Rep. Henry Waxman takes on drug companies over Medicare

From The New York Times:

As the health care debate focuses on whether cost cuts are looming in Medicare coverage, Representative Henry A. Waxman (pictured) is on a crusade to save Medicare billions of dollars — in a way that he says would end up helping the elderly.

That is because the money would come from the drug industry, which is why Mr. Waxman may have a fight on his hands.

Drug makers contend they have already worked out a 10-year, $80 billion cost-savings deal with the White House and crucial Senate gatekeepers on the trillion-dollar health care overhaul. The industry says that trying to add Mr. Waxman’s provision could scuttle that agreement.

“You not only break the deal, but you break the bank for us,” said Billy Tauzin, chief executive of the drug industry’s trade group, the Pharmaceutical Research and Manufacturers of America, known as PhRMA.

At issue is a multibillion-dollar “windfall” that Mr. Waxman contends the drug industry received when drug benefits were added to Medicare coverage in 2006. Mr. Waxman, Democrat of California, is chairman of the House Energy and Commerce Committee and is central to the House’s legislative efforts on health care.

When drug coverage was added to Medicare, under the so-called Part D program, about 6.4 million low-income elderly or disabled people were shifted into the program from the government’s Medicaid program for the poor. Such people, entitled to Medicare and Medicaid, are known as dual eligibles in health policy-speak.

Before that shift, because Medicaid administrators have the legal authority to negotiate prices with drug makers, those 6.4 million dual eligibles had their drugs paid for by the government at deeply discounted prices.

But under the Part D program, by law, Medicare is not allowed to negotiate drug prices. And so, when the dual eligibles were added to Medicare’s drug rolls, the government suddenly started paying higher prices for their drugs — 30 percent higher, on average, according to an analysis by Mr. Waxman’s committee.

As a result, Mr. Waxman contends, the drug industry got a $3.7 billion windfall in the first two years of the Medicare drug program, and he says pharmaceutical makers continue to reap more from Medicaid-eligible patients in the program than the companies would get if their drugs were provided through Medicaid.

“We want it back,” Mr. Waxman said in an recent interview. “We want to make sure the windfall for the drug companies does not continue, and we want to recover the money that has been a windfall.”

Dual eligibles now total some eight million people — or about one-fourth of Medicare drug beneficiaries. Mr. Waxman wants the drug makers to pay rebates on medicines sold to the dual eligibles, to put the prices more in line with what Medicaid pays for the same drugs.

The drug industry, says it has not received a windfall, and that Mr. Waxman’s analysis oversimplifies the issue.

It says that the government and patients in the Medicare Part D drug program can save more money in other ways that the industry has already worked out in the $80 billion agreement with the White House. That deal, which PhRMA says specifically precludes rebates for the dual eligibles, reportedly has the backing of Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee, which is a leader in the Senate’s health care effort.

Some details of the deal, including what political assurances the industry received for its offer, have not been made public by the White House, or Mr. Baucus. But PhRMA has agreed to support health care reform with a $150 million television advertising campaign — as long as the deal is what the industry says it agreed to.

Ron Pollack, executive director of Families USA, a nonpartisan group in Washington that works for affordable health care, said Mr. Waxman faced “an uphill climb” on the issue. Even if the House legislation includes the rebates Mr. Waxman seeks, Mr. Pollack predicted, the Senate will not go along.

But Mr. Waxman vowed to fight for the rebate plan in a conference committee with the Senate.

In 2003, when the Part D drug program was being planned as part of a Congressional overhaul of Medicare, Republicans insisted that the program be administered by private insurers and that the government be precluded from negotiating prices.

Stephen Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota who had conducted research for the government and industry, said that in 2003 many in Congress argued that private insurers would be more than capable of negotiating discounts with drug makers.

“That didn’t pan out,” Dr. Schondelmeyer said. The dozens of insurers involved, competing among themselves, simply do not have the government’s negotiating clout. While Medicaid is able to obtain rebates of up to 35 percent from drug makers, the Medicare drug rebates have been less than 15 percent, he said.

Dr. Schondelmeyer said it would be easy for the government to impose rebates on the dual eligible part of Medicare. But groups that promote free enterprise oppose that idea.

“This is best described not as a rebate but as a price control,” said Michael F. Cannon, director of health policy studies at the Cato Institute, a research group.

The nonpartisan Congressional Budget Office has studied the dual eligibles. A report it issued in mid-July showed that the federal government could save a net $30 billion over 10 years if drug prices were set at Medicaid levels for dual eligibles.

It was partly to head off such talk that PhRMA made an offer to the White House. As part of its $80 billion savings plan, it would give all people in the Medicare drug program a 50 percent discount if they entered an annual no man’s land in the coverage known as the doughnut hole.

The doughnut hole is a coverage gap that occurs after the person’s drug costs for the year reach $2,700; the coverage does not resume until the person’s costs exceed $6,154 for the year.

While in the hole, Medicare beneficiaries must pay for their own drugs or buy supplemental insurance. The PhRMA deal would give people drugs at half price during the doughnut hole period. PhRMA estimates this part of its proposal would save Medicare patients $34 billion over 10 years.

According to Ken Johnson, a PhRMA vice president, the industry placed a condition on its offer: the White House and Mr. Baucus would not support Mr. Waxman’s proposal for rebates.

“Over the long run,” Mr. Johnson said, “we felt seniors would be better served by reducing out-of-pocket costs in the doughnut hole, as opposed to a rebate in the so-called dual eligibles.”

He said that a study paid for by PhRMA had concluded that imposing rebates to benefit the low-income dual eligibles would make drug coverage 25 percent to 50 percent more expensive for the rest of the Medicare population.

But Mr. Waxman is not convinced by PhRMA’s arguments — or its agreement with the White House and Mr. Baucus.

“We don’t have any deal with them, and the whole enterprise of doing health insurance for all Americans isn’t to make the drug companies happy, or wealthier,” Mr. Waxman said. “They’re going to make a lot of money when we insure all Americans. There’s no argument for them to get a windfall.”