NCPA - National Center for Policy Analysis


June 18, 2010

Conventional wisdom says that U.S. pharmaceutical companies made out well under the Obama health plan by bargaining with the White House.  In reality, all they did was invite the same kinds of price regulation taking root in Europe, says Scott Gottlieb, a practicing physician and resident scholar at the American Enterprise Institute.

The core of the drug industry's deal is a promise to plug the "doughnut hole" in Medicare's Part D drug benefit.  This is the financial gap between the initial coverage limit and the amount of spending needed to trigger the program's catastrophic insurance, where Medicare starts picking up 95 percent of a patient's drug costs.  The pharma companies agreed to rebate half of a beneficiary's costs in this coverage gap, so long as patients stayed on their branded medicines.   

Take a hypothetical senior with $3,500 in annual drug charges: 

  • Right now, a Medicare drug plan only covers the first $2,830 of those costs; the rest seniors pay themselves.
  • It is only once patients accrue a total of $4,550 in annual charges that Medicare's catastrophic coverage kicks in to cover 95 percent of all additional spending.
  • When the pharmaceutical industry's deal takes effect, rather than maneuver out of the doughnut hole, more seniors will have incentive to blow through it. 

When the pharma deal inevitably forces premiums -- and in turn, government costs -- higher, it will reignite calls for drug price controls.  Conveniently, the Obama plan already gives Medicare the legal tools it needs to impose them, says Gottlieb: 

  • That authority flows from the new Independent Payment Advisory Board (IPAB); its mandate is to cut $4 billion a year from Medicare's spending, mostly by reducing payment rates.
  • One way is to ratchet down existing price schedules; more efficient would be to merely import into the Medicare benefit the lower government drug pricing schedules required by Medicaid and the Pentagon.  

By offering discounts to Medicare's drug customers that are not available to other patients or drug plans, the pharma companies have undermined their demand to preserve competitive markets as the primary tool for measuring the value of innovation.  The pharma companies sacrificed the most innovative slice of their enterprise to eke out incremental sales from their biggest, but least novel, brands, says Gottlieb. 

Source: Scott Gottlieb, "The Road to Price Controls," The American, June 12, 2010. 

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