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Obamacare vs. Drug Innovation
PhRMA’s quiescence on Obamacare badly hurt the industry — and all those who depend on medical innovation.


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With the release of the president’s budget, it is now beyond dispute Beltway spin notwithstanding — that the decision by the Pharmaceutical Research and Manufacturers of America (PhRMA) to support the health-care bill was one of the worst self-inflicted wounds in the history of lobbying. For biotech and pharmaceutical companies, the president’s budget repudiates one of the most important benefits of their “deal” with the White House: the ability to market biotech drugs without generic competition for twelve years. The president would reduce that period to seven years, precisely the position of the generics industry and a position that the pharmaceutical industry had fought aggressively before it decided to make a deal with the president.

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This embarrassing repudiation of the deal follows another hostile act from the Obama administration. On February 3, health and human services secretary Kathleen Sebelius released a letter to all the governors encouraging them to modify their states’ Medicaid rules so as to use more generic drugs and to make deeper price cuts for drugs purchased in Medicaid. Since the industry had already agreed, when it signed onto the health-care bill, to cut deeply their prices for Medicaid drugs, Sebelius’s inclusion of this advice in her letter to the governors was a gratuitous slap.

In fact, the best thing that could happen to the industry — and therefore to all those individuals, here and around the world, who benefit from the strides it has taken in research — would be an unraveling of PhRMA’s deal. Since the president has walked away from the deal, now is the moment for the industry to walk away from a law that will significantly weaken the all-important U.S. market for pharmaceuticals.

What will Obamacare do to America’s premier health-care research industry?

First, Obamacare inflicts a series of balance-sheet hits on pharmaceutical companies. Last year, companies scrambled to write large rebate checks to satisfy the new price controls that the law imposed in the Medicaid program. In total, the price-control provisions of Obamacare will cost the industry $38 billion over the next ten years. During 2011, pharmaceutical companies will again be required to take out their checkbooks to pay a new $2.5 billion excise tax for this year, a tax that will grow to over $4 billion by 2018; this will cost the industry another $23 billion. Also, every January 1 the drug companies will be required to provide a 50 percent price discount for seniors who have reached the “doughnut hole” (i.e., the coverage gap in Medicare Part D); this represents about $30 billion in industry revenue that will need to be recovered elsewhere.

While these hits to the balance sheet will undoubtedly weaken the industry, cost U.S. jobs, and hinder further research, Beltway lobbyists persuaded Wall Street analysts that the industry “got off easy” because these extortion payments allowed it to fend off more serious congressional threats such as imposing price controls in Medicare and permitting unrestricted drug importation.

But the lobbyists missed the forest for the trees. These taxes and fees are less important than the implications of the law’s gargantuan reordering of the pharmaceutical marketplace. Over the long term, Obamacare will cause a significant degradation of the private-sector market for pharmaceuticals, a market that has been the best in the world.

In the United States, 150 million citizens get their prescription drugs through their health insurance rather than directly from the government. Employers (and unions) contract with private health insurers to deliver the drug benefit, and the insurers negotiate with the pharmaceutical companies to decide which drugs they will cover and at what price.

Employees and retirees generally want access to the newest and best medicines, and their companies want to keep them happy and healthy. Therefore, the health plans serving employers do their best to balance cost with the need to provide high-quality medications.



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