Drug Makers in the Healthcare Reform Catbird Seat

As Congress gets closer to final healthcare-reform legislation, the central question remains murky: Who will foot the bill?

Figures contained in the $856 billion proposal by Democratic Sen. Max Baucus of Montana — which has emerged as the basis for a final compromise between the House and Senate — suggest that key parts of the healthcare industry are getting off easy. The Baucus bill would pay for itself in a number of ways, including taxes on some high-cost insurance plans, Medicare cost reductions, and cuts in federal benefits. It would also raise about $13 billion a year from fees paid by three industries: pharmaceuticals, health insurance, and medical devices.

Within each industry, the fees would be split among all companies according to their market share, so companies with the most business would pay the highest share of the industry fee, and vice versa. But the fees borne by each of the three industries follow a different logic. The pharmaceutical industry, for instance, would be required to pay a relatively low annual fee of $2.3 billion, even though it represents one of the biggest components—and the most profitable segment by far — within the overall healthcare industry. The medical device industry would pay a higher fee than Pharma, even though it's a smaller industry. And hospitals and other healthcare providers wouldn't pay any annual fee at all, even though that sector represents the biggest chunk of the overall healthcare industry, with more than twice the revenue of all pharmaceutical firms combined.

To see how the fees apportioned by the Baucus plan compare to the relative size and profitability of each industry, I analyzed data provided by research firm Capital IQ, a division of Standard & Poor's. Capital IQ determined the total revenue and net income for three groups of companies that approximate the three industries that would pay an annual fee, as the Baucus plan describes them. Then it aggregated the figures to determine each industry's size as a portion of all three combined. Here's how those breakdowns compare with the burden placed on each industry by the Baucus plan:

Industry	Annual fees paid under the Baucus plan ($bil)	Share of total Baucus fees	Annual revenue, past 12 months ($bil)	Industry revenue as share of total revenue
Pharmaceutical manufacturers	2.3	17.7%	271.3	36.0%
Medical device manufacturers	4	30.8%	100.5	13.3%
Health insurance providers	6.7	51.5%	382.2	50.7%
Total	13	100.0%	754	100.0%

The data suggest that the pharmaceutical companies would be underpaying relative to their size, while device manufacturers would be overpaying. The $6.7 billion fee paid by health insurers would be comparable to the size of that industry, as measured by revenue. There are different ways to measure the size of each industry — since some companies are conglomerates that don't fall squarely into a single category — but Capital IQ's numbers are similar to other estimates.

The deal looks even better for pharmaceutical companies when the fees are measured as a portion of profits. Drugmakers had a combined net income of about $44 billion over the past 12 months, according to Capital IQ, so a $2.3 billion annual fee would represent about 5.2 percent of industry profits. The medical device industry earned about $5.1 billion over the past 12 months, which means a $4 billion annual fee would represent a whopping 78 percent of profits. Health insurers earned $11.3 billion, so $6.7 billion in fees would equate to 59 percent of profits.

There's more to the numbers. A Baucus spokesperson explains that other provisions of the bill would add to the amount various industries would contribute. Pharmaceutical companies, for example, have agreed to offer 50% discounts on name-brand drugs for Medicare recipients who have exhausted their drug coverage and must pay out of pocket. Combined with the annual fee, that adds up to an $8 billion contribution from drugmakers, or 18% of profits. Healthcare providers aren't assessed an annual fee in the bill, but other concessions add up to about $15.5 billion a year. With an annual net profit of $18.7 billion for hospitals and other healthcare providers, that would add up to 83% of net income. Concessions by the insurance industry would further reduce profits there, too, but the numbers are hard to quantify. There are no additional concessions by device manufacturers.

If the Baucus plan or something similar becomes law, more Americans will end up with health coverage, effectively enlarging the market and creating new business for most healthcare companies. So new fees that cut into profits could be offset by new revenue. Hospitals could reach their targets partly by cutting costs—a key goal of the bill — rather than paying fees. The numbers could also change as the bill gets modified and lobbyists work their black magic.

Still, the nature of the pain-sharing reflects the hardball tactics adopted by all sides in this bare-knuckles battle. When President Obama began pushing for healthcare reform after taking office in January, the pharmaceutical industry made early concessions and agreed to back the effort in exchange for a set annual contribution and a say in the crafting of the legislation. Other industries were less cooperative—and may now be paying the price.

Of course, the characters running all these industries are shrewd businesspeople, and their stance on reform is influenced by the degree to which they can pass on new costs to consumers or other customers throughout the supply chain. Prescription drugs are closely monitored by watchdog groups, the insurers that pay for them, and the consumers who use them and there's relentless pressure to lower prices. The pharmaceutical industry already has one of the highest profit margins in all of capitalism, so industry leaders may have decided they can afford a relatively minor across-the-board cut in profitability in exchange for reforms that ease the long-term pressure to slash prices—and add new customers.

Manufacturers of medical devices, on the other hand — which include companies like Baxter International (BAX), Medtronic (MDT), and Boston Scientific (BSX) — seem teed up to take a big hit. The industry's trade group, AdvaMed, has said it supports reform. But unlike the trade groups that represent health insurers and drug companies, AdvaMed has strongly protested the annual fee its industry would pay under the Baucus plan. Medical devices typically get sold deeper in the supply chain, further from the eyes of consumers and regulators. So instead of cooperating with reformers, industry leaders may be rolling the dice and hoping they'll be able to pass along new fees to their customers — or just gambling that healthcare reform will never happen at all. Intense opposition is certainly coming from somewhere.

Comments

[Mikethelad:]

Firstly, maybe Advamed isn't being as effective as the other lobbying groups for pharma and services.
But, the quid pro quo for device companies for a hefty fee like the one above could be an acceleration in new product registration cycle time from the FDA. Comparing the US with European regulatory time to approval, new products come to market in the EU 15-24 months in advance of the US.

Sep 26 08:32 AM

[bluesky123:]

None of these "solutions" will solve anything. You have to go to the root of the problem which is that Americans eat too much junk food and don't exercise enough. The country has the fattest, sickest population in the world which leads to the highest incidence of serious illness from diabetes to cancer. We spend more on healthcare than any other nation. Now tell me what about this picture is working?

Jamie Oliver a famous UK chef realized that healthy eating is how to solve the UK's similar obesity problem and embarked upon a successful campaign to change the way kids eat in UK schools. He replaced a school diet rich in sodas and fried foods with healthy food. Kids lost weight, were healthier and were happy with the change of diet. They performed better in school.

I'm a middle aged guy who until a year ago was scared to death of the kitchen. I ate too much junk food. I bought some pots and pans and watched Food Network. Food Network taught me how easy it is to prepare healthy food. I lost 40 lbs in a year. I set a fairly low goal - to learn 1 new recipe a month. I selected the chefs on Food Network I liked and when I saw a meal I thought I'd enjoy, I printed off the recipe. Only 1 year later I eat very healthily and I can make about 30 delicious dishes. I have twice the energy and I'm not overweight any more. More importantly, I'm no longer at risk for one of about 20 illnesses related to being over weight. Probably Food Network saved my life.

America has to go through a food revolution. We eat junk from morning to night. If you don't eat healthy food and exercise, you're a ticking medical time bomb. All the politicians have failed to grasp what Jamie Oliver grasped. This is why all of the "reform" will fail. Americans will be obese and health care will bankrupt businesses and the government.

If you create a nationwide preventative health care plan, Americans will get so healthy that health care costs and serious medical illness costs will drop by 50%. This is how you solve health care costs. What Washington is doing is moving around the chairs but not solving anything. If you want a healthy America, go talk to Jamie Oliver. He's smarter than any politician on Capitol Hill on this subject.

Sep 26 08:43 AM

[BucketofOnions:]

n the 1800's Ralph Waldo Emerson told us that the world is made of two camps of individuals. He called them conservatives and reformers. Conservatives are quite happy with the way things are. They have established themselves in positions of power and influence in society and control government, institutions, and money. Control and Status Quo are the key words of a conservative. The conservatives grant favors to companies and individuals in the form of law to retain their control.

In the other camp are the reformers whose key words are Revolution and Change. The hero is often a reformer who finds flaws in the status quo and leads the revolution. If he succeeds a new order is born.

When change is instigated from the conservative point of view nothing ever really changes because in truth they do not want change. Change in so-called Health care reform is not based on revolting against the current system of health care delivery but with the way to pay for it.

The only way health care costs will lower is to create a landscape that rewards health instead of sickness. Conservatives will not let that happen. Sick people are valuable as evidenced by our massive health care industries.

A sick person is a drain on society. Needed in society is reform that rewards wellness. That kind of reform will not inspire a conservative. The sickness industry is a powerful lobby worldwide. The profit potential in drugs and surgical intervention is far too valuable for any conservative to give up. There is little promise from conservatives who will continue to raise taxes and pay for the system from the ranks of the well.
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Sep 26 01:31 PM

[YoYoMama:]

BucketOfOnions and bluesky123 may have received negative ratings, but their comments are on the money.

The "health care" industry has no vested interest in seeing you healthy. Sure, they want to make you well after you are sick. But they make no money unless you are sick in the first place!

For example, you go to the doctor, and find out - your cholesterol is high. What is his solution? Does he send you to a nutritionist and place you on an exercize program? Recommend relaxation techniques. No - he prescribes a pill.

Why does he prescribe a pill? Well, because if you go diet and exercise, you will likely take care of your cholesterol problem without him. If he gives you a pill, you have to come back to him for regular checkups (more $$), and that pill will likely mean you need another pill to counter that pills side effects (more $$).

Plus he likely gets kick backs from certain pharma companies to recommend certain pills.

This is how the medical establishment is geared. Medical students DO NOT LEARN about health - they learn about treating ILLNESS. They can fix you on the BACK END of your problem - but they are not trained on the FRONT END of prevention.

I have taken myself off of all prescriptions simply by maintaining an exercise regimen, taking vitamin supplements, and understanding how diet effects my body.

Until we as Americans understand what makes us healthy, and what keeps us sick - and stop acting like we DESERVE to stuff our faces with everything we like to eat - there is no "health care reform" that will work.

Sep 26 06:51 PM

[E Nuff Sed:]

Good comments - but don't slam the drug companies. They a net good for society. Afterall illnesss has to be treated.

I can't say the same about the fast food companies or the soda pop companies, which I think should be hit with sin taxes like the tobacco and liquor industry, They are a major cause of morbidity and should be made to pay.

Sep 26 11:15 PM

[secmaven:]

The health care system AKA sickness management system is counted on as the chief job creator of the future. The cash flow directed to this system cannot be reduced by government promotion of a healthy lifestyle or the unemployment rate in this country will be 15%! Think about it. The whole story is how to create jobs and if keeping the sheeple the sickest bunch of voters in the world will accomplish that goal then government policy will be directed toward keeping the sheeple sick.

Sep 27 09:52 AM

[Wil.com:]

On Sep 26 06:51 PM YoYoMama wrote:

> but their comments are on the money.
> The "health care" industry has no vested interest in seeing you healthy.! <

Of course not, where is the profit (prophet)in that?

Sep 27 11:52 AM

[Sacandaga:]

I don't think that a promise of reduced approval cycles would be sufficient to sway the medical device manufacturers. They are always aware that they are one election and one major device failure, like the knee replacements 10 years ago, from having cycles stretched out again.
I think the concession the are really after is more patent protection, although that's less of an issue in the device market than it is in the drug market. Still, patent extensions, or easier-to-get modification approvals, are much less likely to be overturned once put in place.


On Sep 26 08:32 AM Mikethelad wrote:

> Firstly, maybe Advamed isn't being as effective as the other lobbying
> groups for pharma and services.
> But, the quid pro quo for device companies for a hefty fee like the
> one above could be an acceleration in new product registration cycle
> time from the FDA. Comparing the US with European regulatory time
> to approval, new products come to market in the EU 15-24 months in
> advance of the US.

Sep 28 10:52 AM