Politics & Policy

Bitter Pills

Deal or no deal, Big Pharma loses.

This summer, just when the health-care debate grew sour, Big Pharma struck a sweet deal. Or so they thought. By agreeing to pony up $80 billion to support Obamacare, the Pharmaceutical Research and Manufacturers of America, or PhRMA, assumed that they dodged a bullet. Ladle the Democrats some cash now, they reckoned, and maybe they could avoid some big bills later.

Part of PhRMA’s handshake with the White House and Senate Democrats included the protection of a provision that prohibits Medicare from negotiating with drug companies for lower prices. The health-care bill that finally emerged from the Senate Finance Committee last month nodded toward that agreement. All, it seemed, was well.

Yet, while they palled around with White House chief of staff Rahm Emanuel and Senate Finance Committee chair Sen. Max Baucus (D., Mont.) in the back rooms of Washington, PhRMA forgot about one thing: the House of Representatives. Now, after having left House Speaker Rep. Nancy Pelosi (D., Calif.) on the sidelines, PhRMA is realizing that, deal or no deal, they may still lose.

The health-care bill that passed the House by a 220-215 vote is a direct strike back at PhRMA. Instead of charging the pharmaceutical companies $80 billion to play, like the White House and Baucus, Pelosi decided to jack up the price. According to the New York Times, Nadeam Elshami, a Pelosi spokesman, acknowledged on Monday that the House bill, if it becomes law, will end up costing the drug industry $140 billion over ten years by requiring another $60 billion in rebates.

And, most significantly, the House bill also authorizes Medicare to negotiate drug prices directly with manufacturers. Sure, the House bill will probably be altered in the Senate, but there’s no guarantee that PhRMA will be protected. Senate majority leader Harry Reid and the White House are scrambling to do everything they can to get the magical 60 votes they need for passage by Christmas. At the end of the day, when Democrats are looking for those final votes, the PhRMA deal from the summer will be worth as much as most handshakes in Washington.

PhRMA issued a statement critical of the House vote earlier this week. It maintains, of course, that it still wants to support health-care reform. But after seeing their industry trampled in the House, PhRMA should be worried. The Senate is a fickle place.

What would happen if the government began to negotiate Medicare drug prices?

First, Kathleen Sebelius, the secretary of Health and Human Services, would become perhaps the most powerful person in the pharmaceutical industry. She, along with CMS, the center for Medicaid and Medicare, would be able to exert major control over the prices of products that companies spend years developing. This is exactly the kind of scenario that was blocked in the prescription-drug bill that passed in 2003. That was a big victory for the industry. If the House bill’s language seeps into the Senate bill during conference debates, it could be short-lived.

Innovation, too, would be affected. With the government able to haggle over prices, the drug companies could lose billions, just as the Pelosi spokesman projected. Citizens, however, would pay the greatest cost. The entire pharmaceutical industry would be forced to spend millions more each year in order to keep pace with competitors while adjusting to new price controls. Those millions (or billions) should be going toward developing new drugs to fight cancer or HIV/AIDS.

Ken Johnson, PhRMA’s senior vice president, tells NRO that if the government repeals its “non-interference” stance on Medicare prices, this would “result in catastrophic job losses” for his industry. “That’s not a political scare tactic,” he says, “but an economic reality. Pure and simple, it would be an extension of price controls.” And America, he warns, should remember that “our country has had one failed experience after another with price controls. They inevitably lead to shortages, access restrictions, and unhappy voters.”

Still, says Johnson, PhRMA “remains convinced that at the end of the day the Senate will pass a comprehensive health-care bill that will be good for patients [and] the economy, and one that respects innovation.”

Regardless of PhRMA’s confidence in their Senate friends, drug companies should be sweating. If the government gets into the pricing game, it’ll be game over for many of them, and consumers, too. Just two years ago, both the House and the Senate endorsed a plan that favored the negotiation of prescription-drug prices. It was stopped in the Senate by a GOP filibuster. Whether Senate Republicans have as strong a hand this year is unknown.

Anyone can cut a deal in Washington. But as PhRMA is learning, the House almost always wins.

– Robert Costa is the William F. Buckley Jr. Fellow at the National Review Institute.

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