If revenge is a dish best served cold, the pharmaceutical industry may soon be experiencing a Siberian winter. Reports on Capitol Hill indicate that during debt-ceiling talks with the White House, some congressional Republicans are offering to institute Medicare Part D rebates as a way to raise revenue. These would hit the pharmaceutical industry hard — and as satisfying as that would be for the GOP, they should be opposed on solidly conservative grounds.
A drug rebate is a discount given to an insurer that, rather than being offered up front, is paid by the drug company after the patient buys medicine at a pharmacy. Government-imposed rebates are nothing more than price controls — a way to reduce the cost of government-run insurance at the expense of drug manufacturers. But since the rebates will be paid to the government after the fact, rather than reducing the amount the government spends in the first place (as would be true with straightforward price controls), these Republicans think they should count as “revenue.” Supposedly, this would provide a counterargument to the White House complaint that Republicans are inflexible on revenue and want to rely solely on spending cuts to balance the budget. According to the Congressional Budget Office (CBO), the rebates being discussed would amount to $112 billion over ten years.
Medicaid already has price controls via rebates; whenever a Medicaid patient buys a covered drug, the manufacturer has to pay the government at minimum 23 percent of the commercial wholesale price. The GOP proposal, initially floated by the CBO, would bring similar controls to Medicare, imposing them on medicines provided to Part D’s low-income subsidy (LIS) population. Because the LIS population represents 40 percent of Part D enrollees and more than 50 percent of Part D spending, this proposal would slap price controls onto half the Part D program.
Republicans rarely embrace price controls, but their apostasy in this case is understandable. During the first part of 2009, Obamacare seemed on the verge of collapse. Then, that summer, the pharmaceutical industry marched into the White House and cut the infamous “deal”: Drug companies would support Obamacare in return for the White House’s promise to oppose price controls in Part D.
Ironically, the law they supported established the Medicaid rebates that are now serving as a template for Part D rebates. The industry did not seem to understand how attractive a 23 percent discount on drugs is, and how tempting it would be for the government to extend the rebates to Part D.
Arguably, the industry’s dramatic and surprising support for the White House was the single most important event in reversing the declining fortunes of Obamacare; it drove a wedge through the opposition, cut the legs out from under the GOP, and sent other sectors of the health-care market racing to the White House to cut their own deals.
But while GOP antipathy to the pharmaceutical industry is understandable, Republicans should take a step back before they align themselves with a price-controlled vision for the Part D program. There are several very strong reasons to oppose the application of price controls to Part D.
First, House Republicans need to recognize that price controls in Part D would be a repudiation of Paul Ryan’s Medicare reforms. Ryan modeled his reforms on the Part D program, where private plans deliver benefits and manage costs. The Part D program has been far less expensive than early CBO estimates predicted, largely because of the success of the private sector in lowering costs while maintaining satisfactory benefit levels. Embracing government price controls as the primary lever to control costs would repudiate the philosophical foundations of the Ryan plan.
Second, the GOP should consider what a devastating impact such price controls will have upon an industry that is shedding jobs at an alarming rate. The pharmaceutical industry conceded $80 billion in revenue during the Obamacare negotiations. Requiring another $112 billion in price concessions would mean that the federal government will take $192 billion out of the industry over the next ten years. According to a recent employment survey, during 2010 no private-industry sector shed more jobs than the pharmaceutical industry did: 37,000. These job losses are due to a number of factors, but primarily to an unprecedented “patent cliff”; during the 2009–13 period, it is estimated that the industry will lose $137 billion in revenue due to patent expirations. Price controls in Part D will, without a doubt, accelerate job losses in this already struggling industry.
Third, price controls in the government sector lead only to higher prices for other customers. When the government uses its monopoly power to secure lower prices, drug manufacturers make up some of the loss by charging the private market more. Some commercial health plans will see higher drug prices, increasing pressure on employers to dump their employees onto the Obamacare exchanges — hardly a GOP goal.
Finally, price controls in Part D will instigate higher “launch” prices for new drugs as the industry tries to make up for lost revenue. During the debt-ceiling talks, the admirable position of Republicans and tea-party activists is that growing debt levels are morally repugnant because of the burdens they place on future generations. Price controls in Part D simply ensure that future generations will pay higher prices for new drugs.
The political reality is that the pharmaceutical industry is now a man without a country — a huge industry that has no base of support in either political party and is highly vulnerable to attack. For the good of the country, however, the GOP needs to recognize that, despite its poor political choices, the biopharmaceutical sector is one of the crown jewels of American industry. It employs hundreds of thousands of Americans, pays well, and develops cutting-edge technology. China and India cannot match the science and innovation that still occurs in the U.S. and European pharmaceutical industry.
As Burke said, “Magnanimity in politics is not seldom the truest wisdom.” In this case, the GOP needs to embrace an industry that has lost its way, lead it back to its free-market roots, and not, out of the desire for retribution, impose price controls.
—William S. Smith was formerly vice president for U.S. public affairs and policy at Pfizer, Inc. He is currently managing director at NSI, a D.C.-based consulting firm. His views are his own.