Drug Manufacturers Promise $80 Billion In Rx Savings, But How Much Are They Saving Themselves?

Prescription drug manufacturers, represented by their trade and lobbying group, Pharmaceutical Research and Manufacturers of America (PhRMA) [1], have one of the most powerful and successful lobbies in Congress. Seeing them willing to give away $80 billion over the next ten years [2] shows just how strong the push for health care reform is now and how much more savings could be had from prescription drug costs. Otherwise, PhRMA would just keep up its pressure on Congress to forestall any legislation that affected its members’ bottom line, as it has in the past [3].

One of the drug lobby’s most significant victories came when the 2003 Medicare law, which added a long-awaited drug benefit to the program (Part D), was passed. As The Washington Post explained [4] at the time:

“After objecting for years to proposals to add prescription drug coverage to Medicare, the pharmaceutical lobby recently shifted positions and poured enormous resources into shaping the legislation. Since the 2000 election cycle, the industry has contributed $60 million in political donations and spent $37.7 million in lobbying in the first six months of this year.”

PhRMA’s machinations to shape the law were so notorious, 60 Minutes aired an in-depth expose [5] on them in April 2007:

“If you have ever wondered why the cost of prescription drugs in the United States are the highest in the world or why it's illegal to import cheaper drugs from Canada or Mexico, you need look no further than the pharmaceutical lobby and its influence in Washington, D.C.

“According to a report by the Center for Public Integrity, congressmen are outnumbered two to one by lobbyists for an industry that spends roughly $100 million a year in campaign contributions and lobbying expenses to protect its profits.

“One reason those profits have exceeded Wall Street expectations is the Medicare prescription drug bill. It was passed more than three-and-a-half years ago, but as 60 Minutes correspondent Steve Kroft reports, its effects are still reverberating through the halls of Congress, providing a window into how the lobby works.”

And the players were amply rewarded [6]:

“Rep. Billy Tauzin, the chair of the key House committee ushering the bill through, left soon after to get a $2 million-a-year job as a head of PhRMA, the drug company lobby. Tom Scully, the Bush administration's point person who helped keep the actual cost of the bill secret, was already negotiating his million-dollar job as the debate was going on. In all, 15 congressional representatives, aides and administration officials involved in the debate left shortly thereafter to take jobs with the drug lobby.”

So what did drug manufacturers gain? Language was inserted into the law that explicitly prohibited the government from directly negotiating with drug manufacturers for lower drug prices. That has meant billions of dollars in extra profits and an assurance that the government would not interfere in how they set their prices.

Their gain was our loss. As I explained in a previous post [7], evidence shows that the prices negotiated by the private Medicare Part D plans are substantially higher than prices that government-run programs like the Department of Veterans Affairs (VA), Medicare Part B, Medicaid and those in other countries are able to obtain for their patients. The private plans' inability to secure better prices has meant higher costs for people with Medicare and for taxpayers.

So why would one of the country’s most powerful lobbies offer up $80 billion? To forestall government action. As the Associated Press explained [8]:

“‘Our initial take is that this is a win for the industry because it appears to short-circuit the prospect of direct government price negotiation ...,’ said Leerink Swann, a health care equity research company.

“Many Democrats favor giving the government authority to negotiate directly for lower prices under Medicare with drug companies, a step they argue will hold down prices. The Congressional Budget Office has disputed that claim.

“Industry also has been fighting a yearlong effort to prevent passage of legislation permitting the importation of prescription drugs from Canada and certain other countries where prices are lower than in the United States.

“More pressing, House Democrats are drafting a bill that is expected to rely on $61 billion from drug companies to completely fill the coverage gap under Medicare, according to officials, as well as additional money to help defray the cost of subsidizing health coverage for millions who lack it.

“The deal announced over the weekend appears less costly.”

In fact, the Congressional Budget Office projects [9] that if drug manufacturers were required to give Medicare Part D plans the same rebates they give the Medicaid program, the federal government would save $110 billion over ten years—$30 billion more than PhRMA’s offer with that single change.

An article in the Wall Street Journal, “For Drug Makers, Concessions Have a Bright Side [10],” makes the same point:

“The pharmaceutical industry's agreement to contribute $80 billion over 10 years to a proposed health-care overhaul could yield new business for drug makers, and provide them more certainty about how big a hit they'll take from government cost-cutting...

“An estimated $30 billion will help pay for a new program that discounts brand-name drugs for senior citizens who fall into a gap in Medicare prescription drug coverage, commonly known as the "doughnut hole," a White House official said. That new program—offering brand-name drugs at half price—could create new business for the industry while also providing seniors with price breaks.

“Under the deal, these seniors can buy brand-name drugs at 50% off. For drug companies, it would be a loss if a senior currently was paying full price, but a win if a senior was not buying brand-name products at all. The $30 billion represents the approximate lost revenue from all prescriptions filled by this group.

“‘The proposal won't cost the industry much,’ said Scott Gottlieb, a former high-ranking health official in the Bush administration. ‘It will ultimately discourage patients in the donut hole from switching to generics,’ he added, because their out-of-pocket costs for brand-name drugs will be less.

“The remainder of the contribution, approximately $50 billion, will be available to offset the cost of the new subsidies that Congress and the president want to provide to the uninsured, estimated at least $1 trillion over a decade. It's unclear how the government would realize this sum, but officials said one idea under active discussion was imposing lower prices on drugs purchased through the Medicaid program.

“The parties involved have been reluctant to detail how much money would be dedicated to each piece of the puzzle, and the Pharmaceutical Research and Manufacturers of America, the brand-name drug industry lobby, said it did not know what the split would be.”

And as with all voluntary industry changes, savings could be elusive. As POLITICO has reported [11]:

“[O]thers are beginning to wonder just how much money the deal will actually save taxpayers. The questions are reminiscent of the $2 trillion in savings six major health industry groups recently promised to deliver to the administration, only to find that many of their savings proposals weren’t counted, or ‘scored’ as savings by the CBO...

“There are also questions about how much goodwill PhRMA’s deal bought among Democrats, many of whom would like to see the industry contribute even more toward reform’s estimated $1-trillion price tag. Some Democrats, particularly in the House, have suggested using price controls and importation to rein in costs­-ideas that are deal killers for drug makers.”

Let’s be honest. PhRMA is not acting out of a charitable impulse. It is trying to forestall strong health reform legislation that would cost the industry more than it is promising. PhRMA took action in 2003 when adding a drug benefit to Medicare seemed inevitable and managed to keep a public health insurance plan—Medicare—from cutting drug costs. Now the threat of a new public health insurance option for people under 65 has spurred the powerful lobby into action once more, with promises of cooperation and voluntary discounts.

Don’t be fooled! We can do better. A public health insurance plan [12] option will bring down costs and make health care more affordable.

Stand with President Obama and Dr. Howard Dean to demand the choice of public health insurance by writing your Senator today [13]!