2003-10-31 -- Medicare Drug Plan a Boon to Drug Manufacturers


61 PERCENT OF MEDICARE'S
NEW PRESCRIPTION DRUG SUBSIDY
IS WINDFALL PROFIT TO DRUG MAKERS

© 2003 Alan Sager and Deborah Socolar


Click here for full report:
http://www.bumc.bu.edu/www/sph/hs/images/Health_Reform/Medicare_Rx_bil
l_windfallprofit.pdf


Alan Sager, Ph.D. and Deborah Socolar, M.P.H.
Directors, Health Reform Program
www.healthreformprogram.org
Boston University School of Public Health
715 Albany Street
Boston, Massachusetts  02118
617 638 5042
asager@bu.edu
dsocolar@bu.edu



31 October 2003


Windfall - noun  1. Something blown down by the wind, as fruit from a
tree
2. Any unexpected acquisition, gain, or stroke of good luck.


Disclaimer:   As always, we write and speak only for ourselves, and
not on behalf of Boston University or any of its components.


Summary

Congress has declared its commitment to keeping prescription drug
prices high under any Medicare drug benefit.  This report shows that
these unrestrained prices-given the remarkably low real cost of
producing the added volumes of pills that Medicare patients need-will
bestow enormous windfall profits on prescription drug makers.

An estimated 61.1 percent of the Medicare dollars that will be spent
to buy more prescriptions will remain in the hands of drug makers as
added profits.

·         This windfall means an estimated $139 billion dollars in
increased profits over eight years for the world's most profitable
industry.

·         At $17 billion annually, this means about a 38 percent rise
in drug maker profit.

This is the main reason why the proposed legislation gives patients
only a scanty drug benefit, with high continued cost-sharing.  The
gift to drug makers is also why the plan requires a high taxpayer
subsidy-money borrowed from our children and grandchildren.

The legislation would explicitly prohibit Medicare itself from acting
to negotiate or contain the drug prices paid under the new program.
This ominously parallels the 1965 Medicare law's granting of
open-ended payments to hospitals and doctors.  Those payment methods
proved extraordinarily costly.  Congress should not be so naïve today.

The drug industry's current business plan rests on high prices and
rapid revenue growth.  In giving the drug makers the Medicare bill
they demand, Congress offers temporary support to this plan.  But the
plan itself is not durable because it is simply too costly.   Congress
is simply deferring serious work to shape a sustainable drug industry.

Cost analysis

Where will the new federal money go if Congress does create a Medicare
prescription drug benefit without cutting drug prices?

·         We project that $228 billion of $400 billion in new federal
spending over eight years would be used to buy drugs that patients
previously did not get.  This is new revenue to the drug industry as a
whole-that is, to drug makers, retailers, and wholesalers.

·         Together, the retailers' and wholesalers' share is about
24.4 percent.  Therefore, the drug manufacturers get the remaining
75.6 percent as gross income.

·         Drug makers' costs don't rise much when they produce and
sell more pills.  Marketing, administration, and research expenses
would change little.

·         Drug makers' only added costs associated with a new Medicare
prescription drug benefit are expected to be in manufacturing and in
distribution -and these added costs are remarkably low.

Drug makers' factories are already built, and the ingredients in most
medications are inexpensive.  This means a very small incremental cost
to make the added volume of drugs that newly covered Medicare patients
will need.  Estimated added cost of making additional pills is only
about five percent of full retail price.

Subtracting the rise in manufacturing and distribution cost yields an
estimated rise in net revenue for drug makers.  Against that gain,
this report offsets drug makers' lower profit on newly discounted
drugs formerly sold at full retail price.  Conservatively, this report
does not estimate several factors that might raise drug makers' profit
share-for example, a possible shift of many prescriptions to Medicare
from Medicaid.

·         Drug makers' net increase in profit is estimated at $139.2
billion over the eight-year early life of the program.   This rise in
drug makers' profit constitutes fully 61.1 percent of the $228 billion
in Medicare dollars used to buy additional prescription drugs for
patients previously unable to afford them.

The report focuses on drug makers' profits from new business.  It does
not examine the parallel use of federal funds to sustain profits on
old business-drugs that would also be bought by Medicare at high
prices.

The report offers a sensitivity analysis of the effects of different
assumptions about the split of the additional $400 billion between
dollars used to buy new drugs and dollars used to replace present
purchases of drugs, and about the actual cost of manufacturing.

Given current federal deficits, the analysis suggests that Congress is
choosing to borrow from our children and grandchildren to bestow large
new profits on the drug industry-already the nation's most profitable.

Alternatives

·         One option for recouping such unwarranted profits would be a
windfall profits tax.  Such taxes have a long history in the United
States.

·         Paying drug makers for the added volume of medications at
their low actual cost of production is vital to providing a Medicare
prescription drug benefit without yielding windfall profits-to meet
patients' needs while remaining affordable for taxpayers.

·         Prescription drugs can be made affordable for all Americans,
though, using similar methods.  What's essential, to meet the needs of
patients, payers, and drug makers, is a prescription drug peace
treaty.  This would permit drug makers to switch from today's strategy
of high prices and restricted use to a strategy of low prices and high
volume.  Profits and research can be protected at today's levels at
the same time that all Americans obtain all the prescription drugs
that work at a price we can afford.

Today's high drug prices are the main source of pressure to enact a
Medicare drug benefit-and also the main reason why the bill Congress
is likely to pass will be so skimpy for patients and so profitable for
drug makers.

The main choice is among suffering and dying for lack of needed
drugs, paying much more, and reform.  Congress and the drug industry
can shape a bill that addresses the core needs of patients, payers,
and the industry.  They have not yet done so.




Please see full report at
www.healthreformprogram.org


Selected media coverage:
http://www.washingtonpost.com/wp-dyn/articles/A44270-2003Oct30.html
http://www.boston.com/business/globe/articles/2003/10/31/medicare_drug
_plan_rapped/#


Don McCanne's comments:

Physicians, hospitals, laboratories and other providers under the
Medicare program have regulated limits on the rates of reimbursement
for services and products provided. But look at the language of H.R.
1, the House version of the Medicare prescription drug legislation:

(D) NONINTERFERENCE- In carrying out its duties with respect to the
provision of qualified prescription drug coverage to beneficiaries
under this title, the [Medicare Benefits] Administrator may not-- (i)
require a particular formulary or institute a price structure for the
reimbursement of covered outpatient drugs; (ii) interfere in any way
with negotiations between [the various types of private plans] and
drug manufacturers, wholesalers, or other suppliers of covered
outpatient drugs; and (iii) otherwise interfere with the competitive
nature of providing such coverage through such sponsors and
organizations.

The pharmaceutical industry is the most profitable industry in all
history, and this bill hands them a blank check to be honored by the
taxpayers and beneficiaries. And yet the meager benefit provided will
continue to keep prescription drugs out of the reach of millions of
Medicare beneficiaries because of the lack of affordability.

What input do we have? Rep. Bill Thomas, who is crafting the final
legislation, has excluded most of the Democratic members of the joint
conference committee from the process. He is even overriding the input
of his Republican co-chair, Sen. Charles Grassley. His attitude is
expressed well in this quote (Morgan and Eilperin, Washington Post,
Oct. 29):

"I don't think it serves any purpose to attempt to misrepresent or
slant or fabricate... to influence outside the negotiating structure.
My goal is to make law, not to make myself look good."

And from the same article:

... Thomas surprised fellow conferees by outlining a proposed
agreement for the bill. He and his staff had written it without
outside consultation. "It was a total unilateral move," one source
said. Grassley reportedly was furious.

http://www.washingtonpost.com/wp-dyn/articles/A38004-2003Oct29.html

It's time to contemplate those cherished words of Abraham Lincoln: ...
government of the people, by the people, and for the people...

Let's not let Lincoln down.

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