Did the drug industry get a raw deal on healthcare reform?

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Did the drug industry get a raw deal on healthcare reform?
Did the drug industry get a raw deal on healthcare reform?
The President signed the Patient Protection and Affordable Care Act, AKA “Obamacare” or “Healthcare reform,” into law on March 23, 2010. Though the law squeaked through with the (somewhat lukewarm) support of PhRMA, it was controversial within the industry. Some of its chief supporters – notably Pfizer CEO Jeff Kindler and PhRMA chief Billy Tauzin – have left (or been pushed). And while the bill's gains, for industry and the uninsured alike, have yet to be realized, since the bulk of the law is set to go into effect in 2014, the pain to pharmas has been tremendous.

As part of the deal, the drug industry agreed to find $90 billion (really, more like $100 billion) in cost-savings to the government over 10 years, mostly through rebates to seniors that would close the Medicare Part D “doughnut hole.” Those expenses were front-loaded in the legislation, and they've already taken a big bite out of many companies' profits. Merck, for example, recorded a charge of $170 million for PPACA-related costs in 2010. Pfizer estimated the impact of the legislation at around $300 million for 2010, including an increase in the base Medicaid rebate rate, extension fo Medicaid rebates to certain managed care organizations and expansion of Public Health Service program eligibility to include additional institutions. Those costs will grow to an estimated $900 million this year and $800 million in 2012, owing to “donut hole” discounts and an annual fee on branded drug sales to government programs, which went into effect in January.

“Wall Street sees only the downside and Capitol Hill only the upside,” said John Kamp, executive director of the Coalition for Healthcare Communication. “As passed, pharma feels the pain in the early years but benefits in the out years. Thus, PhRMA and its members are focused on holding the gains.”

The agreement between the industry and the White House, much reviled by Republicans (Speaker of the House John Boehner tore into his old colleague Billy Tauzin for appeasing administration “bullies”) was a grand bargain. Two grand bargains, really. 

On the one hand, PhRMA members agreed to effectively lower prices for many patients in exchange for the promise of higher sales volume in coming years, as 30 million or so uninsured Americans come in from the cold. On the other hand, the industry agreed to lend the legislation political support and in exchange, the Democrats agreed to drop efforts to impose cost controls, pull the industry's tax exemption for advertising or ban DTC outright, and open the floodgates to imported drugs. 

Of course, many of the newly-insured will be young people who aren't sick and don't need drugs. Most of those who are sick will opt for generics.  

“I'm not sure I've talked to any clients that felt it was a net win,” said Tom Harrison, chairman and CEO of Omnicom Group's Diversified Agency Services. “Yes, there will be more covered patients, but much of that will be generic, and for those companies that rely on branded products to grow, I'm not sure those 30 million [newly-insured] will make a difference.”

A hundred billion is nothing to sniff at, but the dearth of new drug approvals is a far larger cost, says Publicis Healthcare Communications president and CEO Nick Colucci. 

“There may be some ripple effects from the legislation, but the biggest thing affecting the industry is that there's no new products,” says Colucci, who sees a cautious Obama FDA overreacting to a perception that “nobody was watching the henhouse” in the Bush years.

Already, there's talk on Capitol Hill of re-legislating some of the battles over which PhRMA sought to buy peace with the deal – importation, price controls, the advertising tax exemption for DTC -- though gridlock probably ensures that nothing more than a little theater will come of it. 

"One year later and it's not really a birthday party so much as a prolonged segement of 'deal or no deal,'" said Peter Pitts, of the Center for Medicine in the Public Interest. "Some Democrats in the Senate are bucking the President's agreement with Big Pharma and now want to interfere with the Non-Interference Clause [which guards against the establishment of Medicare formularies]. Others in the House want to reintroduce drug importation and HHS says that it wants government to play 'a larger role in the care of patients.' One year later we're seeing promises ready to be broken and metastatic mission creep."

Meanwhile, PhRMA is still sweating a provision establishing an Independent Payment Advisory Board for Medicare, fearing that the board, appointed by the president, could effectively impose price controls on the program. The board's recommendations go into effect automatically unless Congress approves a bill making alternate cuts. 

And House Republicans are eager to defund or otherwise neuter the comparative effectiveness measures in the law, including the Patient Centered Outcomes Research Institute as well as the comparative effectiveness funds allocated to the Agency for Healthcare Research and Quality's mission.

The law calls for payments of $28 billion in new fees to industry, and PriceWaterhouseCoopers has estimated that pharmas will pay out around $35 billion in Medicaid rebates and another $35 billion in Medicare Part D discounts. The accounting giant calculates industry gains from the legislation at around $11 billion. 

It's worth remembering, though, the intensity of the industry's anxiety about access and affordability, pre-PPACA – the sense that, as the source of the most visible healthcare costs, drug companies were left holding the bag for a failed healthcare system, and were therefore in great political peril.
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