Seniors have saved $3.5 billion on prescription drug costs thanks to an Affordable Care Act provision that closes the coverage gap — known as the “doughnut hole” — in their Medicare Part D plans. But if the Supreme Court strikes down Obamacare later this month, these drug savings could end, according to a drug industry spokesman.

Drug makers pledged $80 billion over 10 years to cut doughnut hole expenses for consumers during the health care reform debate. But without the law’s legal framework, “there are many questions that arise about whether the discount program could continue,” Matthew Bennett, a spokesman for the Pharmaceutical Research and Manufacturers of America (PhRMA), told Kaiser Health News:

But if there is no law to ensure the coverage gap discount, drug makers are concerned that other laws might prohibit it, Bennett said.

For example, drug companies could try to offer the discounts on their own but that effort could run afoul of federal antitrust laws that generally prohibit businesses from agreeing together to set prices for their products. An individual drug company could offer Part D members coverage gap discounts, but it would have to steer clear of anti-fraud laws that ban a company from giving something of value to persuade beneficiaries to use its products.

Nearly one in four seniors “reported skipping doses, cutting pills in half or not filling a prescription, simply due to cost,” before health reform became law. And now, if the Supreme Court rules against the measure, it could put their drug discounts in danger.

At the same time, Medicare participants’ loss would be pharmaceutical companies’ gain because they would not have to shell out $80 billion to help fix the prescription coverage doughnut hole. One CEO estimated that closing the gap would cost his company between $20 million and $30 million in annual revenue. But without the Affordable Care Act, that would be $20 million to $30 million coming out of seniors’ pockets instead.

Obamacare is expected to completely close the prescription coverage gap by 2020.

During today’s RNC debate, some Republicans expressed frustration over candidate Maria Cino’s past as a lobbyist for the pharmaceutical giant Pfizer, accusing the former Bush administration official of lobbying on behalf of ‘Obamacare.’ In June of 2009, Pfizer, along the Pharmaceutical Research and Manufacturers of America (PHRMA), agreed to provide $80 billion worth of discounts on brand-name drugs over 10 years to seniors who fall within the ‘doughnut hole’ not covered by Medicare. In return, Democrats resisted pushing proposals that would have used the government’s purchasing power to negotiate lower drug prices.

Pressed on her role in helping secure the deal — which also kept PhRMA from lobbying against reform — Cino insisted that she worked to promote “innovation” and Republican ideas:

CINO: I think that noone wants to go to a government-run health care system. I think that we’ve seen what has happened overseas, particularly in Europe and I’m proud to say this last year, I worked with our Republican members in the House and in the Senate. I worked against death panels and rationing. I worked to reform malpractice suits. I worked to make sure that innovation was rewarded and I worked to increase intellectual property protection.

[Audible crowd protest]

CINO: No, I did not, I worked for the Republican principles that I just mentioned.

Watch it:

Conservative blogs have criticized Cino for her Pfizer connections since she announced her candidacy in early December, but have failed to explore how health care repeal would benefit Cino’s former employer. The Wall Street Journal noted this morning that pharmaceutical companies stand to gain millions of dollars if the law is repealed and they’re off the hook for closing the doughnut hole in Medicare Part D:

The Republican gains in Congress in November’s election added new questions to the outlook for health-insurance costs borne by companies. Since then, some party leaders have said they aim to reverse or at least starve the Obama health-care law; meantime, lawsuits challenge some aspects of it. “You don’t know where it’s going to go,” said Robert J. Olson, CEO of Winnebago Industries Inc., a maker of motor homes.

For many pharmaceutical companies, the health-care law will be 2011′s biggest challenge. The closing of the “doughnut hole,” a gap in Medicare Part D prescription-drug coverage, will cost drug makers revenue and profit because they must give a discount on brand-name drugs for people who fall in the gap.

Dave Holveck, CEO of Endo Pharmaceutical Holdings Inc., estimated that closing the Medicare hole will cost his company between $20 million and $30 million in annual revenue.

As Merrill Goozner put it, “Repeal the law and that’s $20 to $30 million that will come straight out of senior citizens’ pockets. I suspect most senior voters, who disproportionately supported Republicans and their call to repeal health care reform, were not aware they were voting for higher drug prices. Democrats in the coming weeks will undoubtedly be telling them about that consequence of reform’s repeal.”

Time’s Karen Tumulty is surprised by President Obama’s decision to lower the biologics’ 12-year exclusivity deal to 10 years. “My sources tell me that the first inkling the industry and its allies got to the contrary came in a private meeting in recent days,” Tumulty reports. “In that session, California Congresswoman Anna Eshoo–the lead supporter of the 12-year provision in the House–asked the President to affirm that he supported it. ‘As a matter of fact,’ Obama told her, ‘I don’t.’”

This may be the first time Obama became personally involved in the specifics of reform legislation, but he didn’t go far enough in lowering the price of biologic drugs or closing the loopholes in existing patent law. After all, the 10-year exclusivity agreement for brand-name biologic drugs — a new class of ‘wonder drugs’ that contain living organisms and are incredibly expensive — could postpone any real savings far into the future:

A 2008 analysis by former Clinton Administration official Robert Shapiro, who has consulted for both biologics companies and their would-be generic competitors, suggested that generic versions of the top 12 categories of biologics whose patents have expired or will expire soon could save Americans up to $108 billion in the first 10 years and as much as $378 billion over two decades. “It’s the low-hanging fruit,” says Mark Merritt, head of the Pharmaceutical Care Management Association, the trade organization for prescription-drug-benefit managers. “If you can’t get this right on cost control, what can you get right?”

Currently, there exists no expedited pathway for approving generic versions of brand name biologic drugs. “[A]ny prospective competitor to a brand-name product would have to go through the same lengthy and expensive approval process and clinical trials as the original manufacturer. As a result, there is very little economic incentive to develop a competitive version of a successful biologic.”

Health care experts believe that biologics could some day help treat everything from cancer to Parkinson’s disease and lawmakers are seeking ways to lower costs by increasing competition, while giving brand-name manufacturers the patent protection they need to continue researching and developing new medicines. In 1984, Congress tried to strike this balance with traditional drugs by passing the Hatch-Waxman Act. The bill, which at the time excluded the very small biologics industry, established a pathway for “generic drug firms to challenge weak branded drug patents” and introduce cheaper generic drugs into the market place. But in recent years, brand-name manufacturers have started exploiting a loophole in the law and paying “competitors to keep cheaper, generic versions off the market.” These so-called pay-to-delay schemes have cost consumers “an average of $3.5 billion a year in potential savings, according to a recent report by the Federal Trade Commission.” The federal government loses money “by being forced to pay billions for higher-priced medications needed by patients covered under government health insurance programs” and the Act stifles competition by granting a 180-day exclusivity period “to the first generic manufacturer attempting to market their generic,” detracting other companies from entering the market place.

Former anti-trust enforcer and CAP Senior Fellow David Balto describes the 180-day exclusivity period “for the first generic company to challenge a patent” as “the ticket to the generic market and only one person gets that ticket, the first one that challenges it.” “The generic company could enter the market and it will make a certain amount of money for that period of time, it will do really well. Then at the end of the six-month exclusivity period the prices quickly compete down to marginal costs,” Balto told the Wonk Room. “Ten years ago generic companies figured out that there is only so much money that generic firm can make by entering the market. But, if the branded firm shares its monopoly profits with the generic firm, then both of them profit and both of them are better off,” he said. “In the pharmaceutical industry lawyers actively work to find regulatory loopholes to go and delay the entry of generic drugs.”

If health care reform is to improve the affordability of prescription drugs, reformers must close the loopholes in the current law and create a new generic pathway to reduce the costs of the next generation of biologic drugs. To address the former, a coalition of consumer advocacy groups has written a letter to House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) asking them to declare pay-for-delay “per se illegal.” Rep. Bobby Rush (D-IL) included this language in the House bill, but there is no similar provision in the Senate bill. The letter also asks House and Senate negotiators to extend the 180-day exclusivity period to “subsequent successful challenges to patents.” “Expanding the exclusivity period is vitally important, since it removes the barrier to entry that has protected collusive settlements between brands and first filing generics,” the letter argues.

Limiting the exclusivity period for biological drugs would also increase competition and lower drug costs. A recent Federal Trade Commission report comparing “potential entry and competition by FOBs with entry and competition by small-molecule pharmaceuticals,” concluded that “competition by FOBs is unlikely to be similar to branded-generic drug competition [partly] because” of the substantial costs associated with obtaining FDA approval and “the lack of automatic substitution between an FOB drug and a pioneer biologic drug.” The report concluded that “the 12- to 14-year regulatory exclusivity period is too long to promote innovation by these firms, particularly since they likely will retain substantial market share after FOB entry” and recommended against establishing an exclusivity period.

During House Energy and Commerce Committee’s mark-up of the health care bill, Rep. Henry Waxman (D-CA) “had pushed to shield biologics for no more than five years — the same amount of time that traditional pharmaceuticals get under the Hatch-Waxman law,” but Rep. Anna Eshoo (D-CA)’s 12-year shield prevailed. Obama had originally suggested a 7-year exclusivity provision as a possible compromise, but has now, as Tumulty reports, increased that number to 10.

PhRMA, the lobbying arm of the pharmaceutical industry, is mobilizing against the reduction and threatening to withdraw its support for health care reform. “Mr. Waxman is pushing hard, with the support of the President, to drop our 12-year FOB period down,” PhRMA CEO Billy Touzin wrote in an email to his board. “We are all letting everyone we know hear that we could not support the bill if this happens. Please activate immediately all of your contacts.”

Yesterday, Sen Byron Dorgan (D-ND) officially introduced a bipartisan amendment to allow Americans to import foreign drugs. “My goal isn’t to ask the American people to buy their prescription drugs overseas, my goal is that if we allow the American people to do that, the pharmaceutical industry would be required to re-price their drugs in the country,” Dorgan said, stressing that “the American people pay the highest drug prices in the world for brand name prescription drugs.”

In other words, rather than regulating the pharmaceutical industry domestically, Dorgan wants to rely on foreign regulations. It’s a round about way of getting at the problem of skyrocketing drug prices — but it makes for effective political rhetoric.

From Dorgan’s rather convincing explanation of the problem:

- Drug prices increased 9.3% this year, during a period of national deflation.

- The industry creates demand for drugs through ubiquitous advertising, and then increases prices for American consumers.

- Americans pay 3 to 4 times more for brand name drugs than consumers in Europe and Canada.

- A substantial number of the drugs developed and produced by the pharmaceutical industry were developed at the National Institute of Health.

Watch a compilation of Dorgan’s presentation:

It’s an argument for letting someone else fix the drug price problem. But if policy makers can iron-out the logistical and safety issues (and lawmakers are reluctant to take on the drug industry), why not try it? After all, even President Obama and White House Chief of Staff Rahm Emanuel supported reimportation.

Now, Obama’s Food and Drug Administration opposes it. The Dorgan amendment “would be logistically challenging to implement and resource intensive. In addition, there are significant safety concerns,” FDA administrator Margaret Hamburg wrote in a letter. Dorgan contends that some FDA-approved drugs are already manufactured at FDA-approved foreign plants and that 40% of active ingredients in American drugs are important from India and China.

Ultimately, if the administration wants to retain the industry’s support for broader health care reform, that’s understandable. But it must also take this opportunity do something to address rising drug costs and the disparity in pricing.

Since agreeing to voluntarily reduce drug prices by “as much as $80 billion worth of discounts,” Big Pharma has embarked on a campaign to prevent moderate House Democrats from supporting a measure that would ensure that savings are actually realized. The POLITICO’s David Rogers has the scoop here, but suffice it to say, this rather public intimidation effort casts serious doubt over whether the industry ever plans to realize its voluntary pledge.

The background is rather straightforward. Back in 2003, the Medicare part D legislation moved the six million Americans who were eligible for both Medicare and Medicaid into the Medicare part D program. This created a windfall for the industry. Whereas Medicaid obtained an average discount of about 34 percent from pharmaceutical companies that chose to participate in the Medicaid program, “the average discount obtained by the Part D plans was 14 percent,” according to a report issued by Rep. Henry Waxman (D-CA).

“Under Medicare Part D, the six million dual eligible beneficiaries can take the same drugs they got under Medicaid. The only difference is that the federal taxpayer is now paying 30% more. Add it up, and it amounts to a drug manufacturer windfall worth at least $3.7 billion dollars in just the first two years of the Part D program” Waxman explained:

The drug companies are making the same drugs. They are being used by the same beneficiaries. Yet because the drugs are being bought through Medicare Part D instead of Medicaid, the prices paid by the taxpayers have ballooned by billions of dollars.

Now, if drug manufacturers provided the Medicare Part D program with the same prices that Medicaid receives, “these drug costs could be reduced by as much as $86 billion” over 10 years. Waxman’s legislation would effectively reinstate the rebate for the 6 million who were moved out of Medicaid and, in the process, save taxpayers billions of dollars. And for the industry, that’s precisely the problem. Rogers explains that “PhRMA sees any rebates as a big step backward. In making its deal with Baucus, the industry believes it won a commitment from the senator that he won’t sign a final House-Senate conference report that includes what Waxman wants.”

In other words, PhRMA is only comfortable embracing imaginary voluntary savings. Their agreement with Baucus encourages them to issue coupons or rebates to seniors for “unspacified discounts.” The savings “would benefit Medicare beneficiaries directly” and it’s unclear “what portion would accrue to the federal treasury.” Waxman’s bill would generate guaranteed savings that could help finance health care reform.

The two agreements have different winners and losers to be sure, but any health reform legislation should hold the industry to its word. One option is to design a policy that would trigger Waxman’s rebate proposal if the industry fails to produce the $80 billion it has pledged. After all, these days, triggers seem to be all the rage in health care policy.

On Friday, drug manufacturers “tentatively agreed to provide as much as $80 billion worth of discounts” over 10 years to seniors who are “subjected to crushing out-of-pocket expenses when the yearly amounts they pay for medication fall within” the ‘donut hole’ not covered by Medicare.

The Medicare Part D drug benefit contains a gap in coverage that “leaves beneficiaries on the hook for the cost of prescription drugs when the cost of their prescription drugs passes $2,700 in a year. Coverage kicks back in when a beneficiary’s annual drug cost passes $6,154 in a year.”

The agreement, which was made in negotiations with the Senate Finance Committee, could arguably provide savings for millions of Medicare beneficiaries but is contingent “upon enactment of a sweeping health-system overhaul“:

If health-reform legislation is enacted, the agreement would bring financial relief to about 3.4 million elderly and disabled Americans who currently fall into a coverage gap known as the “doughnut hole.”… Under the proposal, U.S. drug companies would provide half-price discounts to Medicare recipients in the “doughnut hole” and provide other unspecified discounts and rebates for a total of $80 billion in savings to the government.

Like the health industry’s voluntary commitment to slow the growth of health care spending by 1.5 percentage points a year over 10 years, this move by drugmakers “may have been intended to forestall more severe cuts.” It’s more of a public relations victory than a sustainable policy difference. Drug manufacturers may issue coupons or rebates to seniors but it’s unclear how much of the “unspacified discounts” “would benefit Medicare beneficiaries directly and what portion would accrue to the federal treasury.”

As Merrill Goozner notes, “not much of the money will be available for health care reform. The donut hole is by definition out-of-pocket costs for seniors. Cutting those expenses will not free up money in government budgets for helping the uninsured. That means the Congressional Budget Office will score the offer at much less than the $80 billion.” Economist Dean Baker points out that “the projected $80 billion in savings in context” would “equal to a bit more than 2 percent of the $3.8 trillion that the Centers for Medicare and Medicaid Services project the country will spend on drugs over the next decade.”

This isn’t to say that the commitment is worthless. It’s just more political than real, voluntary rather than mandatory. Americans already pay some of the highest drug prices in the world (according to a 2001 report by the House Committee on Government Reform, as a result of price controls in other countries, some drugs cost 31 percent to 48 percent less in Canada, France, Italy, Britain, Germany and Japan than in the United States), and so the industry’s foggy voluntary effort is only inspiring in the sense that it suggests that the industry still believes that health care reform is a very real possibility.

The New York Times is reporting that the American Medical Association will be lobbying Congress to oppose a public health insurance program, an integral part of health reform. In an attempt at damage control, the AMA has responded with a statement declaring it would support a public option if it operates like a for-profit insurance agency. In effect, the AMA still opposes reform. While Igor Volsky details the various reasons why the member physicians of the AMA should support a public health insurance program, it is important to consider that the AMA as an institution is not a neutral player simply representing doctors. Started in the mid 19th century as an accrediting organization, the AMA has morphed into a behemoth lobbying and member services entity that is deeply entwined with the for-profit health industry.

In the past century, the growth of AMA has been not only funded by health industry lobbies such as drug makers, but this relationship has tailored AMA’s anti-reform policy agenda. In reading the Huffington Post and the New America Foundation articles revealing AMA’s opposition to health reform during the New Deal, its efforts to block the passage of Medicare, and the AMA’s critical role in defeating health reform in 1993, questions arise over why the AMA has historically opposed any initiative to take health care out of the hands of the for-profit health industry.

In the first 50 years after its inception, the AMA struggled to fill its coffers. Because member dues were deemed insufficient to fund its various activities, the AMA eventually decided to sell advertising space for its medical journal JAMA to drug companies. Expanding on this business model, AMA President George Simmons decided to create the “AMA seal-of-approval” for favored drugs in 1899, resulting in a five-fold increase in advertising revenue by 1909. Simmons, it turned out, had no credible medical credentials and the AMA did no drug testing for the products given the seal-of-approval.

Simmons was later driven out of the AMA, but his model for extracting fees for branding medical practices and products persisted. Simmons’ focus on molding public opinion also became one of the greatest weapons of the AMA – his “Propaganda Department” would soon expand to communicate the AMA’s views through a column syndicated published in over 200 newspapers, a weekly radio program, and various books about how homeopathic practices and non-AMA approved drugs were “quackery.”

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Families USA and the Pharmaceutical Research and Manufacturers of America (PhRMA) are joining forces to launch a multi-million lobbying campaign to convince Congress to increase Medicaid eligibility to 133% of the federal poverty level, offer income-adjusted subsidies, prevent insurers in the individual market for denying coverage to Americans with pre-existing conditions, and cap out-of-pocket expenses.

PhRMA may be exploiting the coalition to curry favor with the public and fend-off proposals for a new public health care plan, but proposals that expand affordable coverage to the neediest Americans should not be vetoed just because they bolster the profits of private industry. In fact, as Families USA President Ron Pollack pointed out during a recent interview with ThinkProgress, having industry stakeholders “engage in a way that is designed to enable… [reform] to take place in a way that fits their business model, but yet helps people who are currently shut out of the healtchare system — I think that’s a step in the right direction.”

The direction may be right but it’s unclear how this early cooperation bodes for comprehensive health care reform. In fact, Big Pharma, like the insurance industry, is willing to support government intervention that bolsters its bottom line. In this case, rather than lowering drug prices — in fact, “the prices of a dozen top-selling drugs increased by double digits in the first quarter from a year earlier” and Americans are still paying some of the highest prices in the world — the industry is urging the government to subsidize PhRMA products for Americans who can’t otherwise afford them.

It’s a sweet deal for the industry and lower-income Americans, but it doesn’t exactly demonstrate the stakeholder’s commitment to “shared responsibility.”