Billy Tauzin’s $80 Billion Deal

The main objective of the healthcare reform bills being considered is to expand health insurance coverage, especially by reducing the number of uninsured Americans. That goal also benefits the pharmaceutical industry because, with better insurance coverage, people consume more healthcare products and services, including prescription drugs, thus expanding the market for pharmaceuticals. In return for the favor of expanding the healthcare market, the Obama administration has sought concessions from each group who stands to benefit, including insurance companies, hospitals, and pharmaceutical companies. Rather than fight the concessions, the Pharmaceutical Research and Manufacturers of America (PhRMA), under the leadership of president Billy Tauzin, reached an agreement with the Obama administration in June that the pharmaceutical industry would shoulder $80 billion in concessions over 10 years.

What is the composition of the $80 billion? While the precise breakdown has not been disclosed, we can make very rough estimates based on the main provisions in the Baucus bill that reduce pharmaceutical company revenues.

The first is the 50% pricing discount for the drugs Medicare beneficiaries purchase in the so-called “doughnut hole” in Medicare Part D, in which Medicare provides no subsidies for the cost of prescription drugs. The discount would not apply to prescription drug purchases by one of the costliest groups of beneficiaries, the dually eligible beneficiaries who are enrolled in both Medicare and Medicaid. Their drug purchases are always subsidized, so the doughnut hole does not apply to them. Nor would the discounts apply to high-income Medicare beneficiaries who must pay higher premiums in Part B. All other beneficiaries, however, would receive a 50% price discount on their drug purchases in the doughnut hole starting in July of 2010. A rough estimate of the cost of this provision to the pharmaceutical industry is $30 billion over 10 years.

The second is the increase in the statutory rebate rates for brand drug purchases in Medicaid from 15.1% to 23.1%. Rebates for blood clotting factors and for drugs approved for pediatric use only would increase from 15.1% to 17.1%. A rough estimate of the cost of this provision to the pharmaceutical industry is a minimum of $30 billion over 10 years.

A third component is the savings reaped through increased competition as a result of the introduction of follow-on biologics. While provisions relating to follow-on biologics currently are not part of the Baucus bill, provisions similar to those approved in the amended House Energy and Commerce Committee bill and the Senate HELP Committee bill, both of which allow for 12 years of marketing exclusivity, are expected to be included in any final bill. A rough estimate of the cost to the pharmaceutical industry of introducing follow-on biologics is $7 billion over 10 years.

The fourth component is a new fee of $2.3 billion per year that will be assessed on the pharmaceutical industry based upon each company’s market share in sales to public programs, including Medicare, Medicaid, the Veterans Administration program, and the TRICARE military program. Sales of orphan drugs would be exempt. Companies with annual sales of less than $400 million would receive discounted weights for calculating their sales for the purpose of determining market share, and companies with sales of less than $5 million would be exempt. Fees for 2010 will be based on calculated market share of sales in 2009. At $2.3 billion per year, the total cost to the pharmaceutical industry over 10 years is $23 billion. Moreover, by statute, these fees would not be deductible for US income tax purposes.

Adding these four components together results in a total burden to the pharmaceutical industry over 10 years of $90 billion, $10 billion more than the $80 billion pledged by PhRMA’s Billy Tauzin.