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Democratic Medicare drug plan poised to pass House

WASHINGTON—Keeping true to their campaign promise, Democrats in the House of Representatives will try this week to pass legislation that requires the government to negotiate for lower drug prices in the Medicare prescription-drug benefit.

The bill is expected to pass the House but it may face problems in the Senate, where Finance Committee Chairman Max Baucus, D-Mont., who helped craft the current Medicare drug program, is expected to hold hearings on the measure Thursday.

The proposal by U.S. Reps. John Dingell of Michigan and new House Ways and Means Committee Chairman Charles Rangel of New York would help remedy what many see as a costly structural flaw in the program.

Rather than using Medicare's 43 million enrollees as leverage to secure lower drug prices, Republican lawmakers, in concert with the drug industry, blocked efforts to establish a government-run plan and prevented Medicare from negotiating prices with drug makers.

They chose to cover Medicare enrollees through hundreds of private drug plans that the government subsidizes. Competition among those plans is helping to keep prices down, but Democrats say the government could negotiate even steeper discounts than the plans have managed.

That theory is largely untested, but Democrats, eager to flex their new congressional-majority muscle, are determined to test it.

"The Medicare Prescription Drug Price Negotiation Act of 2007" will require Health and Human Services Secretary Michael Leavitt to negotiate prices on behalf of 29.4 million Medicare recipients who are covered through private standalone plans and Medicare managed-care plans, according to a draft of the proposal. The legislation will require Leavitt to update Congress every six months on progress in those negotiations.

A recent national survey by the Kaiser Family Foundation found that 85 percent of Americans favored government negotiations, including 65 percent who strongly support them. That backing crosses all political lines, with 92 percent support among Democrats, 85 percent among independents and 74 percent among Republicans.

But prominent detractors oppose the Democratic plan, saying the short-term savings and political gain from government negotiations could limit seniors' drug choices and hurt the research and development of new drugs.

"This is the big debate that we don't have a perfect answer for," said Geoffrey Joyce, a senior economist at the RAND Corp., a research center in Santa Monica, Calif. "We know that if profitability declines, it will affect research and development over the long run. But it's unclear what the magnitude of that effect would be."

U.S. drug companies spent $60 billion on research and development last year. Benjamin Zycher, a senior fellow at the conservative Manhattan Institute, argues that cheaper government-negotiated Medicare drugs could cut nearly $200 billion from drug-industry research budgets over the next 18 years. That would amount to the loss of an estimated 10 new drugs each year.

Joel Hay, an associate professor of pharmaceutical economics at the University of Southern California, questioned Zycher's numbers but agreed with his premise.

"It's killing the goose to get the golden egg," Hay said of the government talks with drug companies. "It's great for politicians and balancing budgets, and seniors will love it. But their children and their children's children will miss out on new drugs every year, and some of those drugs will be important."

Supporters counter that the Medicare drug program has been too generous to drug companies. They maintain that any loss of revenue could be made up by cuts in marketing and advertising or by focusing research on innovative therapies rather than so-called "me too" drugs, which are slightly modified versions of existing medications.

"There's room in their cost structure for pharmaceutical companies to do well, invest in research and development and give better rates for Medicare beneficiaries," said Robert Berenson, a senior fellow at the Urban Institute, a liberal policy-research center, and the director of Medicare payment policy from 1998 to 2001.

The prospect of government negotiations has caused pharmaceutical stocks to slip since Democrats regained control of Congress in November.

Drug companies spend an average of $1.2 billion to get each drug approved by the Food and Drug Administration, according to Hay. Only 1 in 5,000 tested compounds receives federal marketing approval, and it typically takes nearly eight years for a new drug to hit store shelves, he said.

That high risk yields high rewards; the pharmaceutical industry is one of the nation's most profitable. Revenue from the Medicare drug program has helped counter an industry-wide slowdown in drug launches and will cushion future losses as several hundred medications lose their patent protection and face generic competition in the next five years.

Last year, the federal government spent about $90 billion of the $220 billion that was spent on pharmaceuticals, Hay said. Most of that spending was through the Medicare drug benefit, which will cost taxpayers more than $729 billion over its first decade, according to government estimates.

Discounts negotiated by the private Medicare plans were projected to save 15 percent in 2006 and to peak at 25 percent in 2011, according to government estimates.

The Veterans Administration, which negotiates its own drug prices, gets about 42 percent off average wholesale prices, and Medicaid gets 40 to 50 percent off, Joyce said.


(c) 2007, McClatchy-Tribune Information Services.

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