I am now part of a Washing ton Post panel of health care analysts. Each Monday, the Post sends us a question, and asks us to comment. This week, the question focused on “the pharmaceutical industry’s offer to has put $80 billion on the table to reduce the cost of health-care reform over the next decade. What is your reaction to the offer and the impact it will have on the debate?”
Below, my reply:
The announcement that drug-makers will offer 50% discounts to Medicare beneficiaries who fall into the Medicare Part D doughnut hole is excellent news for seniors. Drug-makers will help to bridge the gap in coverage that forces roughly 15% of seniors stop buying medications when their annual prescription drug bill reaches $2700.
But this is, as the president said, “a first step.” Pharma is going to have to do more.
Look at it this way: this year, prescription drug sales in the U.S. will total $252 billion.Meanwhile, if sales continue to rise—and drug-makers continue to hike prices, spending on drugs is expected to double between 2014 and 2018. By 2019, Pharma hopes to rake in over $500 billion in U.S. sales.
In that context, giving up $80 billion over ten years is not a huge sacrifice. Pretend that the $80 billion is spread out evenly, $8 billion a year. This means that in 2019, instead of showing revenues of $500 billion, the industry would have to make do with $492 billion. But unless GDP doubles, we cannot afford to spend $492 billion on drugs in 2019.
Why does Pharma charge U.S patients sky-high prices? Because it can. No one is pushing back. In other countries governments negotiate to protect dying patients from being gouged.
Meanwhile, Pharma is spending twice as much on marketing and advertising as it does on research. Perhaps it should re-think that spending—and pricing. Either that, or prepare to negotiate. Together, Medicare and a public sector insurer should be able to make drugs as affordable here as they are in France.
Change is not coming incrementally, it is coming as a patchwork. This is never a good sign.
It is clear that the entire health industry needs to be rebuilt, every aspect of it has problems. We have direct to consumer marketing, seen nowhere else by New Zealand. We have “continuing medical education” for doctors run as infomercials by drug firms. We see a scientific publisher putting out fake journals on behalf of drug companies. We see doctors be influenced by drug reps, freebies, speaking “fees” and other bribes. We see me-too drugs being developed instead of useful ones.
Then there are the issues with the cost of medical (and nursing) education, which forces doctors into high paying specialties instead of general practice.
Then there is the lack of a feedback mechanism to determine best practices and weed out ineffective treatment.
The government also fails by allowing patent medicines to be marketed, granting monopolies to drug firms and allowing government-funded research to be used for gain by private firms.
I could go on…
Each time a new gimmick is proposed, it is a sign that no one is willing to address the underlying cause of all this ethically dubious behavior – profit in an area where it doesn’t belong.
Whatever emerges, it won’t do away with the profit and the bad behavior will continue, just migrate to new scams.
It is worth mentioning that then congressman Tauzin played a lead role in turning Part D into the windfall PhrMA benefit plan (tax dollars to pay inflated drug prices) it became, while secretly negotiating to become the head of PhRMA. Also that all this is “voluntary” which is usually code for wont happen. Also that this is a ridiculous cave-in/compromise from the Democrats position just a few months ago.
Real reform would include:
1. There should be complete elimination of the donut hole. That is what Dems were talking about just a little while ago.
2. That under Medicare, drugs would not be paid more for than whatever was the cheapest that the government negotiated, including whatever was the cheapest for the Dept. of Defense, or the Veterans Administration or Medicaid or 340B. Those prices are typical one-half to one-fourth the cost of the same medications under Medicare. The official full price of drugs are completely artificial, and highly elastic to negotiation under a real free market. What we have had up until now are PhRMA lobbyists successfully fixing a higher price and preventing the government from acting as a free market consumer.
3. Indeed, there is no reason for the U.S. to paying more for drugs, as we pathetically do, than the cheapest INTERNATIONAL market rates out there: American should not be paying any more for the same medications as whatever is the cheapest rate for the given medication in Canada, France, Germany, Japan, Taiwan, any other OECD country, to say nothing of our own Dept of Defense, Veterans Administration, 340B Drug program… or Wal-Mart, Target, and etc.
Even though AARP (naturally) and apparently Obama have endorsed this, Waxman may not be going along:
House Energy and Commerce Committee Chairman Henry A. Waxman (D-Calif.) singled out drug manufacturers, saying the legislation attempts to recoup the “windfall” that companies received when Congress created the Medicare prescription drug benefit, which took effect in 2006. As a result of that program, some patients who received deeply discounted medications through Medicaid moved to Medicare, which has generally paid higher drug prices. “We’re simply going to ask the pharmaceutical companies to pay us back the money,” Waxman said during a news conference.
Dr. Steve & Robert
Dr. Steve– Nowhere has the president said that this offer of $80 billion is all that he is going to expect from Pharma.
Quite the opposite.
It is likely that White House will make it much easier for generic biologics to come to market– stiff competition for the hugely overpriced
biolgics that Pharma is selling. (Naomi is working on a post about this.)
I expect Medicare (and a public sector option) will use comparative effectiveness research to hike co-pays on very expensive drugs that are no better than cheaper alternatives. They may even refuse to cover some drugs –if there is no clear benefit, and there are risks.
Note that Medicare has already taken a stand on virtual colonoscopies.
We can expect to see Medicare taking a stand on other procedures and prodcuts..
Also, it’s pretty clear that traditonal Medicare will offer its own Part D–and I expect that it will use comparative effectivness reserach to set up a formulary–just the way the VA and the Mayo Clinic do–and refuse to buy drugs that are more expensive, but no more effective.
The president called Pharma’s offer a “good first step.” He likes to see people volunteer to give something up (even if they are not giving up much.)
He and Orszag can do the math as well as I can.
Pharma may hope that this “buys them a seat at the table.” Billy Tauzin is not smartest man in the world. But I didn’t hear Obama say that–did you?
This administration will take whatever it can get voluntarily. Then they will twist arms –and regulate.
This FDA will also be much tougher. It’s not going to approve new drugs without much stronger, unbiased reserach. And since new drugs are virtually always more expensive, fewer new drugs means fewer expensive drugs.
Meanwhile more and more expensive drugs are going off patent. If we don’t replace them with new block-busters, the total cost of drugs shrinks. . .
Robert– I’m not nearly as pessimistic as you are.
It’s true that there are a great many things wrong with the system
This is why, as Gawande said in an earlier New Yorker article, reform will have to come in phases.
There is so much to be done. It can’t all be done in one omnibus piece of legislation.
If it is going to be done intelligently, it will take time and thought.
But the president has accomplished so much in just 6 months– money for comparative effectiveness, expanding the Health SErvice Corp; pay for primary care docs will be going up, expanded Medicaid and SCHIP, a tough new FDA deputy commissioner overseeing drug and device approvals;
a shake-up within the FDA device division; a radical new director of CDC; an excellent panel to oversee comparative effectiveness research.
Finally, and I think most importantly, the president is holding out for a public sector insurance plan that will serve as an “important tool to discipline the indusrance industry” (as he put it in this week’s press conference) and “keep it honest.”
This non-profit public sector option can set standards for what counts as good coverage at a reasonable price.
Meanwhile, Medicare and this public sector insurer will change how care is delivered by rewarding doctors and hospitals who offer co-ordinated, collaborative accountable care.
Changing what we pay for (by looking at comparative effectiveness) and how we pay for it (changing the delivery system) will change the underlying model.
As Gawande pointed out, you can’t “flip a switch” and change a $2.6 trillion industry overnight.
But we’re going in the right direction.
Maggie,
I have a problem with some of the arithmetic in this post. You say that the drug sales will go from $252 billion to $500 billion from 2009 to 2019. That turns out to be a compound annual growth rate of 7%. In the same sentence you state that drug sales are expected to double in four years (2014 to 2018). Doubling in four years means the CAGR for those four years would be 18%, which is astonishingly high, since it is only 7% for the whole ten-year period.
Here is a hint on how you might check these facts when they are given to you. It’s called the rule of 72. If the CAGR is, say, 6% then divide 72 by 6 and you will find out that the starting value will double in six years. Likewise, you would see a doubling in 8 years at 9%.
I will send you separately an analysis of the savings consumers can expect if the Billy Tauzin proposal is accepted.
Here is an analysis of the savings consumers can expect if the PhRMA proposal is accepted.
The key assumption is that all drugs in the gap are brand drugs and does not include any generic drugs. These calculations were made using the 2009 Part D definition of the Standard plan (annual deductible = $295 and the coinsurance percentage is 25% for all tiers).
The annual Rx costs from $2,701 to $6,000 ensure the consumer enters the gap. The annual savings, which are variable, are shown for selected annual Rx costs based on 2009 Part D parameters. The savings range from 0.06% ($.50) for an annual full Rx cost of $2,701 to 39.32% ($1,650) when the annual full cost of the Rx is $6,000.
If a consumer enters the catastrophic phase (any annual full Rx cost greater than or equal to $6,154) then the consumer will save exactly $1,726.87, which is 50% of today’s gap amount of $3,453.
There is no savings to the government with this proposal.
Thanks for posting this blog. Most people don’t realize how much money the drug companies are actually making. Most people don’t even have any reliable data on drug costs until they get to the pharmacy. We created an online community to share info and hopefully create better consumerism. The link is http://www.rxmole.com. Thanks
Mike–
Thanks for the comment.
I know the rule of 72.
Prescription drug sales are projected to be flat between 2010 and 2014–generics are crowding out brand-name drugs and block-busters are going off patent.
Generic versions of biologoics will also be coming out (see Naomi’s post later today)
Then, between 2014 and 2019 prescription sales are supposed to double (New drugs coming out of pipeline, etc.)
That’s how sales double over the next 10 years– flat –then huge growth.
Sales rarely grow in an even fashion year after year– there are always cycles.
Mike & Bryan
You are right that not all of the $80 billion will go to help pay for reform.
The Wall Street Journal calculated that about 40% of the $80 billion will go to seniors directly to help them buy drugs in the doughnut hole.
(Keepn in mind that, even wtih a 50% discount, manhy seniors will not be able to afford expensive drugs. The average senior has total annual income of $20,000—that includese Medicare, dividends, investment income, part-time jobs etc. Half have less than $20,000.
Bryan– Thanks–
Yes,most people dont’ realize how much many Pharma has been making.
Recently, they haven’t been as profitable– more blockbuster drugs going off patient, fewer new drugs in the pipeline.
But for much of the past two decades they have been raking in extraordinary profits–and their shareholders have come to expect double-digit growth. The rest of the nation just can’t afford this.
The way the Medicare Part D program works is that the drug companies charge top dollar for their drugs via the program, with seniors being shielded from the real costs, for the most part, until they reach the “donut hole.” This occurs at about $2,750 of the total to-date cost for drugs for the year. And it is then that the senior must pay the full retail value for the drugs, not just the co-pay paid before the “donut hole.” This is the point where the drug companies appear to be saying they would charge about half of their retail value for their drugs, until the total to-date cost reaches about $5,000. (At this point, the federal government, under Part D, begins to pay 95% of the total cost of the drugs to the end of the year, while the senior goes back to paying a minimal co-pay.)
The reality is that Medicare Part D was always a scam that primarily benefitted the drug companies and the insurance companies, under the “compassionate conservative” umbrella. American seniors, for the most part, reaped minimal benefits, if at all. And the real losers, of course, have been and will continue to be the U.S. taxpayers, with the federal subsidy for Part D having been estimated to be between $700 and $800 billion over ten years. (Insurance companies receive about $100 per month, per enrollee, under Part D, regardless of the purchase activity, plus they get the co-pays.)
So, when the drug companies tell us that they are going to play a significant role in health care reform, I think we have a right to be skeptical. In fact, I think it would probably be better to reevaluate and possibly scrap Medicare Part D altogether. We could use some of that $700 billion subsidy in more useful ways under a system of universal health reform.
George —
I agree. The Medicare Modernization Act was corporate welfare for
drug-makers and insurers.
Period. Honest Republicans also were horrified by the bill. (McCain planned to eliminate the windfall for insuers if elected.)
I think that under healthcare reform a couple of things will happen:
–Advantage insurers will have to bid for a role– their windfal will be cut substantiallly
–Many will simply drop out of the program
–Very likely Medicare will begin to offer its own Part D–without a doughnut hole–and only cover drugs that have been shown to be effective for a particular group of patients. IF it covers less effective drugs, co-pays will be steep just as co-pays are now steep for prescription drugs when a
generic is available.
George:
Is the federal subsidy the 75% of the premium that is paid by the general funds in the Treasury?
How can you say that seniors reap minimum benefits?
They’re getting a 75% discount.
Don Levit