Drug Deal

by Jonathan Cohn | August 25, 2009

'We'll have the negotiations televised on C-SPAN," then-presidential candidate Barack Obama explained, "so that people can see who is making arguments on behalf of their constituents, and who are making arguments on behalf of the drug companies or the insurance companies."

Those were heady times. It was September 2008, at a town hall in Virginia, where Obama was offering a preview of how he intended to conduct his presidency. He would change the way Washington works, make it transparent, and, in so doing, deliver what the American public needed--starting with affordable health insurance. But, just a few months later, Obama's team was doing exactly what he said his administration wouldn't do: negotiating behind closed doors. The subject, sure enough, was health reform. The partner was the drug industry. By June, they had a deal.

Exactly who agreed to what has been the subject of some controversy, even among parties to the negotiation. But the basics are not really in dispute. The drug industry promised to endorse reform, including initiatives that would reduce its bottom line by up to $80 billion over ten years. In return, the administration--and one of its key Senate allies--agreed to stop at $80 billion, at least as far as the drug industry was concerned.

It's the kind of quid pro quo that generally raises eyebrows, as more than one conservative was quick to note: "The press and congressional Dems would have gone nuts if we had tried anything remotely like this," said Tevi Troy, who was a health care official in the Bush administration. And, in fact, a few congressional Democrats have gone nuts. "We have all been focused on the debate in Congress, but perhaps the deal has already been cut," Representative Raul Grijalva, co-chairman of the Congressional Progressive Caucus, told The New York Times, which first broke the story. Beyond Capitol Hill, the reaction from liberals was even harsher. "When an industry gets secret concessions out of the White House in return for a promise to lend the industry's support to a key piece of legislation, we're in big trouble," former Labor Secretary Robert Reich wrote on his blog. "That's called extortion."

Extortion is a harsh word, but not an inaccurate one. By almost any reckoning, the drug industry demanded--and got--a sweetheart deal in exchange for its support. But were Obama and his allies wrong to go along with it? Not necessarily--at least, not if they really wanted to pass health reform. Good government and good policy make for great speeches. But, in the real world, they're not always so compatible.

 

The lineage of the deal with PhRMA, the drug-industry trade group, traces back to before Obama was even elected president. In the fall of 2008, representatives of the entire health care industry--pharmaceutical manufacturers, insurers, doctors, hospitals, device-makers--began holding regular meetings with key staff on Capitol Hill. The two senators leading the discussions, Ted Kennedy and later Max Baucus, made no secret of their mission. Instead of trying to fight these industries head on, they hoped to come up with a consensus version that at least some of the industries could live with, if not support outright. Once Obama took office, the conversation turned more concrete. Obama and his allies wanted to wring savings out of the health care system, in order to finance coverage expansions, and, over the long run, make medical care less expensive. Which industries, they asked, were prepared to help--to sacrifice some short-term earnings in order to make reform possible?

The drug industry was first in line, according to several sources familiar with the discussions. But its list of demands was long. It strongly opposed letting the federal government negotiate directly with drug companies over price, the way governments in other countries do; it didn't want to give the government rebates on drugs it purchased for Medicare recipients; and it didn't want to let Americans buy cheaper drugs overseas. All three positions ran counter to Democratic Party orthodoxy. (Later, the industry made clear its opposition to a public insurance option, as well.) Pressed to give up something, the drug-industry officials indicated that they would be willing to put up with several other changes designed to reduce its revenues--like giving the government a larger rebate on drugs purchased for Medicaid recipients--but only to the extent they reduced revenues by $50 billion over ten years. Anything more, they said, was unacceptable.

Neither the staff of Baucus's Senate Finance Committee, which had been leading the discussion with PhRMA, nor officials from the administration, who had since joined the talks, were thrilled with this offer, according to people with close knowledge of the negotiations. For one thing, the administration and Baucus believed the drug industry would ultimately make money from reform, since more people with insurance coverage was bound to mean more people buying drugs. (PhRMA countered these arguments with a dubious analysis arguing that reform would not mean much new business, partly because most of the newly insured would be relatively healthy and thus need few drugs.) Obama and his allies also thought $50 billion over ten years just wasn't a lot of money, particularly for an industry that has consistently ranked among the most profitable in the country. They had a bigger number in mind--something closer to $100 billion.

A breakthrough finally came when Obama and his allies indicated they wanted to fill in the "donut hole"--the gap in coverage for seniors who opt for Medicare drug coverage. At that point, the drug industry volunteered to sell its name-brand drugs at a discount to consumers, worth about $30 billion over ten years. It wasn't much of a sacrifice for the industry; the discounts would come almost entirely out of new drug sales, not existing ones. But it helped seal the deal.

 

It took a while for the terms of the arrangement to get out. The initial White House announcement, issued this June, was bland and vague: It merely indicated that PhRMA was giving up $80 billion in revenue to make reform possible. But, in August, PhRMA president Billy Tauzin--apparently nervous that House liberals were pressing for reforms that would reduce drug-industry profits more deeply--gave more details to The New York Times. The deal, he made clear, was to limit drug-industry exposure: Reform would not reduce pharmaceutical profits by more than $80 billion. White House Deputy Chief of Staff Jim Messina subsequently confirmed that that was the administration's understanding, as well. Additional details subsequently appeared in The Huffington Post and The Atlantic, although different sources offered slightly different versions of what Baucus and the White House promised.

While some conservatives were unhappy that PhRMA conceded anything--in an open letter, House Minority Leader John Boehner recently accused Tauzin of "appeasing" the administration and its allies--it was on the left where dismay was most vocal. But, inside the administration and on Capitol Hill, even those critical of the deal's terms say it may have been necessary, given PhRMA's clout. As proof, they point to what happened when two congressional committees-- Senator Kennedy's Health, Education, Labor, and Pensions (HELP) and Representative Henry Waxman's Energy and Commerce--took up their own versions of reform in July. In the HELP deliberations, several Democrats joined with Republicans to reject a proposal that would have let people buy drugs from Canada and Mexico. During the Energy and Commerce Committee mark-up, a similarly bipartisan coalition voted to give the makers of biological drugs the right to sell their wares exclusively for twelve years--more than the administration and Waxman thought necessary. In both cases, PhRMA got exactly what it wanted. Says one senior congressional staffer working on health legislation, "No matter how much high-handed talk there is [in Congress] of reining in PhRMA, in the end, they always get their way."

To be sure, the administration and its allies did get something more than tens of billion toward the cost of health care reform. They also got the drug industry's advertising support, which is no small thing at a time when the right has been running roughshod over reform. PhRMA's proreform advertising may be generic and, in the final analysis, not particularly helpful. But, the plan's defenders argue, it's still better than ads amplifying lies about "death panels." Besides, it's not as if the administration and its allies can't seek more concessions from PhRMA later on--a possibility the White House itself seemed to encourage, after the August Times report, by pointing out that the deal was only about health care reform legislation and not future acts of Congress.

Making some initial compromises in the hopes of revisiting them later is not a far-fetched idea. The people who engineered the original Medicare Act promised that the program would pay doctors their "usual and customary fees." They also handed responsibility for administering payments over to the Blue Cross plans, which had close ties to the hospitals. This helped pacify both physicians and hospitals (although the American Medical Association fought Medicare to the end). Years later, as Medicare's price tag soared, the federal government reduced physician and hospital payments, effectively bringing to the program the sort of cost control that ideally would have been there in the first place. It wasn't the cleanest, most open way to pass and then modify legislation. But that's what it took to get the program up and running. Four decades later, passing comprehensive health reform may require the same kind of unpleasant compromises. As one disappointed congressional staffer puts it, the drug-industry bargain "is offensive--and brash, and tacky, and very PhRMA." But, the staffer added, "the legislative process is messy."

 

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