthrough therapies’ category for promising new medicines are very exciting, because they could help speed the development of safer and more effective treatments for some very serious diseases.  In particular, I think these actions could spur investment, and help companies developing innovative new medicines, which will help patients as well.”

Van Bokkelen sees the landscape from several different vantage points in his various roles, including as a board member at BIO.  He is enthusiastic about what PDUFA 5 could mean to companies developing innovative new medicines, such as companies engaged in development of stem cell therapies or tissue engineering to treat heart disease, stroke, neurological diseases and a host of other serious conditions that affect the older segment of the population.  Athersys is in the midst of Phase II clinical trials using its MultiStem treatment for disease indications that eat up substantial healthcare resources, like ischemic stroke, which affects nearly 800,000 people a year in the U.S. The company has also completed successful initial clinical trials for heart disease and other areas.  The company is also partnered with Pfizer (PFE) to treat Inflammatory Bowel Disease, and has some other promising programs.

“Success in these areas could have a huge impact on improving medical care and by reducing overall health care costs, while simultaneously improving patient quality of life,” added Van Bokkelen. “This could create a win-win scenario for patients, their families, and taxpayers by reducing Medicare costs, as well as expanding access to care, because it means we can make limited resources go further.”

PUDFA 5 also bridges a large gap in the area of rare diseases by relaxing requirements for late-stage studies without sacrificing safety.  Historically, companies developing experimental therapies for rare diseases have faced a tall task to complete the clinical trials needed to get FDA approval. By sheer definition of being “rare,” finding enough patients for these types of studies can be a daunting task for a biotech of any size and ultimately slows down development, and discourages investors, making capital harder to come by. PUDFA 5 has made accommodations to loosen guidelines for the number of studies and patients required for these types of diseases to support development of new therapies, without compromising patient safety--which should help.

The United States remains the world leader in developing new drugs and bringing treatments to market.  PDUFA 5 provides the FDA with resources to continue to promote these initiatives to address unmet medical needs with greater transparency, efficiency and predictability. That, in turn, should help to stimulate the economy and create jobs.  For public companies, it can beget faster and less expensive development, and create a higher ROI for shareholders. “[Its] most important beneficiaries are the patients and families that will be helped by the next generation of affordable medical products this bill will help to foster,” said U.S. Health & Human Services Secretary Kathleen Sebelius in a statement upon the enactment of FDASIA.  That all goes without mentioning the sizeable chunk that could be taken out of the projected budget deficit as long-term health care costs diminish with the emergence of new therapies.

The passing of PDUFA 5 has nothing to do with Obamacare, and was not especially controversial--perhaps a reason why it received little media attention.  But it was a vital step toward ensuring safer and more effective medicines to treat a wide array of diseases, especially hard-to-treat or rare disorders. Perhaps if elected officials in Washington could come together in more areas such as they quietly did with PUDFA, we could see some needed fiscal reform and achieve our desire to improve healthcare.

By Andrew Klips

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
AFSI AmTrust Financial Services Inc. 26.35 -0.06 -0.23 410,756
ATHX Athersys Inc. 1.96 -0.09 -4.39 225,979
PFE Pfizer Inc. 32.18 -0.36 -1.11 18,812,599


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