Why Are The Drug
and Health Insurance Companies Smiling?

Cartoon by David Horsey

By Ralph E. Stone

August 21, 2009

An important objective of meaningful health care reform is cost control. President Obama’s sweetheart deal with the drug companies and the dropping of a public option to provide meaningful competition to for-profit health insurance companies will not rein in the spiraling cost of health care. Given the way health care reform is heading, is it any wonder the drug and health insurance companies are smiling.

Sweetheart Drug Deal

Reportedly President Obama reached an agreement with the big drug companies to cut the price of medicine by $80 billion. Sounds like a lot. But consider that U.S. spending on prescription drugs for the next ten years is projected to be $3.6 trillion. That’s a price reduction of only 2 percent. But the drug industry did not actually agree to cut prices. Instead, they agreed over ten years to reduce by $80 billion the amount at which they would otherwise have raised drug prices. Thus, the agreement locks in a doubling of drug costs, projected to rise over the 10-year period from $250 billion a year to $500 billion a year, minus $80 billion.

What did President Obama give in return for this $80 billion? Reportedly, Obama agreed not to bargain down prices for Medicare purchases and promised that the U.S. would not buy less expensive drugs from Canada. What will that cost us? Well 13 European nations successfully regulate the price of drugs, reducing the average cost of name-brand prescription medicines by 35 percent to 55 percent. Obama gave up that possible savings for 2 percent. Similarly the Veterans Administration is able to use its bargaining power to lower the price it pays for patent medicine by 40 percent. Former President George Bush stopped Medicare from bargaining for similar discounts. Inexplicably, Obama agreed to keep Bush’s costly no-bargaining ban for the next decade. The drug companies will be laughing all the way to the bank. Obama got snookered. Or did he? Regardless, Congress should not feel bound by Obama’s agreement with the drug companies.

No Public Option Is No Option

The insurance companies also love the way “reform” is going. With hints of a public option off the table, the insurance companies stand to make beaucoup profits. Under the proposed health plan, the government will require most uninsured Americans to buy health coverage. The young and healthy will be steered into the industry’s welcoming arms. With the lack of competition from a public option, private health insurance industry record profits can be expected to continue. (Profits at ten of the country’s largest publicly traded health insurance companies rose 428 percent from 2000 to 2007.) And forget about nonprofit cooperatives providing competition to the drug companies. That’s like sending me into the ring against WBA heavyweight champion Nikolai Valuev. No contest.

This additional business for the insurance companies will more than offset the cost of important new regulations that, among other things, will prevent insurers from denying coverage to applicants with pre-existing conditions or imposing lifetime limits on benefits. The old and the sick are on Medicare, and the poor will be on Medicaid, and the rest will be required to purchase private insurance without the option of a competing government-run plan. If you are a health insurance company, what’s not to like.

Forget the Republicans

The way health care reform is heading, more people will have health coverage, but it will do little to control the escalating cost of health care. Giving consumers the choice of an efficient, nonprofit, government-run insurance plan would move us toward real cost control. And forget about Obama’s sweetheart deal with the drug companies. We have a Democrat-controlled Congress. So lets forget the Republicans. President Obama must ignore the polls and the Republican hecklers and take charge of the details of a reform bill. He along with Representative Nancy Pelosi and Senator Harry Reid must begin to twist the arms of reluctant Democrats. Americans deserve a meaningful health care reform plan now, not one the drug and health insurance companies favor.

Ralph E. Stone

I was born in Massachusetts; graduated from Middlebury College and Suffolk Law School; served as an officer in the Vietnam war; retired from the Federal Trade Commission (consumer and antitrust law); travel extensively with my wife Judi; and since retirement involved in domestic violence prevention and consumer issues.

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