President Barack Obama declared Monday that the gathering of drug makers, health insurers, unions, hospitals and doctors at the White House was “so remarkable” because these diverse interests agreed on containing health care costs — a first step in his plan to remake the American health care system.
The White House claim that the “medical-industrial complex” is on board with health care reform prompted disbelief in some quarters, rosy speculation in others.
One Huffington Post writer accused the White House of naivety and “blind optimism” in trusting big business.
Paul Krugman, the liberal columnist for the New York Times, offered this hopeful explanation: “What’s presumably going on here is that key interest groups have realized that health care reform is going to happen no matter what they do, and that aligning themselves with the Party of No will just deny them a seat at the table.”
Warding off a more damaging overhaul (such as a government takeover of health care) is certainly part of the game for the insurers and the drug makers, but the cooperation isn’t primarily defensive. And it’s not another case of gangster government, with the Obama White House beating business into submission as it did with Chrysler’s creditors.
To understand why the medical-industrial complex backs Obama’s reform, just read the executives’ words. Simply put, health care reform — if it’s the right blend of Obama’s plan and Sen. Ted Kennedy’s plan — will increase profits for health care giants while diminishing competition.
The insurers’ interest here is obvious: Half their business is reducing health care costs. Plus, Kennedy’s plan would mandate everyone maintain health insurance.
The drug makers’ angle was spelled out last month by David Brennan, chief executive officer of AstraZeneca and newly elected chairman of the Pharmaceutical Research and Manufacturers of America, the No. 2 lobbying organization in the country as measured by first-quarter spending this year.
At PhRMA’s annual conference, Brennan uttered the magic words of a corporate executive looking for a handout and beneficial regulation: “I’m an advocate of free-market-based health care solutions. But within that framework, I support appropriate government efforts to protect people whose health care needs aren’t met by the private marketplace.”
Specifically, PhRMA wants a government mandate that insurers cover prescriptions. Also, the biggest drug makers currently subsidize the prescriptions of poorer customers, and health care reform provides an opportunity to shift the subsidy costs onto the government and the insurers.
“Quite frankly, Americans deserve co-pay reform,” Brennan said. Translation: Government should regulate insurers in a way that subsidizes prescription drugs.
Brennan also bragged about the industry’s recent lobbying for big government, notably its central role in passing both the State Children’s Health Insurance Program and George W. Bush’s Medicare prescription drug coverage.
Going forward, Brennan called for even more subsidies, including more research aid. In the context of curing cancer, he said, “Our industry can’t get there without the government.”
On the specific topic of cost containment in health care, PhRMA’s position is nuanced. First, PhRMA argues (with apparent merit) that drugs are often the cheapest way to cure or prevent illness, as opposed to hospitalization.
But the high price of name-brand drugs poses a trickier issue. If government drives business toward cheaper generic drugs, PhRMA’s members could lose out. But consider for a moment the cost structure of a drug company.
The industry rule of thumb is that the first pill of a new drug costs a billion dollars and each subsequent pill costs a penny. Manufacturing a drug — combining the ingredients into a pill — is very cheap. The real cost is the research and development, including outlays for producing experimental drugs that fail. Government helps drug makers recover this high overhead through patent protection: granting the inventor a monopoly for about 15 years before generic drugs can compete.
Because of the low marginal cost of making more pills, drug makers would be happy to offer the government a discount on name-brand drugs sold to new customers if it didn’t cause a downturn in full-price sales.
When the drug makers and the insurers get their way, with minor sacrifices by the companies, Obama will be praised as a deal maker and a reformer who tamed big business. When taxpayers and consumers suffer from high costs and stifled competition, will Obama also take the credit?
