Promises to the Drug Industry: Like Renegotiating NAFTA?
Apparently the Obama administration made a commitment to the drug companies that it would block efforts to reduce drug costs in the Medicare prescription drug program. This was apparently in exchange for a promise by Pharma to cut their prices to seniors by $80 billion over the next decade. While we may not know the full content of whatever agreement was actually struck, if this exchange is at its center, the taxpayers got a bad deal.
To give some context, the country is projected to spend more than $3.5 trillion on prescription drugs over the next decade. This is more than 2 percent of projected GDP over this period and comes to about $12,000 per family. That is real money even in the context of federal budgets.
The industry's promised $80 billion in savings would be equal to less than 3 percent of its projected revenue. It is also important to remember that these savings are not well-defined and there is no obvious enforcement mechanism. Given the record of the drug industry, a certain amount of skepticism would certainly be warranted.
Even if the industry carries through with its promise, they would still be getting a very good deal. The United States pays nearly twice as much for its prescription drugs as do people in other countries--or for that matter - as do our veterans who receive their health care through the Veterans Administration (VA). If Medicare were to pay VA type prices, it could easily save taxpayers and beneficiaries $600-$800 billion over the next decade.
There is a great deal of support among Democrats in Congress for having Medicare negotiate lower prices with the drug industry. The industry scored a real coup if it was able to head off this possibility with a vague promise of $80 billion in savings.
It is important to realize that high drug prices don't just cost us money, they are also likely to lead to bad medicine. The basic story is that drugs are almost invariably cheap to produce; the reason that prices are high is that the government grants the industry a patent monopoly. This monopoly allows Pfizer, Merck, and the rest to charge hundreds or even thousands of dollars for a prescription of life-saving drugs that would sell for $4 at Wal-Mart if we had a free market.
When there are huge gaps like this between price and cost of production, then the industry has enormous incentive to promote their drugs, even when they may not be the best medicine for patients. This is why it spends billions of dollars each year on ridiculous television ads and why it spends tens of billions of dollars hiring former cheerleaders to go to doctors' offices to push their drugs.
Business responds to incentives, that's basic economics. And the incentives the government is giving the drug companies is to push their drugs to anyone they can get to buy them, whether or not the best medicine for their condition. Needless to say, this goes directly against President Obama's efforts to contain costs by promoting good medicine.
If we had drug prices more in line with production costs, we would take away the industry's incentive to lie in ways that are bad for our health. In short, we would get better medicine and pay less money for it. (Yes, we would have to find alternatives to patents for financing drug research, but there are better ways.)
Of course there is an alternative spin that we can put on the deal with the pharmaceutical industry. Politicians often have to make commitments to gain support in the middle of heated campaigns. Remember how all the leading Democratic presidential candidates promised to renegotiate NAFTA during the primaries? We haven't heard a lot about that one lately.
Perhaps the pledge to block lower Medicare drug prices is like the commitment to renegotiate NAFTA. We better hope so.
. . . these savings are not well-defined . . . .
Ya see, I was going to charge Medicare $3 billion for Plavics III but because I'm a man of my word, I'm reducing that charge to $2.9 billion.
Sort of like the old price hike before the sales discount. Half (more than half?) of the drugs haven't been put on the market or priced, yet. How would we know whether we're getting any savings at all.
August 7, 2009 2:08 PM | Reply | Permalink
Sort of like a price drop of 50% for a drug one day - look at the huge savings your government has gotten you in med costs - and the next day the price is 75% higher because in getting you that 'huge saving' the government gave up its previous right to negotiate drug prices with pharma.
As far as I can figure, neither government nor business is on our side, but they're certainly on each other's side.
August 7, 2009 2:38 PM | Reply | Permalink
Are these figures adjusted for inflation? If the $80 billion isn't, it is not a reduction at all, but an increase. For Congress to sell negotiating rights for this paltry sum is a crime in itself. Billy Tauzin is already laughing all the way to the bank over this deal.
August 7, 2009 3:37 PM | Reply | Permalink
We are talking trillions of dollars here. What wouldn't you do for a trillion dollars? Some people will kill for much, much less.
They're not going to give up this money just because it's the right thing to do. It has to be taken from them. And they're not going to just let you take it. It's trillions of dollars. That much money can buy anyone. That much money, anything can happen. What is least likely to happen is democratic process and bipartisan agreement. It's a huge, wealthy industry that will not be reined back with talk and promises.
I hope President Obama understands that.
August 7, 2009 3:38 PM | Reply | Permalink
It is not clear that the taxpayers "got a bad deal", although they may have. The Administration received more than an $80 billion promise. It also achieved a commitment by the drug companies to refrain from fierce opposition to the reform packages (a la Harry and Louise type public advocacy) and instead assert their rather strong support for the proposals overall. Given the parlous state of the reform legislation, that may be worth a considerable amount, but how much can't easily be quantitated.
I also find it misleading to suggest that the huge excesses in drug costs the industry is inflicting on us would necessariy have been substantially reduced if the Administration had not agreed to abstain from negotiating Medicare drug prices. Most of those excesses are such an inherent part of the structure of the pharmaceutical industry that they would be unlikely to change dramatically simply via a negotation. What I believe will be needed is a major overhaul of how drugs are developed and marketed. That will require considerable government intervention and legislation, and perhaps some tax increases, all directed toward the goal of an eventual net savings, but this would not be the year to add such a contentious process to what we already see happening.
For some more on drug development reform, see
http://tpmcafe.talkingpointsmemo.com/talk/blogs/fredmoolten/2009/06/prescription-drug-costs-can-be-2.php
August 7, 2009 3:42 PM | Reply | Permalink
So why did the government agree to abstain from negotiating drug prices - remember it was in place prior to MedicarePartwhatever.
August 7, 2009 4:58 PM | Reply | Permalink
phelicity - See my comment above. It was a political calculation designed to promote the overall reform legislation while limiting the sacrifice required by the drug industry. Was it worth it? Probably, but unless we knew how much the legislation was in danger without the compromise, and how much the danger is reduced by the compromise, we can't be sure of its value.
August 7, 2009 5:22 PM | Reply | Permalink
August 7, 2009 4:43 PM | Reply | Permalink
Your arithmetic, using Baker's figures, seems to be correct. But I think Baker's figures are off and shouldn't be relied upon.
There are approximately 113 million households (75+ million families) in the U.S. Assuming that current drug costs are $260 billion,* initially, households would be paying about $2300 a year -- and families more than that.
* See, Marcia Angell for how difficult it is to get a handle on how much we pay for drugs. My cost figure includes retail and pharmacy revenues.
August 8, 2009 2:25 AM | Reply | Permalink
The Centers for Medicare and Medicaid Services (the project that drug spending will rise rapidly over the next decade [http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2008.pdf](see Table 2).
August 8, 2009 8:05 AM | Reply | Permalink
According to the CBO, a restored ability of the government to negotiate Medicare D drug prices would have little impact on those prices, because they are already subject to competitive negotiation. This appears to add substance to the justification for Obama's agreement with the drug companies in exchange for their support of reform efforts, plus an $80 billion promise -
http://www.cbo.gov/ftpdocs/79xx/doc7992/DrugPriceNegotiation.pdf
August 8, 2009 11:04 AM | Reply | Permalink
Fred,
It depends on the nature of the negotiations. The VA pays about 60 percent of the price that beneficiaries pay within Medicare. Congress could write into law that Medicare will pay VA prices.
August 8, 2009 11:37 AM | Reply | Permalink
A law isn't a negotiation, but it was the latter that is an issue regarding the Obama agreement with the drug companies. The main point made by the CBO is that negotiations by the government would probably lead to little further price reduction, because individual plans had already negotiated price reductions. I don't know whether the CBO was right, and they didn't attempt a precise estimate, but their general point seems to be a reasonable one.
Concerning the VA, its very favorable treatment probably reflects two factors. One is its negotiating leverage (I think reflecting a population of about 5 million veterans within the program). The second, however, is the calculation by the drug companies that they can make up the difference elsewhere. My own view is that the industry could make little or no profit if it charged everyone VA prices, unless the entire drug development and marketing paradigm it utilizes were radically overhauled. I would welcome the overhaul, but without it, prices are likely to change only minimally, and Congress is unlikely to force the overhaul in the face of the controversies it's already forced to endure by the healthcare reform debate.
August 8, 2009 12:12 PM | Reply | Permalink
Please don't use doublespeak. You are not talking about negotiations. You propose that a federal agency set drug prices in US.
August 8, 2009 12:12 PM | Reply | Permalink
Naturally a loyal donkey like me would never speak of 'doublespeak' in such a context, but let's face it, 'law' is scarcely the only noun that needs to be put between shudder quotes in this weird discussion. 'Negotiation' is just as shudderiferous for anybody who is more interested in how "our country" is generally to be run than in particular power grabs and market cornerings.
Move over Bulwer-Lytton!
"It was a dark and stormy night. In a smoke-filled room at an undisclosed location, the President of the United States had put in many wearisome 'negotiating' an 'agreement' with the drug companies...."
Indeed, maybe that should be "drug companies" while we are at it? Your neighborhood mom-and-pop pharmaceutical developers will not have been invited to attend so select an event any more than journalists and Congresspersons and other irrelevant nuisances, you and me among them.
Now of course it has been established by the Cheney Corollary to the Nixon Doctrine that this sort of thing can go on unchecked (and uncheckable on) as long as its only a matter of bombing and invading and occupying non-voting foreigners, but I was not aware that Mr. Madison's Constitution had been laid aside domestically as well. Do Mr. Reid and Ms. Pelosi know yet that they have been obsoleted?
Picking the general weirdness up by the other end, one might wonder how President Summers and Mr. Obama expect to get through the old-fashioned formal obstacle course without ever letting the Speaker and the Majority Leader (and Televisionland and the electorate) that they (and we) have now been promoted from being a mere 'efficient' part of the Yankee constitution to being a 'dignified' part thereof. [1]
Then there is the SCOTUS caltrop. Once the Administration and the druggies have 'negotiated' an 'agreement' of this Pickwickian sort to their own subjective satisfaction, I fear it will turn out to be a dignified 'contract' rather than one of those tiresome old Contracts that one could usually get courts to resist the Impairment of. (That's article I, section 10, clause 1 of the musty old parchment.) What's to prevent President Summers on the one side or Big Pharma on the other from cheating like crazy?
Larry and Barack dispose of more nukes than Pfitzer and GlaxoSmithKline and Novartis, to be sure, but it is not easy to see exactly how that immense theoretical advantage would be brought to bear in practice.
Still, if it is to be a secret what is in the 'agreement', perhaps one is being unreasonable to wonder how the High Contracting Parties propose to make sure that everybody keeps her word.
No business of yours or mine is that!
Happy days.
McNarrative
___
[1] Does anybody still read Bagehot ?
(( "Uncultured and rude population" fits the Teabag Tribe rather well, does it not? Unless, of course, it matters that the Foxcuckooland crew have rather relapsed into barbarism than never arisen from it to begin with. ))
August 9, 2009 3:41 PM | Reply | Permalink
Fred,
please read the post. I was talking about overhauling an incredibly inefficient and outmoded system of drug development.
August 8, 2009 1:37 PM | Reply | Permalink
I agree you made some important points. My comment related to your suggestion that Obama's agreement with the drug companies in exchange for abstaining from Medicare drug price negotations was a bad deal. I interpret the evidence to say otherwise (see the CBO letter above), but we clearly agree on a need for substantial changes in the way the industry operates.
August 8, 2009 5:59 PM | Reply | Permalink
"Needless to say, this goes directly against President Obama's efforts to contain costs by p*romoting good medicine. "
Dean, this sentence doesn't make a bit of sense, the "this" is President Obama's efforts.
So your sentence says:
Obama's efforts go directly against Obama's efforts.
I think you are trying to decieve us, or are incredibly naive to not get that what Obama says to the public, and his backroom dealings are often complete opposites.
This follows the trends of "transparency" "anti-War" "NAFTA" "telecom immunity" "rule of law" etc.
Just face it - Obama doesn't want healthcare for all, he wants to ensure the profit stays in the medicine field. Obama has never really pushed for what he says in public. Did you ever wonder how Obama got all the fawning press coverage and was even considered "electable"?
Obviously he had made promises to the power players that he wouldn't really rock the boat at all, he would just talk about it. I'm sure he convinced the big money powers that be that he would be on thier side, and not on the side of the middle class, and poor.
Otherwise GE wouldn't allow Chris Matthews to get chills up his legs. Just like they muzzled Olberman re: Fox News and OReilly.
The fix is in, Obama is not a liberal, not even close, he is a corporatist plain and simple. Actions speak louder than all of his soaring rhetoric - and all Obama does is cave in to Republicans/Corporations and pass half-ass bullshit bills that don't solve the problems we absolutely know how to solve - and would have the votes to if Obama wanted.
August 8, 2009 5:37 PM | Reply | Permalink
Up until Captain Obvious's comment, this thread appeared to be an intelligent discussion.
August 8, 2009 6:02 PM | Reply | Permalink
DIVIDE AND CONQUER!!!
the Teabagger movement.
We need to pull a Rovian Gambit
We need to cause dissention in the ranks of the Teabaggers.
If the American worker, had not allowed American Industry to move overseas; If America had decent paying jobs here at home; the American people would not be forced to have a government plan, to assure the countless Jobless from being uninsured.
Now MR. High and Mighty Representative; where do you stand on renegotiating NAFTA?
Let the Teabaggers turn they’re attention back; against those opposed to JOBS for America.
Below you’ll find one example that it was the Conservatives, the Republicans, who voted for NAFTA.
With so many unemployed I wonder; if the vote were held today would NAFTA Pass?
http://epi.3cdn.net/3d995382f3252362c7_ydm6bxl4u.pdf
THE POLITICAL ARITHMETIC
OF THE NAFTA VOTE
Excerpts
“Start with the obvious fact that Clinton’s NAFTA was repudiated by a strong majority of his
own party -- three-fifths of congressional Democrats….For example, the non-college-educated,3
who provided almost three-quarters4 of Clinton’s support, opposed NAFTA 43 percent to 34
percent in a Gallup poll taken on the eve of the vote. In contrast, the college-educated -- just 27
percent of Clinton’s support -- favored NAFI’A by 54 percent to 34 percent.
In the same poll, those with $20,000-$50,000 in family income -- the heart of the middle
class -- opposed NAFT’A by 47 percent to 32 percent.”
August 8, 2009 10:40 PM | Reply | Permalink
Why do politicians always seem to skirt the obvious question? Most on main street have lived long enough to know that money buys power and influence. Yet in recent memory only one politician ( Dick Durbin ) actually blurted it out. The money interests on Wall Street own the government. The next question should be, how do we change this? How do we get our elected officials attention? Do we march on Washington en mass? Do we form a tax revolt and take our money power away from those we elected? It's not like they can arrest the entire country. But in the end, we have to get off our butts and take a stand. We have to talk truth to power in order to get power to change it's mind set and do what's right for all rather than those at the top who continue to rape the system at our expense.
August 9, 2009 12:29 PM | Reply | Permalink