Big Pharma Will Be Ultimate Victim of Its Sellout on Obama Health Care Plan

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phrma logoIt may be high irony, but capitalists over the decades all too often have been at odds with capitalism. That is, business organizations, for any number of reasons, have been prone to support ideas and policies whose intent is to bring free enterprise under social control. This syndrome is well and alive at a pair of prescription drug/biotechnology industry organizations: the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Pharmaceutical Industry Labor-Management Association (PILMA). Each group is working to promote a radical expansion of government involvement in health care, acting in concert with Capitol Hill Democrats and especially the Obama administration. These measures effectively would nationalize health insurance in the name of providing coverage to most of the estimated 47 million currently uninsured. All are bad bets for Americans, whether as taxpayers, consumers - and, fittingly - as pharmaceutical providers.

These past several weeks have witnessed widespread and vociferous public opposition to health care reform, over the airwaves and especially at "town hall" meetings sponsored by congressional Democrats. It doesn't take much political wisdom to grasp that these meetings are stage-managed warm-ups to the main event. Once summer recess ends, Capitol Hill interest-group politics will begin in earnest. And "reform" will be a juggernaut difficult to stop. In large measure, that's because of support from organizations that should know better. It's not just the pharmaceutical industry that supports more federal control, but also the American Medical Association, the American Nurses Association, Business Roundtable, and various unions, churches and civil-rights groups. And the entire Democratic majority in both houses of Congress will be under enormous pressure to get with the program. Any moderate "Blue Dog" Democrats holding out can be guaranteed to feel the wrath of White House Chief of Staff Rahm Emanuel.

Opponents know this is the last stand for a reasonably free market for medical services and products. But even many among them often overlook a salient fact: Almost half of the nation's roughly $2.5 trillion a year (17.6 percent of GDP) in health-related expenditures is already in the realm of the public sector. Federal, state and local governments now pay for a combined 47 percent of all health care expenses in this U.S., the biggest components being Medicare, Medicaid, and State Children's Health Insurance Program (SCHIP). A public insurance program of the sort envisioned by the Obama White House would raise this share far higher.

Despite this, there is no shortage of people who believe that our country's health care system is "broken" and that reining in excessive profits enjoyed by insurance companies (not to mention HMOs, hospitals, and drug manufacturers) is the key to fixing things. For now, they view displacement of private medical insurance with a centralized system as Priority Number One. Barack Obama explicitly endorsed this view during his presidential campaign and again in his televised address to Congress this February. His proposal, unveiled in May, therefore shouldn't have been a great surprise. Among its features, his measure would force major employers into a "choice" of contributing to a new federally-run insurance plan or providing equivalent private coverage. Further, it would prevent employers from denying coverage to applicants for pre-existing medical conditions. And it would allow children - using the word loosely - to remain on their parents' plan until age 25.

None of this will come cheap. The Congressional Budget Office (CBO) estimates the cost of the Senate Finance Committee proposal, chaired by Max Baucus, D-Mont., during the first decade at $1.6 trillion, based on the assumption that a combination of industry cost controls and new taxes on households with incomes above $250,000 will cover the tab. Supporters such as Baucus and Ron Wyden, D-Ore., want to partially defray the cost by taxing benefits from employer-sponsored health plans - never mind that Kaiser Family Foundation estimates that workers on average now pay 41 percent of their cost. Premiums under the Obama plan would be about 30 percent to 40 percent lower than equivalent private-sector plans, thus necessitating public subsidies.

The House of Representatives is ready with its own measure. The mammoth 1,017-page bill, known as America's Affordable Health Choices Act (H.R. 3200), would move tens of millions of Americans into Medicaid or a heavily-subsidized government-run National Health Insurance Exchange. Either way, the attractiveness of private health plans would be undercut. Roughly 88 million Americans, estimates The Lewin Group, would lose their employer-based coverage and be forced into this arrangement. Households with incomes up to 400 percent of the poverty line would be eligible. Like the Obama plan, it would force large employers to provide coverage, ban denial of coverage for pre-existing conditions, and expand the Medicaid income-eligibility limit, in this case 133 percent of the poverty level. To pay for this extravaganza, the House bill would impose a surtax of 5.4 percent on higher-income families and small businesses. Combined with President Obama's other proposed tax increases, as well as Medicare and state taxes, the nation's top income tax rate would reach 52 percent.

And even this wouldn't cover projected revenue shortfalls. The Congressional Budget Office has concluded that the House plan would run a cumulative $239 billion deficit through 2019. And that would not be the end of things.  CBO Director Doug Elmendorf stated in a July 26 policy memo to Ranking Minority Ways and Means Committee Member Dave Camp (R-Mich.), "(R)elative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window." Two Senate bills, one put forth by the Health, Education and Labor Committee and the other by the Finance Committee, share many features of the House measure, though they would allow consumers to buy insurance through their respective states. Supporters are considering splitting the final bill into two parts so as to gain bipartisan support.

All of these measures would require price controls and/or subsidies. "Universal" health care would be another way of saying "second-rate" health care for those unable to buy private insurance. We will have achieved something approximating Great Britain's current two-tiered system. And the federal government would have the power to squeeze people out of the private sector. As Reason magazine science correspondent Ronald Bailey recently noted:

The worst-case scenario is that the public option plan would eventually absorb what remains of the private health care system. This could happen as the political constituency for private health care and insurance shrinks while more and more Americans become covered by government insurance. In addition, it will be hard for politicians to resist forcing wealthier patients to join the government plan as a way to make up for eventually shortfalls in revenue.

The Obama administration is doing everything possible to buy off private-sector opposition. In the case of the drug manufacturers, they're succeeding. This past June, the Washington, D.C.-based Pharmaceutical Research and Manufacturers of America (PhRMA) and the White House reached an agreement in which the industry reportedly would contribute $80 billion over 10 years to a health care overhaul. Industry payments would come from revenues from prescription drug discounts, especially from recapture of Medicare purchases. The administration would benefit by neutralizing a major source of opposition, and without alienating Left-populist Democrats in Congress seeking far greater industry concessions. PhRMA-affiliated firms in 2008 invested $50.3 billion to discover and develop new medicines. The industry-wide figure was $65.2 billion. If nothing else, Obama's people know where the money is.

Drug makers benefit as well - at least in the short run - gaining millions of new customers. The fact that this demand would materialize at enormous taxpayer cost apparently is a minor aside. To advance its goal, the Washington, D.C.-based PhRMA, headed by former Congressman Billy Tauzin, R-La., is gearing up for a massive advertising blitz that would use its own name and that of an allied group, Families USA. Insiders estimate the cost at $150 million and possibly as high as $200 million. PhRMA Senior Vice President Ken Johnson recently stated, "We will have a significant presence over the August recess, both on television and newspapers and on radio, but we have not finalized details for our fall campaign."

Thus far, PhRMA has contributed millions each to the Washington, D.C.-based health care advocacy group, Families USA, and an ad hoc nonprofit group, Healthy Economy Now (HEN). The latter organization reveals just how tight the triad between the White House, lobbyists and the health care industry really is. HEN members include PhRMA, Families USA, the American Medical Association, Business Roundtable, AARP, the Advanced Medical Technology Association, and the Service Employees International Union. HEN thus far has given a combined $12 million to two major lobbying shops, AKPD Message & Media and GMMB Campaign Group. The Chicago-based AKPD is the public relations firm headed by Obama White House Political Director David Axelrod before he came to Washington. As for GMMB, one of its partners is Jim Margolis, also an Obama strategist. Each was instrumental in making the Obama presidency a reality. Last year, the Obama campaign paid $2.77 million in consulting fees to AKPD and a whopping $340.53 million to GMMB, Federal Election Commission records show. Julius Hobson, a senior policy adviser at the Washington, D.C. office of the St. Louis law firm of Bryan Cave, explains the connections this way: "If you're in support of the president, then you use the people he used."

To its credit, PhRMA sees prevention as the key to health care reform. "(W)e must focus more effort on creating a system that rewards and promotes disease prevention - a critical component of PhRMA's Platform for a Healthy America," wrote CEO Billy Tauzin in an online memo this February, noting that identification and treatment of chronic diseases account for more than 75 cents of every dollar spent on U.S. health care. Widespread dissemination of information, he believes, is the key to keeping household health care spending down. Yet paradoxically, the industry also supports an expanded federal presence. PhRMA, in Tauzin's words, "is proud to be part of a diverse coalition dedicated to improving children's access to healthcare - including labor, patients, child welfare activists, and community and business organizations that supported reauthorizing SCHIP and supported providing health insurance for more kids." In other words, the Obama White House knew this was a group that could be bought.

PhRMA isn't the only pharmaceutical industry organization that supports the Obama health care proposal. The Pharmaceutical Industry Labor-Management Association, or PILMA, also is pitching in. The Alexandria, Va.-based PILMA is a cooperative venture of business and labor. Trustee organizations on the corporate side include AstraZeneca, Johnson & Johnson and Merck; on the labor side they include the International Association of Fire Fighters, the International Brotherhood of Electrical Workers, and the Sheet Metal Workers. This March PILMA released a monograph, "Health Care Reform for Workers and Working Families," that could have served as a blueprint for Democratic Party health care policy. On financing and cost-containment, for instance, the document reads:

PILMA believes that successful health reform for currently covered workers will support expansion of coverage to the uninsured. Elements of this reform must include: establishing systemwide programs to prevent and manage chronic disease; requiring employers to offer health benefits (with recognition that small businesses may be exempt); and treating health benefits more equitably under the tax system.

As the Obama administration continues to generate support from the private sector, the likelihood of it getting what it wants will increase. For business, it's a losing game. Organizations such as PhRMA and PILMA fail to grasp that whatever short-term benefits are to derived from a "partnership" with the federal government will be dwarfed over the long run by their loss of independence. In a manner not unlike the auto industry, the pharmaceutical sector will become an adjunct to the federal government.

Health care nationalization will place intolerable strains on an economy already mired in recession. Raising taxes is about the last thing any government should do to combat a recession, but the Obama White House and its allies in Congress are going full speed ahead. The Obama federal budget for fiscal 2010, if fully put in place, would hike per-household federal spending from about $24,000 to $32,000 by 2019 (inflation-adjusted).  Total government debt in this country in 2010 is projected to reach 60.1 percent of Gross Domestic Product, up from 36.9 percent in 2007. Those numbers don't look promising for the economy as a whole. Health care "reform," Democrat-style, will make things worse. The National Federation of Independent Business projects that over the first five years, employer-mandate health plans such as that proposed by the House would cost the nation 1.6 million jobs, 1 million of them in small businesses.

Pharmaceutical firms will benefit in the short run, but over the long run they, too, will be brought low by public control and a sagging economy. Anyone who thinks the federal government won't punish drug manufacturers and other health care industry enterprises so long as they "cooperate" is deluded. It can and, where necessary, it will. "The government never lends or gives anything to business that it does not take away from business," remarked the late business journalist Henry Hazlitt in his classic book, "Economics in One Lesson," more than 60 years ago. Such words seem lost on all too many companies and trade associations who think that the road to profitability lies with lying down before an administration and certain members of Congress eager to deny them the "selfish" pursuit of profit.