That Little Matter Of Drug Prices

Once a Democratic U.S. Representative from Louisiana, Billy Tauzin was instrumental in forming the Blue Dog caucus. When it became clear the Democratic label had become anathema to white Southerners, Billy Tauzin in 1995 became a Republican member of the House of Representatives. As chairman of the Commerce and Energy Committee, in 2003 he shepherded through the House the Medicare Modernization Act, creating Medicare Part D in 2006, in the process prohibiting Medicare from negotiating prices with drug companies.

Never let it be said that Billy Tauzin would fail to seize an opportunity. Mr. Tauzin resigned from Congress and that day became president of the Pharmaceutical Research and Manufacturers of America. And now Tauzin has seized the opportunity to negotiate with a President who desperately wants a health care reform bill, passage of which numerous pundits have suggested would put him on an upward spiral toward an historic presidency.

A few months ago, President Obama announced that the pharmaceutical industry had agreed to $80 billion of savings (over ten years) to help pay for a reform package. Unfortunately, as the Los Angeles Times reported

Tauzin said he had not only received the White House pledge to forswear Medicare drug price bargaining, but also a separate promise not to pursue another proposal Obama supported during the campaign: importing cheaper drugs from Canada or Europe. Both proposals could cost the industry billions, undermine its ability to develop new cures and, in the case of imports, possibly compromise safety, industry officials contend.

If Medicare were permitted to negotiate drug prices, according to a report by energy and commerce's investigations subcommittee, savings would approach $156 billion over the same ten-year period. However, the authors of a paper (pdf) prepared by the Institute for America's Future conclude that the savings would be nearly $35 billion a year.

That would amount to $350 billion over the ten-year period, substantially in excess of the $80 billion Obama procured from the drug industry. But even at the conservative estimate of $156 billion, the President has managed to negotiate away $76 billion, a not insubstantial sum of money.

Tauzin's pre-emptive strike was in response to action by the House Energy and Commerce Committee in reporting out a bill which would permit Medicare drug negotiation. Timothy Noah in slate.com describes the Administration's response. It is somewhat cryptic and hardly reassuring, and suggests that the Administration has cut a deal it is displeased has been interpreted as giving away the store.

If, as is probable, such a deal was cut, the obvious savings and benefit to Big Pharma are substantial and reasonably calculable. Aside from that, however, is a cogent objection leveled by one reader of Noah's article, who notes

it would be instructive to define the true cost/benefit to Pharma of the purported $80 billion they are "giving up" (putting aside the backdoor negotiation to prohibit any future risk). Assuming that health reform includes a drug benefit for an additional 45 million uninsured any reduction in drug charges will be compensated for by increased volume, thus at the least preserving current and future revenue (and very likely expanding it). In addition, the basis from which the $80 billion "savings" is derived needs to be defined - is it retail or wholesale pricing, are standard discounts acknowledged etc?

And a simpler objection need be raised: how enforceable is the industry's promise of $80 billion in savings? Clearly, in either case, President Obama needs to start one of his famous dialogues, this time with candidate Obama, who seemed in this video (below) to have no illusions about Billy Tauzin. He still does not, but apparently also wants a health care bill, representing a notch in his belt, at virtually any cost.