Universal Coverage: A Big Feast for Big Pharma

Every special interest group knows that in Washington, “you are either at the table or on the menu.” Big Pharma seems to have taken this motto to heart as Obama & Co. proceed to make mince meat out of the American health care system. And it is coming out a big winner.

Remember the $80 billion that President Obama said he had extracted from the drug industry over the next 10 years in order to fund his universal coverage plans? Well, The New Republic reports that it might have all been a giant sham. Far from eating into the profits of Big Pharma, health care reform is likely to prove a big boon to it.

As evidence, compare the March and the October profit forecast of IMS Health, a respected global research and consulting firm.

Back in March, according to TNR, IMS had projected no growth at all for the drug industry between 2008 and 2013. But in October, it projected average annual growth of 3.5%.

What changed? A major factor, according to IMS, was the emerging details of health care reform.

Health reform, as currently envisioned, wouldn’t merely bring coverage to the uninsured. It would also fill in the “donut hole” in Medicare Part D–the gap in coverage that leaves beneficiaries with serious health problems paying for hundred if not thousands of dollars in out-of-pocket prescription costs.

In addition, because it will take several years to close the donut hole, reform relies on voluntary discounts from the pharmaceutical industry to make drugs more affordable in the intervening years. But those discounts would apply only to name-brand drugs, not generics.

Put it all together, and you have more demand for name-brand drugs. As a result, IMS believes, pharmaceutical companies would be able to raise their prices–enough to boost revenue significantly: “If this bill is implemented,” the report concludes on page 138, “an increase in prices on new drugs can be expected.”

Big Pharma has launched a major counter-offensive to the IMS report. It argues that:

“Projecting annual prescription drug sales is notoriously tricky, evident by the fact that IMS Health has released three different forecasts for 2009. Most troubling, the IMS report is based on incomplete information because it does not take into account discounts and rebates which can significantly lower the cost of drugs to payers.

“In some ways, it’s like trying to project annual U.S. auto sales by adding up sticker prices. That’s not reality. How many people actually pay full price for a car? Similarly, drug manufacturers often offer steep discounts and rebates through private negotiations. Medicare Part D is a good example. The Medicare Trustees, who unlike IMS have access to rebate data, report that rebates in the Medicare prescription drug program reach 20%-30% for many brand-name drugs and have increased over the past several years.

“The IMS forecast is incomplete in other ways, too. For one thing, it does not include key elements of health care reform legislation now pending before Congress, including a large increase of 8 percentage points in the base formula for the rebates that brand manufacturers pay in Medicaid. Nor does the report take into account the fact that Medicaid eligibility could be expanded to tens of millions of Americans who then would have access to lower-priced medicines.

“Most curious, however, is the notion that pharmaceutical sales will increase dramatically during the forecast period when major coverage expansions won’t even kick in until 2013 or 2014, depending on what’s in the final bill……”

It is entirely possible that Big Pharma is getting the short end of the bone in this dog fight. But it is also the case that it has spent $150 million in TV and radio ads to promote universal health care. Is it remotely possible that it is doing so purely out of the goodness of its heart even though it will lose money?

Call me difficult, but that’s a line I find hard to swallow ….