02 August 2004

Kerry Health Plan Would Force Drugmakers to Accept Lower Prices

(Bloomberg) - Democratic presidential candidate John Kerry's plan to make health care a right and ``not a privilege'' would give the U.S. government the leverage to force drug companies to cut some prices in half.

In his acceptance speech Thursday at the party's convention in Boston, the four-term senator from Massachusetts said he would permit the government to directly negotiate with pharmaceutical makers for lower prices and push to allow Americans to buy cheaper medicines in Canada.

Kerry's plan to insure 27 million more Americans would add to the 41 million people who are under the Medicare system, raising the government's negotiating clout and ending what he calls an industry ``windfall.'' Drug companies are becoming more dependent on sales to the U.S. government, which may provide as much as half of their U.S. revenue within 10 years, according to Lehman Brothers Washington's health-care group estimates.

``If 60 or 80 percent of your business is with one customer, they're not negotiating,'' said Ian Spatz, vice president for public policy at Merck & Co., the second-largest U.S. drug company. ``It's about price-setting.''

President George W. Bush, 58, opposes direct negotiation of prices with the $466 billion pharmaceutical industry. Most of the federal health-care system is already prohibited from such negotiations, in contrast to Canada and Europe, where governments have broad authority to influence prices.

Industry Outlook Dim

Kerry, 60, wants a negotiation policy that would mirror the Veterans Affairs Department, which gets discounts of as much as 65 percent off average wholesale prices of drugs by Bristol-Myers Squibb Co., GlaxoSmithKline Plc and AstraZeneca Plc.

A June 2 report by Families USA, a Democratic-leaning consumer group, found that Veterans Affairs paid 59 percent less for Pfizer Inc.'s Lipitor cholesterol pills than patients using Medicare discount cards, and 64 percent less for Merck's Vioxx.

``The Bush presidency is better for the sector than Kerry,'' said Steven Lampe, who helps manage $8 billion in assets at Delaware Investments. ``If you have the government regulating price, the outlook for the industry is dim. It would become much more likely with a Kerry administration.''

Senator Hillary Clinton, 56, says one of the first steps under a Kerry administration would be to repeal the part of the 2003 Medicare drug-benefit bill that prohibits the U.S. program for the elderly and disabled from negotiating drug prices.

``It really is one of those hard-to-imagine-or-believe instances because when you are a big purchaser, you're supposed to be able to get a lower price,'' the New York Democrat said at a forum in Boston Thursday. ``We're not getting a fair deal.''

Attacking the Companies

About 78 percent of Americans want to place limits on drug prices, according to a survey of 810 adults June 5-27 by Stony Brook University in New York. The same poll found health care ranks as the third most important issue in deciding how to vote Nov. 2, behind jobs and Iraq, and slightly ahead of terrorism.

``An overwhelming majority of Americans support a Canadian- style government-imposed cap on what pharmaceutical companies can charge,'' Leonie Huddy, director of Stony Brook's research center in New York, said. ``There is really very little popular sympathy for the pharmaceutical companies.''

``Kerry really has nothing to lose and much to gain by attacking the pharmaceutical companies,'' Huddy said.

Clinton Redux

Kerry's proposals mean the Democratic Party is reopening a debate it all but abandoned in 1993.

``I know a thing or two about health care, and the problems have only gotten worse in the past four years,'' Clinton said Monday in a convention speech, referring to her failed attempt as First Lady in 1993 to establish universal health care.

The Democrats now have an advantage on domestic issues like health care and they should exploit it, said Michael Traugott, a polling expert and University of Michigan politics professor.

``People are concerned about health care,'' said Frank Newport, a pollster at the Gallup Organization. ``It used to be cancer and AIDS. Now it's cost and availability.''

In addition to saving money on prescription drugs, Kerry would increase taxes on the wealthiest Americans to fund what he says is a $653 billion plan to increase access to health care.

The government would also cover 75 percent of the costs for the most expensive cases insured by private industry, reducing premiums by as much as 10 percent; in return, companies would offer basic health insurance to all employees. The proposal also includes programs to lower costs by preventing diseases.

Major Reform

``That would be akin to major health-care reform,'' said Norm Fidel, who helps manage more than $3 billion in health-care- related stocks at Alliance Capital Management.

To succeed, Kerry needs more than his own victory on Nov. 2. Analysts and investors including Fidel don't expect an overhaul of the system unless control of Congress unexpectedly passes to the Democrats from Bush's Republican Party. When former President Bill Clinton and Hillary Clinton failed to get their health plan passed more than a decade ago, their Democratic party controlled Congress.

``They can say whatever they want,'' Fidel said. ``The question of what will Congress pass is another whole issue.''

Democratic Senator Barbara Boxer of California said Kerry's plan is structured to avoid some of the pitfalls of the past by making sure both consumers and companies benefit.

Plus, she said, ``Presidents usually get about 90 percent of what they want, no matter how you slice it.''

Drug Stocks

Legislative battles this year over drug costs, lower prices in Canada, government investigations and patent expirations have kept some investors away from drug companies. Only two of the 13 stocks in the Standard and Poor's 500 Pharmaceuticals Index are up so far this year, and only four in the past 12 months.

``Some action by the federal government and, if not, by the state governments on drug pricing is an eventuality,'' said Rami Armon, a senior analyst at Lehman Brothers in Washington.

Sarah Bianchi, Kerry's policy chief, said the plan to allow Americans to buy foreign drugs would come with ``strict safety provisions,'' such as a tracking system for medicines and a requirement that exporters register with the U.S. government.

The campaign hasn't given a detailed plan for how the U.S. government can negotiate prices without effectively putting price controls in place. ``John Kerry and John Edwards do not support price controls on prescription drugs,'' Bianchi said. ``It makes no sense that Medicare is forbidden from negotiating prices. Private insurance companies negotiate every day.''

Republican Senator Olympia Snowe of Maine split with Bush on the drug-price issue this year and introduced a measure with Oregon Democrat Ron Wyden that would give Medicare the power to negotiate price discounts directly with drugmakers.

U.S. Programs

The Medicare program, which has insured people over the age of 65 and the disabled since 1965, and the Medicaid program for the poor are the largest health insurers in the U.S. based on beneficiaries. UnitedHealth Group Inc., the biggest private insurer, has about half the number of members, 22 million, and $29 billion in annual sales.

Drugmakers already lose about 40 percent of their revenue when patients switch from U.S. pharmacies to lower-cost Canadian suppliers, according to Boston University economist Alan Sager.

IMS Health Inc., the world's biggest seller of drug-market data, reports that the global pharmaceutical industry gets almost half its annual revenue from the U.S., since most drug prices in Europe and Asia are controlled by governments.

The companies say those policies hurt profit. On July 26, German drugmaker Schwarz Pharma said its second-quarter European sales fell 3.1 percent partly because of ``drastic governmental interventions.''

The health industry spent more money on lobbying the U.S. Congress last year, $294 million, than at any other time. Drug companies say lower prices would reduce incentives to fund the riskiest research that finds the most-needed new medicines.

Bad Idea

"It's a bad idea all around," said Spatz of Whitehouse Station, New Jersey-based Merck. ``Inevitably, negotiation would be politicized. It would be about your lobbying skills with the government, not about the quality of your product.''

Pfizer, the world's largest drugmaker, declined to comment on Kerry's health proposals. The company's chief executive, Hank McKinnell, is one of Bush's biggest fundraisers.

Megan Hauck, deputy policy director for the Bush campaign, told investors in July that the new Medicare law is already reducing the price of medicines, and that will continue.

``Competition is the answer to lowering drug costs,'' Hauck said. ``We are not advocating for price controls.''

Bush would depend on limiting damages in malpractice cases to lower health-care costs and offer $90 billion in proposals including tax credits to extend insurance to 2.1 million to 2.4 million more people, according to Emory University economist Kenneth E. Thorpe. The costs for both the Kerry and Bush plans are during a 10-year period.

Drug Spending

An American on average spends about $744.15 a year just on medicine, based on the ratio of U.S. prescription drug sales in 2003 divided by the population.

The average annual expense for patients over age 65 who bought prescription drugs between 1997 and 2000 rose 35 percent to $1,102, according to the government's Medical Expenditure Panel Survey, the most recent figures available. For those younger than 65, drug expenses rose 40 percent to $485 a year.

AARP, the largest lobbying group for senior citizens, says prices for the most popular brand name drugs rose 7.2 percent in the year ending in March, outpacing inflation more than 3-1. The organization is advocating a drop in drug prices and endorses at least one Senate bill that would allow the importation of brand name drugs from lower-cost suppliers in Canada.

The American Medical Association, which represents 250,000 physicians, ran a full-page advertisement in the New York Times on Thursday calling on Democrats to address the lack of health- care options, and it plans to run the ad again during the Republican National Convention starting at the end of the month.

Employers' Headache

The chief executives of some of the largest U.S. corporations also cite the burden of rising health-care costs.

U.S. companies' health-insurance premiums surged 42 percent in the past three years to $9,100 for an employee and family last year, according to the Menlo Park, California-based Henry J. Kaiser Family Foundation. This year, employers face a jump of 14 percent, about the same as in 2003, according to a survey by Lincolnshire, Illinois-based consulting firm Hewitt Associates.

``We continue to try to do some modest shifting of costs,'' Boeing Co. Chief Executive Harry Stonecipher said Wednesday in an interview. ``All of our employees have to have as we say, a little bit more skin in the game,'' Stonecipher said. ``But we recognize that you can't shift much of that cost to them.''

Automaker General Motors Corp., the largest U.S. private provider of health-care insurance, spends $5 billion a year on medical coverage for workers, and Chairman Richard Wagoner has cited the costs repeatedly for poor earnings performance.

Kerry's plan will make a meaningful impact on the costs that both businesses and individuals have, Jon Corzine, a Democratic Senator from New Jersey and a former co-chairman of Goldman, Sachs & Co., said in an interview from the convention.

Baby Steps

Senator Clinton called Kerry's plan a good interim solution to help reduce costs, and Democratic Senator Ted Kennedy said Kerry offers hope of expanding health care to everyone.

``We have to have leadership that is willing to admit we're heading in the wrong direction,'' Clinton said.

Clinton and other Democrats also say they have learned their lessons from the 1993 attempt to overhaul the health-care system, an effort that was challenged by hundreds of millions of dollars in lobbying by corporate America.

``We bit off more than we could chew,'' said Thomas McLarty, Bill Clinton's former chief of staff, in an interview last month. ``Senator Kerry has put forth a comprehensive plan, but one that does not try to get everyone insured immediately but is a step-by- step approach.''

To contact the reporters on this story:
Kristin Jensen at the Democratic National Convention in Boston [email protected] and Kristen Hallam in
Washington [email protected]

To contact the editor responsible for this story:
Glenn Hall at [email protected]

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