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PHARMA/POLICY/POLITICS: More rational behavior from big Pharma

Exactly as happened in 2000, and 2002 a late surge of money is coming to help Republicans from the PACs of New Jersey’s finest.

According to a report published Wednesday in the Wall Street Journal, drug-industry dollars are helping to fuel the campaigns of Republican candidates like embattled incumbent Sen. Rick Santorum, R-Pa., who faces a tight race against Democratic challenger Bob Casey Jr., who calls the Part D program a “giveaway to Big Pharma.” The Santorum re-election bid has drawn $454,500 in contributions from pharmaceutical companies, WSJ said.Part D has drawn fire from Democrats in congressional races in part because it doesn’t permit the federal government to negotiate with drug companies on drug prices, and Democratic challengers have vowed to change that if elected, the report said.

While the concept of science-based companies backing Rick Santorum (the one who took his stillborn child home to meet his kids, and thinks that the earth is 6,000 years old) may be odd, it’s completely rational. Essentially now that there is a Medicare drug benefit, eventually price controls will be introduced. It’s in Pharma’s interest to delay that day as long as possible. Anyone can see that including big Pharma, who as Joe Paduda reminds us have seen profits rise with their volume now that Part D has cut in

However, it therefore exposes the whole McClellan/Ignagni line about how the private market in Medicare Part D has lowered drug costs more than direct negotiations would have done for the lie it is. After all, if Part D as written is so much worse for big Pharma than government negotiations/price controls, why would they be fighting so hard to protect it?

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16 replies »

  1. Your suggested idea of a percentage and deductible is very workable, Barry, but I would argue that politicians, in their infinite wisdom, wanted to design a benefits package rather than an insurance program. Neither is true. They wanted a government giveaway to the pharmaceutical industry; nothing more and nothing less.

  2. Jack,
    The flat $20 co-pay does, indeed, have the advantage of being simple and easy to understand. I don’t know how it would have costed out. I do know, however, that I don’t like flat dollar co-pays because they remove price sensitivity both among drug stores and between generics and brands. I prefer a percentage of the cost approach with a sensible deductible of about $500 or so, along with means tested help for the lowest income elderly. The doughnut hole could have been easily eliminated if the deductible were set higher than $250. However, politicians, in their infinite wisdom, did not want to design an insurance program. They wanted a benefit program that would be a good value relative to premiums paid for as many people (voters) as possible.

  3. Barry, a simple system that paid all but a flat $20 co-pay would have been the easiest, would not have had a doughnut hole, and probably wouldn’t have cost much (if any) more. I think the worst is yet to come as people slip into this doughnut hole. The fuse is lit on this system.

  4. Matthew — I think the comments by the insurers regarding how good a job many (not all) of the elderly did in choosing a plan that made sense for them was in the context of how confusing it was at first. While I was not paying much attention to Medicare issues when it first started up in 1965, my understanding is that the original program did not exactly enjoy a smooth startup either. At any rate, as the Part D program approaches its first anniversary with many of the early glitches resolved, satisfaction rates appear reasonably high. Furthermore, according to Acting CMS Director, Leslie Norwalk, it is a top CMS priority to make sure that the process works much more smoothly as we go into the new enrollment season. Would a one size fits all approach have made more people net better off and more satisfied? I don’t know, but I doubt it.

  5. Barry — calling the signup “process” a success is revisionist rubbish. It was a dreadful process with complete confusion all around. And MOST IMPORTANTLY the group that theoretically benefits the most from the new benefit, the “near poor” elderly, have been the slowest to sign up! Indicating that the benefits were NOT clear to them and that they did NOT easily figure out what to do .
    The good news for you is that you won’t (I assume) be in that group. The bad news is that the best known benefits consultant in America told me that he could NOT figure out which plan to sign his mother up for. Mile Leavitt’s parents couldn’t figure it out either. So you’ll doubtless have a lot of research to do when your time comes!

  6. Barry, to do this correctly the feds would not have fascillited the establishment of 45 different insurance companies giving Medicare patients 500 different choices (or whatever the number there is). They could have done it with less than 10 plans. Many experts have already seen the shiftiness in the process, and nobody – nobody! — denies that it was a $780 billion taxpayer giveaway to the pharmaceutical industry. That’s one hell of a return on investment.

  7. Jack,
    I love the drug stores too and think they do a great job. The difference is that the insurance plans sold by PBM’s, health insurance companies, and Medicare itself are risk products. They guarantee to provide all drugs included in their formulary under the co-pay and deductible terms of the policy without limit (unless their is a specified benefit maximum) in exchange for the premium paid by the beneficiary and the taxpayer (or employer). The drug store takes no financial risk. It just modestly marks up the medication and adds a professional or dispensing fee to cover the cost of its pharmacy infrastructure and provide a profit for shareholders.
    Even if Medicare winds up negotiating directly with drug companies, I hope the drug retailers continue to be adequately compensated for their professional services. This is one area of healthcare that is priced fairly (in my opinion) and, for the most part, has not been abused.

  8. Guys, what’s wrong with the drug distribution system we had in place before Part D came along? It was called drug stores, and drug stores could bill insurance companies. I bought drugs and paid my deductible. They billed my insurer for the rest. It worked!
    I would have preferred that Part D stood for Drug Stores, but of course they were an established entity. Insurers and politicians found a way to create a new and parallel industry in which they all could share in the profits. (Actually, because they now get a piece of the profits the drug industry has to make it up in increased prices, which it has, and increased sales, which it has through the $780 billion Part D program.)
    At the risk of beating a dead horse, we should be putting politicians in jail rather than re-electing them.

  9. Rick — Both PBM’s and health insurers selling Part D plans told investors that they were “amazed” at how good a job seniors did in sorting through the available choices and finding a plan best suited to their needs. I was surprised as well. Speaking as one who will be eligible for Medicare in the not too distant future, maybe you CAN teach an old dog new tricks!

  10. Adam, if you want to talk about things that are not self-evident, consider your own assumption that the multitude of choices is a welcome thing for seniors. When we are young, we want choices. When we are old, we become settled and want to stick to what we chose long ago because it suited us, even if it wasn’t the best, like driving a Crown Vic or Grand Marquis. Choice is not the high priority among seniors that the younger folk creating health plans for them assume it is. Never having been a senior citizen, you don’t know that yet, but you will.
    And let me pre-empt the argument that they can be educated as to what’s best for them by first encouraging you to go try to tell an aged relative of your own that they are wrong about something.

  11. This whole “free market” approach to drug development has gotten terribly out of hand. The FDA is now in great part funded by the Pharma companies who are thus viewed by the FDA as “customers” rather than an industry they regulate. (The public is the real customer, but that has gotten lost in our moneyed political system.)
    Over half of the scientists that sat on the Vioxx approval board had received money from the manufacturer but did not recuse themselves. We saw the results here and in many other product categories.
    We must revamp how we develop drugs, and I do not buy the argument that “high profits” are necessary to support industry efforts. First, their profits are calculated after deducting for high executive salaries, research and development and marketing (which significantly exceeds R&D costs).
    And what do we see for it? More me-to drugs than new innovations! Me-to drugs are those where they change one molecule and market the drug as “new and improved” after testing it (again) against placebos rather than the original drug. Not only do they double R&D costs, the resulting drug’s effectiveness may be the same or not be as good as the original, but good enough for FDA purposes. The purpose, of course, is to get another 20 year patent protection. I recommend Marcia Angell’s book The Truth About the Drug Companies – How they deceive us and what to do about it.
    We must break this conflicted and dangerous link. I’d rather see the pharmaceutical industry’s role as coming up with ideas, testing them on animals, and then turning the idea over to NIH for contracting to an independent medical university for further development and testing on humans.
    But the NIH (the taxpayers) would fund all drug development, submit the research to the FDA for approval, own the patent, and allow any qualified manufacturer to market the product. The originating company would receive attractive royalties and could also be a manufacturer, but would not have control of the product.
    Why won’t this happen? Follow the money! Over $50 million per year in lobbying and campaign contributions.

  12. Of course prices will be lower. But your embedded assumption is that lower pharma prices are automatically beneficial to society in the long run. That might be true, but is not self-evident.
    To quote from the Amazon description of Richard Epstein’s new book Overdose: “While critics of pharmaceutical companies call for ever more stringent controls on virtually every aspect of drug development and approval, Epstein cautions that the effect of such an approach will be to stifle pharmaceutical innovation and slow the delivery of beneficial treatments to the patients who need them.”
    I recently attended a conference at which the keynote speaker made an off-hand remark that “drug prices are too expensive.” But as an economist, I must ask: “Too expensive compared to what?”
    By all means, let’s have a vigorous debate about how to make tough tradeoffs in health care. But is it simplistic to think that mandating “lower” prices will not have unintended and potentially undesirable consequences. Lunch is still not free.

  13. So Adam, answer me this. If negotiations won’t lower Pharma prices (if not profits) why are they fighting it so hard?

  14. The Democratic playbook on Medicare has been clear for some time. (See my July post on the topic:
    The Part D direct negotiations movement)
    Given the diversity of PDP plans, it’s not clear whether direct negotiations will make things better and could make things worse. Monthly plan premiums for the top 10 PDPs ranged from $2 to $75 in 2006, suggesting that seniors have a lot of choices based on personal needs and situation. The band is narrower in 2007 ($10-$88), but there is still a lot of variation and choice.
    As I point out in a post last week, direct negotiations may also throw the pharmacy industry into chaos and help Wal-Mart — a true irony for Democrats! (See Are the Democrats helping Wal-Mart’s Pharmacy?

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