Will PhRMA’s $80 billion Help Fund Health Care Reform?

The Pharmaceutical Research and Manufacturers of America (PhRMA) announced $80 billion in concessions over the next 10 years to help make health reform affordable. The American Association of Retired Persons (AARP) endorsed the deal, and a substantial portion of these dollars are said to be dedicated to a discount drug program for senior citizens in the “donut hole” in Medicare Part D. Beneficiaries who have spent $2700 for medicines currently have no coverage until their costs hit $6100 when ‘catastrophic’ coverage comes into effect. The Wall Street Journal reports that some portion of the $80 billion will be used to underwrite insurance expansion, although that’s not consistent with the PhRMA press release or reporting from the Washington Post, the New York Times , or the Los Angeles Times.

$80 billion is a lot of money – although still does not approach the savings the pharmaceutical manufacturers might have to identify if the coalition of the willing (AMA, AHA, AHIP, PhRMA, AdvaMed, and SEIU) hope to find $2 trillion in savings over the next decade.

Is this a good deal for the pharmaceutical manufacturers? The Wall Street Journal reports that Wall Street analysts think so – and project that this price concession might increase drug sales by as much as $12 billion a year. How does that work?

1) The donut hole in Medicare Part D is not an accident – it’s a conscious attempt fashioned by the Bush administration to increase price sensitivity of Medicare beneficiaries. Getting rid of this donut hole could substantially decrease price sensitivity, which is good for brand name drug manufacturers.

2) Decreasing the gap between brand name and generic prices for the elderly will help decrease profit margins for generic manufacturers

3) The pharmaceutical industry has high fixed costs – so every extra sale (even at a reduced rate increases profit margin

4) It’s better for the pharmaceutical industry to keep its price discipline and offer discounts only to selected groups who would otherwise not purchase, rather than offer broader price discounts.

So – I’ll be anxiously awaiting word on how this $80 billion is allocated – and whether it lowers overall medical costs, or increases them.