Yesterday, President Obama announced a plan under which drug makers will forgo $80 billion in revenues over the next ten years by paying half the cost of prescriptions for patients in the Medicare Part D "doughnut hole." See:
- Drug Makers Trim Prices for Health Overhaul
- PhRMA Statement on AARP-White House Press Conference
- AARP Thanks President, Senate Leaders for Helping to Close the “Doughnut Hole”
As I see it, PhRMA has shrewdly slowed (but not stopped) the momentum behind harsher "reforms" such as Medicare Part D rebates (Get Ready for Part D Reform) or importation fairytales (Surprise! New Importation Bill Introduced). I suspect the reprieve will be short-lived as the pharmaceutical industry will be forced to make more quid pro quo deals with the government.
President Obama's remarks yesterday make the game crystal clear:
And drug and insurance companies stand to benefit when tens of millions more Americans have coverage. So we're asking them, in exchange, to make essential concessions to reform the system and help reduce costs. It's only fair.The pharmaceutical industry will suffer some pain from the lost revenue. Perhaps all of us will suffer, too, if there is less money left for the development of innovative new drugs. Is that really fair?
Two other comments:
This deal represents significant savings for consumers.
CMS recently estimated that cumulative outpatient drug spending from 2009 through 2018 (ten years) will be $3.3 trillion dollars, of which $584.4 billion will be out-of-pocket payments by consumers. (I discuss these forecasts on February 26 in Who Will Pay for Prescription Drugs?)
Thus, yesterday's deal could reduce aggregate consumer out-of-pocket payments by as much as 13.7% (=80/584.4). Note that the proposal only covers the 3.4 million beneficiaries that have out-of-pocket spending in the coverage gap of Part D, not all consumers. My computation is just a way to size the proposal, not a measure of actual savings by any individual.
For consumers that reach the coverage gap, they will receive a 50% discount off the negotiated price in their Part D plan (rather than pay 100% as they currently do). But the full negotiated price (100%) will count toward their true out-of-pocket cost, which means they spend less out-of-pocket to reach the catastrophic threshold.
Other sectors of health care can't match this deal.
The two largest components of U.S. health care spending – hospital care (32%) and physician services (21%) – represent services provided by people. A similar price cut from providers would be extraordinarily difficult because reduced spending would come primarily from lower labor costs, i.e., fewer people or lower salaries. I don't see that happening anytime soon, although my medical doctor friends claim to be worried.
So, what do you think? Did pharma make a smart deal or are they playing with fire?
[Updated on June 23 at 9:15 AM EST]