OPINION: drug firms say no to rebates, despite billions in new revenue from Part D

Introduction

If you watched President Obama’s State of the Union address last week, you might have missed the scheme he unveiled that will lead to the ruination of the Medicare prescription drug program, destroy pharmaceutical companies’ incentive to develop new life-saving medicines and even imperil our country’s economic growth.

I know I missed it.

Fortunately, the top PR guy at the drug companies’ big trade association in Washington quickly issued a press release to clue us in on what the President is really up to and what will happen if he can follow through on his pledge to curtail Medicare spending by reducing “taxpayer subsidies to prescription drug companies.”

Here’s what Matthew D. Bennett, senior vice president of communications and public affairs at Pharmaceutical Research and Manufacturers of America (PhRMA), wrote within hours of the speech:

“The President’s proposal to tamper with a program that works well would not yield any benefit for seniors. Instead, analysts have projected that the President’s scheme would harm Part D’s competitive dynamics, yielding higher premiums, more restrictive access to medicines, and diminished research on the next generation of medicines.”

So what is Bennett so worked up about? The White House said after the speech that the President intends to ask that drug makers help the government cover the prescription costs for a group of Americans referred to as “dual eligibles.” Of the approximately 50 millions Medicare beneficiaries, about a fifth are also eligible for Medicaid because of their low incomes.

Before the Medicare Part D drug program was created in 2006, the pharmaceutical industry paid rebates to the government to help pay for those folks’ medications. The rebate program ended when Part D went into effect and the dual eligibles’ drug coverage was switched from Medicaid to Medicare. As a result, taxpayers are paying more now than before, even though drug companies are getting billions of dollars in revenue they never had before Part D was created. So the President will be asking Congress to reinstate the rebates, which the nonpartisan Congressional Budget Office says would save billions of dollars in government spending every year. That’s because even though dual eligibles comprise only 20 percent of the total number of people enrolled in Medicare, they account for almost a third of total Medicare spending.

What drug companies are really worried about, of course, is that bringing the rebate program back would reduce their profits a little bit. But it’s not as if these companies can’t afford to pitch in to help bring Medicare costs down. Reuters estimates that drug makers take in about $300 billion a year in the United States alone. When you consider that the profit margins for pharmaceutical companies are among the highest in the corporate world, that translates into serious cash going into the pockets of investors. Pfizer’s most recently reported profit margin, for example, was 24.7 percent. Astra Zeneca’s was 22.5 percent. Exxon’s, by comparison, was a measly 9.98 percent. Insurance companies somehow make do with 5 or 6 percent or less.

A Wall Street analyst told Reuters that reinstituting the rebate program could cost the drug companies 2 to 7 percent in profits. I added up the 2012 profits of nine of the biggest drug makers and came up with about $60 billion. Even if they had to give up 7 percent of that to help the government pay for prescriptions for the sickest and poorest of the Medicare population, they would still have profits of more than $55 billion. And that’s just for nine companies.

That sounds pretty good. But over the next few months, you can expect to hear that the sky will fall if Congress goes along with the President’s “scheme” —which is probably unlikely anyway because of all the buddies that PhRMA has on Capitol Hill. Just last week I noted that the drug makers have spent more than any other industry over the past several years lobbying Congress, just to keep something like this from ever happening.

Here’s more of Bennett’s spin on the President’s scheme, which gives us a hint of the talking points we’ll be hearing from PhRMA and its friends about the dire consequences of asking drug makers to sacrifice a few bucks to help save a program that they benefit from:

“R&D (in the pharmaceutical industry) is critical to the country’s long term economic growth and to important medical advances that improve quality of life. Biopharmaceutical sector R&D investment should be fostered, not singled out for destructive policies.”

And this: “The President has again proposed to upend the successful Medicare Part D prescription drug program by imposing government price controls on it.”

What the President really should be proposing to “upend,” in my view, is the stranglehold PhRMA has on Washington. We’ll see later this year if that’s even remotely possible.