Another Big Run on Pharma's Bank Account

What exactly did that $80 billion deposit for health reform buy?

Lots of industry CEOs traveled to the White House and shook hands with President Obama during the spring and summer of 2009, and while the specifics of those conversations haven’t been made public, the result was industry support of healthcare reform, and a pledge of $80 billion in savings on drug spending over ten years.

Industry support, political and financial, comes at a price, and in some respects, the Patient Protection and Affordable Care Act was notable for what it didn’t contain: shortened data exclusivity periods, Medicare and Medicaid dual eligibility rebates, pay for delay restrictions on generic market entry, and most importantly, no recourse for price negotiations to leverage the market power of the Centers for Medicare & Medicaid Services (CMS) under the Medicare part D drug benefit.

Those hard-won omissions protected industry profits, but now they’re back on the table, as reducing the national deficit has become one of the noisiest political issues in the US, just in time for the start of election season. The Obama Administration’s proposed budget for 2012, and a new deficit reduction framework that “builds on the Affordable Care Act by including new reforms aimed at further reducing the growth of health care spending – a major driver of long-term deficits,” both target the very practices that industry thought it had safeguarded during healthcare reform negotiations.

PhRMA is crying foul. “Unfortunately, the President’s approach to reducing our deficit fails to consider the impact on the entire policy tapestry – local and federal – that influence our industry’s current and future health,” said John Castellani, PhRMA president and CEO, in a statement following Obama’s budget speech last Wednesday. “Specifically, proposals to expand rebates, saddle seniors with higher premiums and slash data protection for biologics are bad for patients and are bad for innovation.”

Obama’s speech at George Washington University last week didn’t directly address shortening biologic data exclusivity protections from 12 years to seven years, for example, but industry read between the lines when the President said things like “We will cut spending on prescription drugs by using Medicare’s purchasing power to drive greater efficiency and speed generic brands of medicine onto the market.”

However, a description of terminations, reductions, and savings included with the proposed budget for 2012, released in February, was explicit: “Under the Administration proposal, beginning in 2012, innovator brand biologic manufacturers would have 7 years of exclusivity and would be prohibited from receiving additional exclusivity by ‘evergreening’ their products.” That change would reduce federal spending by $2.3 billion, between 2012 and 2021, according to the budget document. Prohibiting “brand and generic drug companies from delaying the availability of new generic drugs” would save the government $8.8 billion during the same period, the document says.

As detailed in the deficit reduction framework released last week, Obama will also strengthen the Independent Payment Advisory Board (IPAB), created by the Affordable Care Act. Specifically, the IPAB will set a target cost for Medicare beneficiaries, based on GDP per capita data plus 0.5 percent, and recommend actions to Congress if costs rise above that target. The IPAB will also get additional enforcement mechanisms, such as “an automatic sequester as a backstop” to other Medicare reforms, to keep costs in check, according to the framework.

On top of that, new price negotiations between CMS and industry are likely to occur around the issue of the notorious dual-eligibles, those nine million beneficiaries eligible for both Medicare and Medicaid that consume 40 percent of total Medicaid spending, according to the deficit reduction framework. An Obama 2012 budget proposal would also “enforce Medicaid rebate agreements,” and “increase penalties on drug manufacturers for fraudulent non-compliance with Medicaid drug rebate agreements.” The budget doesn’t attempt to predict how much money those two proposals would save the government, but the HHS Office of Inspector General’s December 2010 report on industry fraud and abuse did impose significant multi-million dollar fines on several companies for violations of the rebate rules. A report from The National Commission on Fiscal Responsibility and Reform, which also came out in December, estimated that $49 billion could be saved through 2020, and $7 billion through 2015, by extending the Medicaid drug rebate to dual-eligible beneficiaries.

So what did industry get for its support of healthcare reform and $80 billion? Well, no one is talking about importing drugs from Canada, at the moment. Nor is there as much interest in a proposal recently floated by legislators in both parties to tighten or eliminate the tax deductibility of promotional ads for prescription medicines. But the move to gore the industry asset ox is definitely on in Washington, and big pharma will need all its lobbying clout to keep that $80 billion “contribution” from moving into the triple digits. At some point, it’s going to add up to real money.