Corporatecare for PhRMA

Last week Jon Cohn and Sam Stein reported on a just how much of a sweetheart deal PhRMA actually got by negotiating with Baucus and the White House on reform efforts. In return for the $80 billion in reduced payments to drug makers over the next decade, the industry stands nonethless to profit handsomely, as much as $137 billion over the next four years. Cohn, reporting on "an October forecast by IMS Health, a respected global research and consulting firm."

The report, which IMS distributed to clients and which a source provided, projects that the drug industry will see average annual growth of 3.5 percent between 2008 and 2013.

Back in March, IMS had projected no growth at all during that same five-year stretch. In fact, it projected the drug business would actually contract slightly--with negative annual growth of 0.01 percent.

What changed? A major factor, according to IMS, was the emerging details of health care reform.

Health reform, as currently envisioned, wouldn’t merely bring coverage to the uninsured. It would also fill in the "donut hole" in Medicare Part D--the gap in coverage that leaves beneficiaries with serious health problems paying for hundred if not thousands of dollars in out-of-pocket prescription costs.

In addition, because it will take several years to close the donut hole, reform relies on voluntary discounts from the pharmaceutical industry to make drugs more affordable in the intervening years. But those discounts would apply only to name-brand drugs, not generics.

Put it all together, and you have more demand for name-brand drugs. As a result, IMS believes, pharmaceutical companies would be able to raise their prices--enough to boost revenue significantly: "If this bill is implemented," the report concludes on page 138, "an increase in prices on new drugs can be expected."

Closing the donut-hole is a critical part of healthcare reform, and will help America's seniors, no doubt about it. But never fear about PhRMA being left behind, because their brand-name drugs remain protected. Nonetheless, PhRMA and IMS, the research firm which produced the report disputed Cohn's and Stein's interpretation. Here's what IMS had to say:

The cumulative $137 billion difference between the April and October 2009 forecasts takes into account a large number of factors impacting the pharmaceutical and healthcare industries. These include the macroeconomy, the changing mix of innovative and mature products, generics, the rising influence of healthcare access and funding on market demand, along with the effect of any potential legislation. The direct impact of current U.S. healthcare reform measures embedded in the IMS forecast is less than one percent of projected total industry sales through 2013.

While the industry is undoubtedly going to reap some benefit from healthcare reform, today's news hints that IMS's projection might have actually had to more with the industry's response to the impending healthcare reform:

Even as drug makers promise to support Washington’s health care overhaul by shaving $8 billion a year off the nation’s drug costs after the legislation takes effect, the industry has been raising its prices at the fastest rate in years.

In the last year, the industry has raised the wholesale prices of brand-name prescription drugs by about 9 percent, according to industry analysts. That will add more than $10 billion to the nation’s drug bill, which is on track to exceed $300 billion this year. By at least one analysis, it is the highest annual rate of inflation for drug prices since 1992.

The drug trend is distinctly at odds with the direction of the Consumer Price Index, which has fallen by 1.3 percent in the last year.

Drug makers say they have valid business reasons for the price increases. Critics say the industry is trying to establish a higher price base before Congress passes legislation that tries to curb drug spending in coming years.

"When we have major legislation anticipated, we see a run-up in price increases," says Stephen W. Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota. He has analyzed drug pricing for AARP, the advocacy group for seniors that supports the House health care legislation that the drug industry opposes....

This year’s increases mean the average annual cost for a brand-name prescription drug that is taken daily would be more than $2,000 — $200 higher than last year, Professor Schondelmeyer said.

And this means that the cost of many popular drugs has risen even faster. Merck, for example, now sells daily 10-milligram pills of Singulair, the blockbuster asthma drug, at a wholesale price of $1,330 a year — $147 more than last year. Singulair is now selling at retail, on drugstore.com, for nearly $1,478 a year....

But this year’s price increases would effectively cancel out the savings from at least the first year of the Senate Finance agreement. And some critics say the surge in drug prices could change the dynamics of the entire 10-year deal.

Was the deal Baucus and the White House made with PhRMA worth it? Not without securing a promise, which undoubtedly would have nixed the deal, that PhRMA wouldn't do precisely what it has done: jack up prices to set a new price base for when reform kicks in.

All of which points to the one lie that's been told about this healthcare reform effort: Barack Obama isn't going to be the last president to take it on. Until real cost controls are imposed on industry, until the nation's healthcare consumers have as much sway in Washington as industry lobbyists, this system is not going to be reformed.