Will healthcare reform gains outweigh pain?
As part of the deal, the drug industry agreed to find $90 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 of 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 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.”
Those gains are largely intangible, while the costs are measurable in dollars and cents due up front. 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. The line was that what industry lost in lower prices it would gain back in higher volume, but many of those newly-insured Americans will be young people who aren't sick and don't need drugs, and most of those who are sick will opt for generics.
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. Together with Medicare Part D, the deal strengthens the safety net in such a way that will dial down public anxiety about healthcare coverage. It also bought a measure of peace with the Democrats, with whom the industry had a fraught relationship after backing Republicans to the hilt through the Bush years.