The $80 billion health-care question

By any measure, $80 billion is a gargantuan sum.

It is twice the net worth of Bill Gates, the world's richest man. It would pay for almost three decades worth of "Cash for Clunkers" programs.

This $80 billion is the amount the pharmaceutical industry has told the Obama administration and Senate leaders it will chip in over 10 years to help pay for health-care reform.

The White House asked the industry to cough up the cash. Big Pharma agreed, allotting $30 billion to $35 billion of the figure to help Medicare participants pay for drugs when they reach the so-called doughnut hole gap in coverage.

Medicare covers up to $2,700 in yearly drug costs. After that, recipients must pay any additional amount until total costs hit $6,154 and coverage resumes. While in the "doughnut hole," participants' out-of-pocket expenses might be as high as $3,400.

Under the agreement reached with the White House, pharmaceutical companies would reduce prices of brand-name drugs 50 percent to those in the "doughnut hole."

It is not clear yet where the rest of the $80 billion would go.

Besides the money, the administration won the drug industry's support for reform.

Those new "Harry and Louise" commercials, in which the couple that doomed the Clinton plan now back Obama's health-care proposals? Paid for by the Pharmaceutical Research and Manufacturers of America (PhRMA), the trade group that negotiated the $80 billion deal.

In the world of medical care, where most numbers are Carl Sagan-size, $80 billion was a small price to pay for what drug companies hope to get in return.

The White House and Max Baucus, head of the Senate Finance Committee, which is overseeing health-care legislation, promised they would fight efforts in the U.S. House of Representatives to win even lower prices for drugs paid for by Medicare. The pharmaceutical industry also won a pledge that the administration would oppose importation of cheaper drugs from Canada.

But U.S. Rep. Henry Waxman, a leader in the House debate, said he thought that deal let drug companies off too easily. He argues that the industry received a windfall when Medicare took over drug payments for several million consumers known as dual eligibles, who had been getting them through Medicaid, the government program for the poor.

Medicaid can negotiate the prices it pays for drugs, so it pays significantly less than Medicare, which is barred by law from doing so. Instead, private insurers negotiate Medicare drug prices. But Waxman and others said they believed the program would get bigger discounts if it bargained as a single entity.

The Congressional Budget Office estimates the federal government would save $3 billion yearly if dual eligibles got drugs at Medicaid prices.

Ken Johnson, senior vice president of PhRMA, said switching some consumers from Medicaid to Medicare did not create an industry windfall.

"It's just not borne out by the facts," Johnson said. His group's research says that lower prices for dual eligibles would result in higher premiums for other participants in the Medicare drug benefit.

High drug prices put a dent in many consumers' budgets, but winning lower prices for Medicare probably won't save the government much, several experts said.

According to the Centers for Medicare and Medicaid Services, the total spent on health care in the United States in 2007 (the latest year for which data were available) was $2.2 trillion, with prescription drugs costing about $227 billion, or about 10 percent.

Medicare spends about $450 billion yearly. Most of that pays hospitals and doctors and, again, drugs account for about 10 percent.

"It's not a lot of money. From my perspective of looking at the deal for Obama and for the Democrats, the benefit is that it has engaged pharma on the side of health reform," said Georgetown University health-policy analyst Jack Hoadley.

Gains from reform may help the industry offset the cost, and drug companies may get more customers if health care is expanded.

"If the country can add 46 million to the rolls of the insured, that's a lot more people who can afford their medicines," said Drexel law professor Robert Field.

PhRMA's Johnson, however, said most of the uninsured were younger people with fewer prescription-drug needs. Many of those who do have prescriptions take generics, he said.

Some research shows that when seniors fall into the "doughnut hole," they cut back or stop taking their medicines, so giving them a break also may reap profits for the industry.

The $80 billion will lower prices only for branded, not generic, drugs, which also could push more income Big Pharma's way and raise Medicare's costs.

PhRMA's Johnson said the industry simply applied its share of the country's health-care tab (8 percent to 11 percent, depending on who is counting) to $1 trillion, the estimated 10-year cost of reform.

"This wasn't loose change that we found in the sofa. It's going to require our companies to make some very difficult choices going forward, from the size of workforces to what drug to develop. Many in Congress and in the White House would have liked to see the number a little larger, and our companies would have liked to have seen it a little smaller," he said. "It was a compromise."

But will PhRMA be able to hang on to its compromise as the House hashes out its version of reform?

That's the next $80 billion question.