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Drug Industry Scores Gains in Medicare Bill

Pharmaceutical firms would escape price controls while getting new customers. Private health insurers could also benefit.

November 26, 2003|Denise Gellene and Nancy Rivera Brooks | Times Staff Writers

The far-reaching Medicare legislation that cleared the Senate on Tuesday provides an invigorating tonic for the health business -- from drug makers that stand to gain customers to medical plans that will administer new programs.

But exactly how much of a boost the Medicare overhaul will mean to the industry, let alone any individual corporation, remains to be seen.

Opponents said the bill amounted to handing a big check to pharmaceutical and health-care companies, which lobbied Congress hard for the Medicare bill. The drug industry in particular scored victories by escaping the specter of price controls and maintaining a ban on the importation of lower-cost drugs from Canada.

"It's tragic that a majority of Congress values the special interests -- pharmaceutical and insurance companies -- over the interests of American seniors and the disabled," said Gail Shearer, director of health policy analysis for Consumers Union.

But others said the potential outcome was not so simple, largely because of the prospect of increased competition within the industry.

The complex legislation, at a projected cost of about $400 billion over 10 years, would help seniors and the disabled on Medicare pay for prescription drugs. Medicare now covers only drugs that are given in a hospital or a doctor's office.

That change, analysts said, would open a new market to drug makers: people who previously couldn't afford their products. The biggest winners are expected to be companies that produce medicines demanded by an aging population to treat such ailments as arthritis, Alzheimer's disease, cardiovascular problems and osteoporosis.

However, that opportunity is tempered by other provisions of the bill that make it easier for cheaper, generic drugs to reach the market.

Analysts at the Wall Street firm Lehman Brothers said the legislation would add $3.5 billion to U.S. pharmaceutical sales in 2006, when the drug coverage begins. That's 1.4% of the $250 billion in prescription-drug spending forecast for that year.

"I don't know about a windfall, but it will be a positive undercurrent," said Tony Butler, a Lehman Brothers pharmaceuticals analyst. Over 10 years, he noted, the industry probably would see a 6% increase in sales.

Ian Spatz, vice president at drug maker Merck & Co., said the company was pleased with the legislation because "it's the right thing to do for seniors who can't afford their medicines. It's certainly in our interest to see people get their medicines."

Health-care stocks, which had rallied strongly in the days leading up to passage of the legislation, generally declined in price Tuesday as investors took profits. The Standard & Poor's Pharmaceuticals Index fell 0.8% after climbing 7.6% in the previous two weeks.

"It was a buy-on-the-rumor, sell-on-the-news kind of thing," said Paul Abel, portfolio manager with Kinetics Medical Fund.

Drug makers were not inclined to engage in unseemly celebration Tuesday over what Abel and others said was their greatest victory -- language that blocks Medicare from directly negotiating with manufacturers to hammer prices lower. Soaring drug prices have created political and public relations headaches for the industry and brought the recurring threat of price controls.

Under the legislation, the new drug benefit would be administered regionally through private insurance plans or pharmacy benefit managers. Pharmaceutical firms believe that these private plans have less power to set prices than a single government purchaser.

The industry "has divided the enemy," said Washington health policy analyst Ira Loss. "It is not going to be the government negotiating on behalf of Medicare patients. What causes apoplexy in the boardroom are price controls, and this [bill] pretty much means there won't be price controls."

However, the legislation could backfire for drug companies if private health plans fail to offer drug coverage. The bill allows Medicare to negotiate directly with drug makers in regions without a private drug-benefit program.

Spatz, who is Merck's vice president of public policy, questioned whether private corporations would present an easier negotiating partner than the federal government.

"They know how to drive very difficult bargains with us and this bill gives them the ability to do it," he said.

Howard Phanstiel, president and chief executive of PacifiCare Health Systems, which operates one of the nation's largest Medicare health maintenance organizations, said the legislation would allow his company to restore a full drug-benefit plan for seniors. "I think it's an opportunity," he said.

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