Dollars For Donuts: PhRMA's $80 Bil. Coup In Health Care Reform

PhRMA's commitment to contribute $80 billion toward health systems savings over the next 10 years looks like an important tactical win for the brand name industry entering the critical phase of the health reform debate.

With the $80 billion pledge, the Pharmaceutical Research and Manufacturers of America ensures that closing the infamous "donut hole" in the Medicare Part D prescription drug benefit will be included in comprehensive health care reform - or ready to move as part of a more incremental bill if universal coverage falls apart.

When the agreement was announced June 20, details were limited about the deal reached behind the scenes between PhRMA and Senate Finance Committee Chairman Max Baucus - and blessed by AARP and by President Obama (¹ (Also see "PhRMA Donut Hole Pledge Sets Nice Tone, But Negotiations Continue On $80 Bil. Contribution" - Pink Sheet, 22 Jun, 2009.)).

What was disclosed was the $80 billion overall value of the commitment and that part of the total contribution would come from 50 percent discounts on the cost of branded drugs for certain Part D beneficiaries who had reached the donut hole.

Details of the total package are dependent in part on scores from the Congressional Budget Office, PhRMA Senior VP Ken Johnson said. The concessions are contingent on health reform legislation passing Congress; that is, they need to be part of legislation that includes an expansion of health insurance to the uninsured.

$25 Billion From Donut Hole Fix

When the donut hole discount program was announced, it was unclear how much, if any, of the savings produced would accrue to the federal government. In principle, at least, the discount program would add cost to the government, since much of the savings would go directly to beneficiaries while accelerating the time it takes a beneficiary to enter the more generous catastrophic portion of Part D.

Approximately 3.4 million members reached the coverage gap in 2007 and only about 5 percent typically proceed to catastrophic coverage.

However, the discount program is reportedly being structured so it can produce $25 billion in scoreable savings. CBO will apparently be asked to compare the cost of closing the donut hole without the discounts to the cost under PhRMA's plan. In that scenario, the 50 percent discount would clearly represent significant savings.

Draft legislation announced by three House committees June 19 proposes phasing out the coverage gap by progressively increasing the initial coverage limit and decreasing the annual out-of-pocket threshold (² (Also see "House Health Reform Bill Increases Drug Rebates, Drops Part D Donut Hole" - Pink Sheet, 22 Jun, 2009.), p. 5).

No Part D Rebates?

As the package of concessions takes shape, it is also said to include savings from follow-on biologics - estimated at about $7 billion - and adjustments to drug rebates under Medicaid, which could add up to about $20 billion.

The deal is now said to exclude a mandate setting rebates for Part D drugs provided to beneficiaries dually eligible for Medicare and Medicaid at the rate they would be under Medicaid.

That proposal has been a high priority for Energy and Commerce Committee Chairman Henry Waxman, D-Calif., and while introducing the Tri-Committee bill, he repeated his call for "clawing back" the "windfall" manufacturers received under Part D.

The House leadership was not part of the deal struck by PhRMA and Baucus. But industry believes the involvement of the White House should ensure that the House accepts the terms.

Staving off those rebates would be a victory in itself for PhRMA. However, even if the association ends up being forced to accept Part D rebates, the "dollars for donuts" deal ensures that the industry will still gain something - enhanced coverage for its biggest market rather than seeing them devoted solely to offsetting other costs.

Medicaid Rebate Revisions

The Medicaid rebate changes are likely to reflect current legislative proposals.

Bills being developed in the Senate Finance Committee and the tri-committee bill in the House (Energy and Commerce, Ways and Means and Education and Labor) suggest three changes to drug rebates under Medicaid, which could save the government a total of about $20 billion.

The first is to raise the basic rebate for single-source drugs from 15.1 percent up to as high as 23.1 percent. In December 2008, the Congressional Budget Office estimated that would yield more than $7.2 billion in savings over 10 years.

A second proposal would consider line extensions of existing drugs, such as a new dosage or formulation, as if they were the original product for calculating the Medicaid rebate, which is scored by CBO as saving $3 billion.

A third option would set new requirements for manufacturers to provide states rebates for drugs supplied to Medicaid managed care organizations, scored at potentially saving $9.1 billion.

Savings from those three elements, alleviating the coverage gap, revising Medicaid rebates and FOBs, total approximately $52 billion. For the pharmaceutical industry, that would mean about $30 billion more in savings that needs to be found to get to $80 billion,

Other ideas being floated include a proposal to eliminate tax deductions for direct-to-consumer advertising and possibly other promotional activity (³ (Also see "DTC And Health Care Reform: Self-Regulation May Not Be Enough As Advertisers Brace For New Legislative Battles" - Pink Sheet, 27 Apr, 2009.), p. 13).

The Donut Hole Details

There is still plenty of time for things to go awry in the reform debate from industry's perspective, but the commitment of the White House to support closing the donut hole suggests that will remain a part of any bill that moves this year.

The details on the donut hole discount program are as follows:

It involves a mandatory 50 percent discount on the negotiated price of all branded drugs once beneficiaries reach the coverage gap.

It would not apply to beneficiaries receiving the Medicare low-income subsidy, who are not subject to the gap, or high-income seniors - those paying income-related Part B premiums and who have incomes over $85,000 for individuals or $170,000 per year for families.

Although enrollees would pay only half price in the gap, 100 percent of the negotiated price would apply toward true out-of-pocket costs, so as not to delay the point at which members reach the catastrophic coverage level.

Eligibility will be determined by the federal government based on current beneficiary data. No asset test.

The program would be set up by HHS July 1, 2010 and would be administered by an independent third party.

To avoid an influx into the program from retirees who currently have coverage from employers, the agreement includes a provision to discourage private employers from dropping such coverage.

It also establishes drug manufacturer audits to ensure that discounted prices are appropriately set.

The donut hole fix is a political home run for PhRMA. The gap in coverage has long been a source of concern for congressional Democrats and the discount program appeases a key constituency: AARP was on hand at the June 22 White House event held to announce the agreement.

In a statement, PhRMA President Billy Tauzin described the deal as a turning point in the health care reform debate. "With the strong support of AARP, we believe this agreement will be looked back in time as a momentum changer in the legislative efforts to reform our troubled health care system."

PhRMA also scored points for being the first to step up among the health care stakeholders coalition that promised the administration to help reduce the health care spending curve by more than $2 trillion over the next 10 years (⁴ (Also see "Bending The Cost Curve: Obama Presses For Specifics On Coalition Pledge" - Pink Sheet, 18 May, 2009.), p. 4).

In announcing the PhRMA deal, Obama took the opportunity to put pressure on other members of the group, which also includes insurers, physicians, hospitals and medical device firms.

"Drug and insurance companies stand to benefit when tens of millions more Americans have coverage. So we're asking them, in exchange, to make essential concessions to reform the system and help reduce costs," Obama said. "Today marks a major step forward. But it will only be meaningful if we complete the journey."

- Cathy Kelly ([email protected])