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June 30, 2009

Health Care Reform: Obama, AARP and PhRMA Offer Help to Seniors

With comprehensive health care legislation only being “discussed” on the House side, and with the Senate Finance Committee yet to publish their “discussion” on health care reform, the new $80 billion agreement between the Obama administration and pharmaceutical companies is interesting.

According to the Wall Street Journal “The $80 billion deal announced last week between drug makers and Washington Democrats highlights a problem within the Medicare Part D Drug Benefit: The doughnut hole.”

This “doughnut hole” refers to the gap in coverage that leaves beneficiaries on the hook for the cost of prescription drugs when the cost of their prescription drugs passes $2,700 in a year. Coverage is then returned when a beneficiary’s annual drug cost passes $6,154 in a year, in which "catastrophic" coverage kicks in and covers nearly all drug expenses. As a result of these gaps, for one quarter of Medicare beneficiaries, about 15% stop taking their medicine.

The $80 billion in revenue over a decade would largely cover more of the cost of brand-name prescription drugs under the federal government program for seniors, and “it would make up part of the $313 billion in government health-spending cuts.

-                           The proposal would cause drug makers to pay half (50%) of the cost of prescription drugs when Medicare beneficiaries are in the “doughnut hole.”

-                           The proposal also offers other unspecified discounts and rebates or medications purchased through the Medicaid program or those for seniors enrolled in Medicare managed-care plans.

-                           The full price of the drug would count toward a person's out-of-pocket total, thus maximizing the insurance benefit.

-                           Those earning more than $85,000 a year -- would probably continue to pay full price, according to an industry source.

President and CEO of PhRMA applauded Chairman Baucus and President Obama on putting together the agreement, as did Barry Rand, chief executive of AARP. However, AARP’s still wants to “close the doughnut hole entirely.”

Consequently, there are still a lot of unknowns about who else will benefit from the deal, and what portion would accrue to the federal treasury. Moreover, the deal is contingent upon overwhelming health care reform legislation actually getting passed.

Another concern about the deal is how much the government will get from the deal to pay for covering the uninsured. Furthermore, not all of the $80 billion will go to offset the costs of covering the uninsured. An estimated $30 billion, which represents the approximate lost revenue from all prescriptions filled by this group, will help pay for the gap in Medicare prescription drug coverage.

The remainder of the contribution, approximately $50 billion, will go to new subsidies to provide to the uninsured—a total estimated at least $1 trillion over a decade. Accordingly, PhRMA has “been reluctant to detail how much money would be dedicated to each piece of the puzzle, and it did not know what the split would be.”

Some assert that the deal won’t affect the bottom line of drug companies because it “will ultimately discourage patients in the donut hole from switching to generics," because their out-of-pocket costs for brand-name drugs will be less. Many analysts estimate expanded insurance coverage (which PhRMA is advocating for) could increase yearly drug sales in the U.S. by $9 billion to $12 billion, or 3% to 4% of annual sales.

If health-care reform legislation is enacted, the agreement would bring financial relief to about 3.4 million elderly and disabled Americans, and could save 3.5 million retirees up to $1,700 a year, according to AARP.


Ultimately, with a health care plan that has yet to been finalized for public comment, and only $50 billion in savings for over $1 trillion in spending, Obama and his health care team have a long way to go.  While addressing the gap in Medicare for prescription drugs is certainly a very important effort, and will ultimately reduce spending and cost in the health care system, the plan may still be unaffordable.


Democrats and Obama need to look for more ways at spending less money from taxpayers, and still save seniors money.  In other words, even if Obama or AARP say they are saving money for seniors, that money saved is going to be taken right out of their pockets and the pockets of their grandchildren in order to pay for this plan. Most likely, Congress will not even get to debate the health care legislation before August, let alone this deal.

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