the other drug war [home]
uwe reinhardt
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Reinhardt is a professor of economics and public affairs at Princeton University and has been studying the U.S. health care system for two decades. He argues that a prescription drug benefit should be targeted not strictly towards seniors, but towards the poor and poor seniors. Reinhardt says that the pharmaceutical industry could have avoided being "the scapegoat for all kinds of problems in health spending" if it had been proactive in assisting low-income recipients. He believes that if a federal prescription drug benefit does not pass, the battle will return to the states, and says that the states "will use every trick in the book and push for all kinds of things." This interview was conducted on Nov. 4, 2003. [Read an earlier interview with Reinhardt from October 2002.]

In June, when both houses of Congress passed this bill, what was going on? Were these forces aligned in a particularly unique way?

In June, the forces were not aligned. They had rather different bills. First of all, both of them of course had this, what is called "donut hole" -- although I call it the "abyss" -- where there's huge gaps in coverage. But those could be negotiated down, I'm sure. The bigger divide was whether Medicare itself would have to behave like a competitive health plan after the year 2010, which is the House plan. And the Senate doesn't have that in it, and the Democratic senators don't want this, because they think that competition won't be fair.

Back then, people were making noises that this was going to happen this time. Did people just push that issue to the back of their mind?

Well, the press was thinking this will happen because Bush needed it, the Republicans needed it, and the Democrats wanted it. So there was an alignment there.

I think we'll try everything in the book before having price controls.

On the other hand, the cognoscenti knew they are very tricky issues that have to be negotiated. And the negotiators are not the kind of people that are really all the smoothest at negotiating. And I think that's another really serious problem. Different human beings could have probably negotiated that by now. But you have personalities that are not great negotiators.

Talk about the different constituencies and what was in it for them.

For the White House, the political victory would have been to be able to go into the 2004 election and [for President Bush] to tell the people, "For 30 years, you didn't have drugs. I came on the scene, bingo, you got it." Now, the fact that they really didn't get a whole lot would get lost in the noise. Nevertheless, "I gave you $400 billion and there is relief." And that would be a coonskin nailed to the door. That would be great for him. And the Republicans could ride on that coattail and say, "Look at what we gave you. The Democrats never did, when they ran the show." So they have much to gain.

The Democrats also politically have always stood for helping the elderly, and I think they also really want to get this done, because they see this as sort of the camel's nose under the tent, that once you have this, you can then keep expanding it. I personally think they're dreaming, but that's the Democratic strategy, to say, "Get something done, and then we can expand it."

And $400 billion was on the table.

Four hundred billion dollars was on the table. That's a completely artificial number. It's somewhat fake, because the first two years of that 10 years, there is no spending. So it's actually only $400 billion for eight years. In the last year of these 10 years, the total spending bill would be $73 billion. In the beginning it's only like $23 billion in 2006. So if you look for the next 10 years, that very same bill would cost -- I calculated, I believe, something like $1.7 trillion. So it is big money, and yet only about a quarter of what the elderly will spend for drugs over that decade.

Before this was happening, we had the Supreme Court verdict on Maine. There was a lot of state stuff that was biting and irritating [the drug companies]. What was in it for them? Was a federal solution preferable to anything else, for them?

For the drug companies? Well, what they wanted, absolutely wanted [was] a regime where Medicare itself doesn't buy the drugs; where whatever happens, the government pays, but the drugs are purchased by private insurance companies, who are known to be fairly weak, or pharmaceutical benefit managers, who are fairly weak too -- certainly weaker, as a buyer, than a big gorilla like Medicare. They fear that like the death. And I understand why they do, because Medicare can be brutal.

So they didn't want the government to set the prices?

Yes. They have seen government set prices for hospitals... The government can just do that with a stroke of the pen. And they don't want to set up where the government could simply, with a stroke of the pen, regulate their prices.

Why was a federal bill, with the risk, better than no bill at all, leaving it to the states? Was there a fear that something had to be done, or else there would be other stuff?

I think the drug companies prefer a federal bill for several reasons. One, they own tremendous influence over the Congress. When I say "own," [I mean] with campaign contributions and others. They have a tremendous stake in the Congress, probably more than in all these 50 statehouses.

Secondly, states have balanced budgets. And it turns even Republicans, who are sympathetic generally to business, into pretty tough bargainers. So you see Republican governors doing all kinds of things that they wouldn't do, were they not under the budget constraint that they have to have balanced budget. The federal government has no constraint. As President Reagan has shown, and President Bush now shows, you can run up deficits to any number, and the American people yawn. So it is much easier to get this money out of the federal government than to get it out of the states. The states would price-regulate.

And so the only risk of the federal thing is if the government becomes a monopoly purchaser?

The only risk with the feds is that the government, the big gorilla, would in fact become a price setter, like the Soviets. Now, we do set prices for hospitals like the Soviets do. It was ironic; Ronald Reagan introduced this. But the drug industry fears that like the plague. They just don't want it.

This passed both houses, in different forms. Has it surprised you that the conference has been having difficulties?

When it passed, I personally would have predicted they'll never, ever iron out the differences. And I would have predicted the conference will collapse. I'm surprised that it's still alive. I'm surprised that people give it at least 50-50, probably more like 60-40, that something will in fact come out. And that surprises me.

Talk about the issues, then, that they have to resolve.

The issues they have to resolve in conference, the big issue, is that the Senate, where the Democrats have power, do not want a setup where the traditional Medicare gets converted into just another health plan that has to compete on premiums for enrollees, with private health plans. The Democrats don't want to for a number of reasons. But one suspicion they have is the private health plans would actually get paid more money by the government per elderly than Medicare would. And so they fear this kind of competition, and think it will lead to the demise of Medicare as we know it. ...

The Republicans in the House, particularly their conservative wing, is absolutely insistent that there be this competition. So that is an issue over which the conference could collapse.

They want the competition as a matter of ideology, or because they believe it will control costs?

I believe it's a matter of ideology. I bet you some of them believe it'll save costs, although at the moment there's no evidence for that at all. In fact, all the evidence points to the fact that it'll cost more. Even the Congressional Budget Office, which is headed by someone Republicans picked, came out in saying this private competition will cost more for the same person. Even they said that.

But [for] some of them, it's just pure ideology. Even if it costs more, they just hate Medicare. Some of them may believe it because they're not into the data. They just hear it. And it kind of makes sense. Private sector's always better. Some of them maybe believe that the private insurance industry can do disease management, and thereby save costs for the chronically ill, can really look after them and use best practices. Well, these people also believe that Medicare is too rigid; that they cannot move without legislation, and therefore they'll never be nimble enough to cope with changing technology. So there's sincere belief on the Republican side.

Personally, at the moment, there's no evidence that this would save money. But knowing that, as a policy wonk, doesn't mean a politician would know the same data. They don't have the time I have to look at this.

While this is going on, there's a lot of rhetoric about the high price of drugs in this country as compared to Canada. One of the things that these bus trips to Maine has really done is make very visible this issue of the difference in price. And you even get Republicans talking about re-importation. What's going on? And does that make sense? Talk about the economic aspects.

The reason why it's so easy to have different prices for the same drug is the economics of drug production. Once a drug has been approved for market, all the fixed costs have been incurred. Making the pill is dirt cheap. So most of the costs are sunk. And any smart buyer who knows that says, "If I give a drug company a price that wouldn't cover their full cost but covers much more than their variable cost, they will sell to me." And the Canadians exploit that. They go and regulate prices, and pay the drug companies a price big enough so it's highly profitable, but not large enough to cover all the fixed costs. And the Canadians saying, "Let the Americans pay it." Now, why would Canadians say that? Well, their GDP per capita is about 60 to 70 percent of ours. So they say, "If we pay prices about 60 to 70 percent of the American price, that's fair, because we're poorer." And that does sound fair.

The problem is that many very poor Americans, who don't have insurance, pay prices at the pharmacy that are twice the price that rich Americans who are insured pay. And that creates the anger among Americans, particularly low-income Americans, and especially low-income elderly Americans.

Going on from that, we've gone from people going and buying the drugs there themselves, to ideas of whole states re-importing the stuff. What's going on? Talk about re-importation as a concept.

Well, re-importation in a small trickle is a trivial issue and no one really cares about it. If that trickle becomes a major drain on the revenues of the American drug companies, they will stop the flow. And they have two mechanisms to do it. The first one is to tell Canadians, "We will give you an allocation of each drug, roughly the same per capita as Americans consume. And it's all we'll sell to you. And if you want to eat it, eat it. If you want to sell it, sell it. But you're not going to then get any more." That would stop the re-importation totally, because Canadian government would then say, "We won't allow this re-exportation. We'll keep these drugs for ourselves."

Should that not work for some reason, then the second recourse is that the drug industry would go to the United States Congress and really get this outlawed, to say you'll just arrest a few people. You know, you'll never arrest an elderly coming off a bus. This is not worth it. But you would pass a law that would make it illegal for a state to [re-import], and I think, override the states.

You have a couple of states, and you've got towns within states, actually going ahead with this, haven't you?

Yes. But so far, it's small. I mean, they do it for their employees, and there aren't that many state employees. And even the towns that do it, do it only for their employees, I think, not for the whole town. But supposing the whole state of Michigan did this for every resident of Michigan. I think the drug industry would pull out the big cannons and start shooting.

Now, you have congressmen, including Republicans, talking about this as if it was a good thing and wanting to get it into the bill. What's that about?

If I were a Republican congressman, knowing that it's probably not going to happen, I'd vote for it. Why? I'd go home and say, "Look what I did." You know, makes sense. You know, it's just market. You could put nice noises around it, and then, "Do this for you, the elderly. I allow this." And then you know damn well this is not going to happen.

So it's grandstanding?

I think it's grandstanding. But forgivable. I mean, I'd do it in a moment. In a New York minute, so to speak. Because wouldn't you?

Now, let's talk some scenarios about what could happen. We're into November, and they haven't resolved this yet. They've still got a lot of issues to sort out. If they don't do anything before Congress adjourns, what are the consequences?

Well, I'm not the expert on legislative and political maneuvers of that sort. But if Congress goes into recess, obviously momentum is lost. And positions can rigidify. And I think when they get together again in the spring, you're then getting into the election season. I think there's a good chance this bill could die. And then you would have quite a few commentators who would say, "It was a good thing it died, because we have a better idea. I would have a better idea, rather than what this monstrosity that they want to pass." And so a lot of people on both left and right and center would say, "You know, if it died, it wouldn't be the end of the world. We could think up something more humane and better."

But it's another death in a whole series of deaths, isn't it?

Well, it would show again gridlock. It shows even President Bush can't get this done, and so on. It would not be good for the parties, but both of them would bear the blame. They would sling mud at each other.

I mean, the better thing that you could do, if you are absolutely committed to spend no more than $400 billion in the next 10 years on helping the elderly get prescription drugs, what I would do if that's as firm as the sun going up in the east, then I would means-test. I would call it a whole new benefit, not part of Medicare, and say we're going to use all of that money for people who have two characteristics: A, they're poor; and B, they use a lot of drugs. That would be plenty to take care of an awful lot of poor, chronically ill elderly. And it seems to me, that would be, in a way, more humane.

So this wouldn't be a bill for seniors. It would be a bill for poor, sick seniors.

Ideally, I'd like it for poor people. Whether $400 billion would do it? But, $400 billion would, I believe, do it for poor seniors. And you would start there. And then you could really say, "We actually did something where it hurt the most."

Now, could they pass a bill which is not even as good as that, just has a discount card, a very lame sort of compromise? Would they suffer if, after promising so much, they came in with something?

I believe, if they came with a discount card, they would get a two-week benefit from that. And then when people realize that discount card, after I used it, didn't mean much to me, they'd be doubly angry. I'd worry about a few umbrellas coming down on legislators. I frankly don't think that's a solution. Discount of what? Right? Drugstores can just raise the price and give you a discount. That doesn't do it.

If Congress fails to act this year, does the initiative go back to the states, like the Maine Supreme Court, other states following suit, and so forth? Is that an uncomfortable environment for the drug companies?

I think the drug companies have something to lose if this drug bill fails, because then the states will once again agitate. Because state governors are closer to the people, and I think, regardless of party, they really do care about people on a sort of humanitarian basis. And I think they will use every trick in the book and push for all kinds of things. If they cannot re-import, they will just impose price controls. And they will sue the drug companies, who'll be all over the creation suing. It goes to the Supreme Court. But they'll lose some of the battles, as they did in Maine.

Plus, the $400 billion, if it's not on the table, a lot of that money would be pure gravy for the drug company. Not all $400 billion, of course. If the government puts $400 billion on the table, some of that money replaces money the elderly would have spent out of their own pocket. But my hunch -- I don't know the number, but supposing half of it is new money, that's $200 billion for pills that have already been researched. All you got to do is push a button, pump out another 100,000 pills.

So they're worried about losing?

I think they would lose quite a bit of gravy, because they're under pressure for other reasons. They're under tremendous economic pressure. A lot of drugs will come off patent in the next five years, and then go generic, and prices will collapse. And another problem is, there haven't been a lot of new drug applications. There isn't much in the pipeline. Some, of course, but not nearly as much as there was in the mid-'90s. So the drug companies are getting it really from both sides.

So it's much better for them if there's a deal?

I think the drug companies behind the scenes are really pushing for the deal. And I think ultimately they might even prevail on the House to give up the competition thing, because it's not good for the drug companies. They don't really care about this competition. ...

From a public relations point of view, the drug companies have really been in the crosshairs, attacked from many, many sides. Does it matter that they are as unpopular as they are? Can they weather this, or do they have to really pay attention to their image?

Industries can weather such storms, but it's very expensive and the impression lingers. It goes into the folklore. It saddens me, in a way, how that industry has allowed itself to become the scapegoat for all kinds of problems in health spending that's really not their fault. They could have been more proactive.

For instance, that industry should have worried about having a lot of poor elderly without insurance having to pay double the price for drugs that everyone else pays. You know, that sort of situation really violates the sense of fairness among Americans. That should never have been allowed to happen. They should have done something. Maybe a card that such elderly get, that says you pay no more than the average insurance company pays in this state, something where the drug industry would have sort of made a gesture. But they didn't.

And so I think when they get in trouble, as they might in the next five years, there'll be relatively little sympathy for them. And in a way, I don't think it's good, because whom do we look to, to get rid of SARS? It's not surgeons. It's the drug industry. So you know, you don't really want to hurt that industry.

Last question. If Congress fails to pass this and doesn't do something early next year, is there a danger? We are the last country which doesn't have price controls on pharmaceuticals. It's where most of the profits come from, this market. Is the house of pharma under threat? Can you see a time when, in fact, prices would become controlled here, one way or another, as they are in the rest of the world?

I cannot see, within certainly the next 10 years, that we would have drug price controls. First of all, that's extremely difficult to do. You can do it when you're Canada, because whether they set the price 10 percent higher or lower, that's not going to impact an industry a whole lot. But when the biggest economy in the world does that that will have a huge impact on the global pharmaceutical industry. And what politician wants to be responsible for that? So I think we'll try everything in the book before having that kind of price control.

Even though there's tremendous pressure and concern about the cost of drugs, now with seniors, but then maybe later with ordinary people who have to pay more and more of the price of their drugs?

Well, my advice to the pharmaceutical industry would be: If you worry about that pressure, you should agitate to get people insurance, because insured Americans don't give a tinker's damn about drug prices. They pay their co-pay or their co-insurance, and they're basically happy. They get all these drugs, the price to them is fairly low, and they're peaceful. So the agitation comes from people who don't have insurance coverage for this product. People don't agitate a lot about hospital costs, which are the real cost drivers now. They drive the premiums. Premium increases are not driven by drug prices. Premium increases for insurance are driven by hospitals.

That's recent though, isn't it?

Recently. Now by hospitals, and then doctors. Drug is number three only. But no one agitates about doctors and hospitals. Why? Because people generally are covered for that. It's for drugs they're not. So if that industry wants to save its skin, it should be a champion for health insurance for drugs.

But having health insurance doesn't do anything necessarily to keep prices under control.

I don't think it will. And yet, you might say that's not even a big national priority. At the moment, drug spending is 10 percent of total national health spending. You know, there're bigger fish to fry. And even 10 years from now, it'll be 14 percent. I just looked it up. That's not the end of the world. So you know, this is not going to sink the ship. Far more important for America would be to find out is: Why does Medicare now spend more than twice as much per elderly in Miami and Baton Rouge than they do in Minnesota or Oregon? That's where the money is. It's not in those drug prices.

So you know, the real social piece in health care for the drug industry would be to make sure that sick Americans don't bleed to death fiscally when they buy drugs. And it is so simple. It is just that simple. And they should be the champions of that.


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posted november 12, 2003

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