[A-List] US corporate state: unhealthy accumulation

["Michael Keaney" <michael.keaney@xxxxxx>]

US reform may lift drug sales $35bn
By Christopher Bowe in New York
Financial Times; Jan 14, 2003

Extending the US federal health scheme for the elderly to cover prescription
drugs could boost pharmaceutical sales by up to $35bn (£22bn) a year,
according to analysis of official data.

The long-debated move, which could be agreed by Congress this year, would
lead to a big increase in the usage of prescription drugs by the 14m elderly
Americans currently without cover.

Analysis by Goldman Sachs suggests it could increase sales of prescription
drugs by 25 per cent, or $35bn, though other forecasts are significantly
lower. Given the high margins that drug companies make on prescription
drugs, that could mean a windfall profit boost of up to $14bn a year.

Joan Woodward, a Goldman Sachs analyst, said extending the Medicare scheme
to cover prescription drugs "brings an 800-pound gorilla into the market".
The size of the potential windfall for drug companies is likely to increase
the pressure from Medicare for big price discounts.

CIBC World Markets argues that uncertainty over the size of discounts and
the increase in demand could mean the boost to sales would be only $5bn a
year. Even so, with average margins of 40 per cent that would still mean
$2bn of extra profits for the industry.

The increased sales would benefit all the world's leading drug companies,
for which the US is by far the biggest market. GlaxoSmithKline, for example,
generated 53 per cent, or $13.1bn, of its drug sales in the US in 2001.

President George W. Bush is due to present his proposal to extend Medicare
in his State of the Union address on January 28. Long-supported by the
Democrats, Medicare reform is now seen by Republicans as a key issue in the
run-up to next year's presidential election, despite budget concerns.

Apart from the sales boost, companies believe it would help improve the
image of the industry, which is widely blamed for rising healthcare costs.

-----

41m Americans lack insurance and costs are soaring: for Bush, reform becomes
a priority
By Christopher Bowe and Geoff Dyer
Financial Times; Jan 15, 2003

Bill Frist, the first practising doctor to be elected to theUS Senate since
1928, hasbeen known to spend his holidays conducting medical clinics in
African villages. He keeps a physician's bagin his office and on New Year's
day he helped to resuscitate three people involved in a severe car crash in
Florida. Supporters claim the Tennessee Republican perfectly embodies what
President George W. Bush likes to call "compassionate conservatism".

Recently elected as Senate majority leader, Dr Frist now faces a new
challenge for his medical dexterity: to usher through Congress a reform of
Medicare, the creaking system of health insurance that provides hospital
care but not prescription drugs for the elderly and disabled. The issue has
become one of the most pressing domestic priorities for Mr Bush as he
prepares to seek re-election in 2004.

Of the 40m pensioners on Medicare, about a third lack insurance that covers
their expenses on drugs, forcing many to skimp on important expenditures or
forgo treatment altogether. Analysts note that these same people are a
growing political force, especially in crucial states such as Florida.

Although both Republicans and Democrats have long been committed to
including prescription drugs in Medicare, all recent attempts to revamp the
system have been bogged down by partisan infighting on Capitol Hill. But now
that Republicans control both houses of Congress, Mr Bush will find it
difficult to blame opponents if the stalemate continues.

"Bush and his political team know they absolutely need to enact something
before they face voters in 2004," says Joan Woodward, policy analyst in
Washington for Goldman Sachs. "If they don't, the Democrats will have him
for lunch."

Yet, while nearly every member of Congress has promised drug benefits to
elderly constituents, Medicare reform remains as complicated as it is
politically charged. The room for extra spending has been limited by a
slowing economy, a booming budget deficit and the president's own
tax-cutting plans. A war in Iraq could sap political energies, as well.

Not only must Mr Bush and Dr Frist overcome opposition from Democrats loath
to relinquish the limelight on one of their favourite issues but they must
also convince Medicare members that a new programme will not automatically
shift the costs on to them. Mr Bush will also be keen not to alienate the
huge pharmaceuticals industry, an influential lobby in Washington and a big
contributor to past campaigns.

Medicare is returning to the top of the political agenda amid a growing
perception of crisis in the US healthcare system. There are now about 41m
Americans without any health insurance at all and many companies are cutting
back the benefits they offer.

Yet a federal government report last week underlined that rising healthcare
costs, which slowed in the mid-1990s, are back with a vengeance. Total
spending jumped 8.7 per cent in 2001, the biggest increase since 1991, while
the cost of prescription drugs soared by 15.7 per cent to $140.6bn, making
it the fastest-growing component.

Healthcare spending now accounts for 14.1 per cent of US gross domestic
product and some estimates suggest it could rise to up to 24 per cent by
2011. While the left bemoans the huge gaps in coverage and rocketing drug
costs, the right complains that the US already spends more than twice as
much per capita on health as most other developed countries.

The trends are similar for Medicare. Federal government spending on Medicare
jumped nearly 8 per cent in 2001 and is likely to have reached $250bn last
year, yet doctors are frustrated with the programme after their payments
were cut in each of the last two years. With millions of baby-boomers lining
up to join the scheme, the Medicare bill could double by the end of the
decade. And all that is without adding in the cost of any drugs benefits
that might be added to Medicare.

According to David Walker, the comptroller-general: "Absent policy change,
in the long term, persistent deficits and escalating debt driven by
entitlement spending will overwhelm the budget."

The challenge facing Mr Bush is, therefore, to expand Medicare while taming
its future growth. His solution, which could be outlined during his January
28 State of the Union address, appears to be to promote competition.

The most likely approach would be a combination of Medicare drug coverage
with a scheme that allows the elderly to opt for parallel insurance plans
run by private companies. Such a change could ultimately make Medicare look
more like private insurance, the theory being that competition between
private insurance companies and the federally run plan would help drive down
costs, with companies encouraging their clients to use cheaper drugs and
more preventive care, thereby reducing hospital bills.

Most Medicare members already pay an annual premium of about $700. Under the
parallel private schemes, pensioners would pay a higher premium in return
for drug coverage and perhaps other services not currently available under
Medicare, such as nursing home costs.

This kind of reform has been discussed in the past. Indeed, Dr Frist was the
co-sponsor of a bill two years ago that was based on similar ideas.
Moreover, last year the House passed a Republican bill for drug coverage
under Medicare that included an experiment for separate private insurance
plans for the elderly.

"Done properly, I think that giving Medicare beneficiaries some choices can
have a good effect on costs and what people get for their money," says
Joseph Antos, a healthcare specialist at the American Enterprise Institute,
a conservative think-tank.

Such a programme will be a tough political sell, however. Many Democrats
would be reluctant to support a sweeping reform of Medicare as the price for
including drug costs. And there is little appetite among elderly voters for
a shake-up of the immensely popular system.

Critics are already accusing the administration of aiming to "privatise"
Medicare. Vikki Gottlich of the Centre for Medicare Advocacy, which gives
advice to patients, says a similar plan was tried in 1997 under a programme
called Medicare + Choice, where elderly people joined plans run by managed
care organisations. In the end, the programme did not lead to any savings
and many health plans dropped out because of low payments from the
government. "What will happen is that the costs get passed on to the people
who use the services the most because of greater medical needs," she adds.

If broader Medicare reform stalls, Mr Bush is likely to have a fall-back
programme for prescription drug coverage - a measure that political advisers
see as the bare minimum. "There is nobody in this arena that's going to
argue against prescription drug benefits because of the clout of seniors,"
says Chris Hansen, associate executive director of AARP, a lobby group for
senior citizens.

Yet even this more limited reform would require the administration to
navigate between the grey lobby, the pharmaceuticals industry and the
government's budgetary constraints.

For a start, there is the question of resources. While a bill introduced
last year in the Senate, which is still supported by many congressional
Republicans, would cost about $370bn over 10 years, many Democrats have
called for the government to spend double that amount.

Another idea being discussed in Washington is a more limited drugs benefit
that would provide assistance to elderly people on low incomes but would not
extend coverage to all Medicare members. But at a time when Mr Bush is
pushing for another round of huge tax cuts, he could face a political
backlash from the elderly if his plan appeared miserly.

There is also a substantial difference of opinion between the parties over
how the issue should be tackled. Many Democrats want to extend the Medicare
bureaucracy and use its power as a huge purchaser to squeeze more discounts
on drugs. This brings them into direct conflict with the pharmaceuticals
industry, for which drug pricing is a vital issue. The US accounts for more
than half the profits of the main pharmaceuticals companies and is one of
its fastest-growing markets. And the industry is a powerful political force
- Public Citizen, a consumer watchdog, estimates that it employed 623
lobbyists last year.

In the past, the industry has opposed all attempts to include drug coverage
under Medicare, seeing it as a threat to profitability. That position began
to change, however, in the late 1990s when the industry found itself under
increasing attack for "gouging" pensioners. Many executives now view
Medicare reform as a means of removing the industry from the political line
of fire.

"Drugs account for about 9 per cent of healthcare costs but they're seen as
100 per cent of the problem," says Hank McKinnell, chairman of Pfizer. "We
can't possibly be 100 per cent of the problem. I think now is the time for
some new thinking."

Indeed, the industry could emerge as a big winner of Medicare reform.
Although companies would probably have to offer substantial discounts to the
programme itself, the increased volume could boost total revenues.
Additionally, the introduction of a Medicare drugs benefit might lead some
patients to trade up from old, cheaper medicines to the new generation of
branded drugs, such as the Cox-2 painkillers that are now commonly used to
treat arthritis.

Goldman Sachs has calculated that a Medicare drug benefit could boost sales
by up to $35bn a year and add $14bn to annual profits.

Yet, for the industry, there is also a huge danger. The legislation would be
likely to turn the federal government into the single biggest purchaser of
prescription drugs in the US and some executives fear that could be the
start of a process of creeping price controls. The industry is already
facing concerted pressure from state governments to cut drug prices, just as
Congress has passed a bill making it easier to import cheap drugs from
Canada.

Lobbyists claim that if legislators damage the industry's profitability by
squeezing prices, it will hamper long-term and risky research into poorly
treated diseases such as Alzheimer's.

The Republicans propose to overcome this problem by requiring private
insurance companies to run the new drug benefits. Although the subsidies
would come from the government, there would be no centralised agency for
buying drugs.

"Bush is not going to do anything that harms the industry, which has been so
closely aligned with his campaigns in the last electoral cycle," says Morris
Reid, a former Clinton administration official.

The political danger for Mr Bush, however, is that if he strives too hard to
defend a private sector scheme he will open up a line of attack from
Democrats that he is pandering to big business.

Given the complexity of the issue, some analysts expect Mr Bush merely to
set out a few principles in his State of the Union address, then let Dr
Frist and other Republican leaders try to forge a consensus among
congressional colleagues. Much would then depend on the negotiating skills
of Dr Frist.

As Mr Antos of the AEI says: "When it comes to healthcare reform, if you
propose gigantic changes it scares everybody. But there is an opportunity
here to do something that will move us in the direction of of reasonable
reform."

-----

 LEADER: With Medicaid under strain, the states land in court

Financial Times; Jan 15, 2003

Medicare is not the only health insurance programme under pressure.
Medicaid, which provides healthcare for 40m low-income Americans, is also
feeling the strain from rising costs.

The result is a growing stand-off between the pharmaceuticals industry and
state governments, which partly fund Medicaid and are feeling their budgets
squeezed by escalating spending on drugs.

This month the US Supreme Court will hear oral arguments in a lawsuit
brought against the state of Maine by the pharmaceuticals industry over its
plan to force discounts on drugs for citizens without insurance. With half
the states in the country implementing or planning schemes to reduce drug
prices, the case is seen as a crucial test of strength.

And while the Bush administration has recommended that the Maine programme
be overturned, it has given its support to many of the other state schemes,
bringing it into a rare conflict with the industry.

Drug prices are an obvious target for states. On top of economic weakness
and shrinking tax revenues, the rising cost of healthcare has brought on a
fiscal crisis in many states. Their combined budget deficit is estimated to
worsen to $60bn-$85bn in 2004, according to a Kaiser Family Foundation study
on states' healthcare, which is equivalent to 13-18 per cent of their total
expenditure. As a result, 49 states are planning to make cuts in Medicaid
coverage this year.

Under the Maine programme, residents without insurance for prescription
drugs would get a discount of about 20 per cent. The drug companies would be
obliged to pay the state a rebate, which would then be used to reimburse the
pharmacy that offered the discount. To persuade companies to pay the rebate,
Maine would publish the names of manufacturers who refused and require
doctors to call the state for prior authorisation before prescribing one of
its drugs for Medicaid patients.

"It's no surprise that the industry is challenging such efforts. We feel as
though [the drug discount scheme] could have said 'Mary had a little lamb'
and it would have drawn a lawsuit," says Charles Dow, spokesman for Maine's
attorney-general.

But the Pharmaceutical Research and Manufacturers of America, the industry's
trade group, alleges that the programme is illegal for several reasons.It
claims the plan is beyond the spirit and letter of the law that created
Medicaid and that it is an unlawful regulation of interstate commerce.

The industry is also suing Michigan, Vermont and Florida after they
established lists of preferred drugs in a bid to contain costs. If companies
refuse to negotiate rebates, they risk being left off the list. PhRMA argues
that the programmes supersede doctors' ability to treat patients and that
state bureaucrats are not qualified to pick the right drugs.

"The industry is always concerned with programmes that restrict the access
of Medicaid patients to get the drugs that their doctors prescribe them,"
says Andrew Nannis, PhRMA spokesman for state policy.

A Michigan state appellate court last year ruled in favour of Michigan's
programme; PhRMA plans to appeal against that decision. The industry is
seeking another Supreme Court review of the Florida law, which was upheld in
federal appellate court last year.

Other pending litigation includes a lawsuit issued by PhRMA against Tommy
Thompson, the US health secretary. Mr Thompson, the former governor of
Wisconsin, has granted "Medicaid waivers" allowing states such as Illinois,
South Carolina and Wisconsin to change their programmes under certain
conditions.

While the legal battle gathers pace, nine states and the District of
Columbia have formed a non-profit organisation to manage their prescription
plans. The organisation will act as a drug-buying pool and benefits manager
for employees of the states and their Medicaid patients. It will then use
rebates and discounts negotiated with drug companies to expand coverage.

The plan is also to cover low-price, mail-order prescriptions from Canada,
another bone of contention for the pharmaceuticals industry that it fears
could hamper its profitability.