WSJ on Health-Care Overhaul: "Ahead of these give-backs, they dramatically raise prices," Dr. Rost says. "They always do that."

MAY 27, 2009
Drug CEOs Switch Tactics on Reform

Pharmaceutical Companies Join Health-Care Overhaul, Hoping to Influence Where Costs Are Cut

By JONATHAN D. ROCKOFF
Drug-company executives are aiming to prevent steep cuts in prescription prices by joining the effort to overhaul the U.S. health-care system.

Their approach contrasts sharply with their behavior 15 years ago, when they helped defeat President Bill Clinton's reform efforts from the outside. "This is not the 1990s, when the industry was playing defense," says John Lechleiter, Eli Lilly & Co.'s chief executive. "We're playing offense. We're at the table."

The pharmaceutical executives are using their new access to try to steer lawmakers away from measures that could reduce drug margins, pressing instead for cost reductions by hospitals and insurers.

In their meetings at the White House and on Capitol Hill, as well as in speeches and op-ed articles, industry executives and lobbyists have backed such steps as shifting insurance coverage toward prevention, which could increase sales for heart, diabetes and other drugs that patients take long term.

AstraZeneca PLC Chief Executive David Brennan argues that prescription drugs account for "just about 10% of the overall cost" of health-care spending in the U.S. "That hasn't changed in 40 years," he says, "and right now that is going down."

Instead of worrying about drug prices, Mr. Brennan says that a health-care overhaul should tackle the insurance co-payments that he says deter patients from taking the drugs they need. Reforms, he adds, shouldn't force doctors and patients to choose a drug based on cost if the more expensive treatment would have a better outcome.

The pharmaceutical industry "has a strong interest in working the benefit-design side rather than the price side," says Dan Mendelson, president of Avalere Health, a consulting firm that keeps health-care companies, patient groups and medical foundations abreast of developments in Washington.

Pfizer Inc. Chief Executive Jeffrey Kindler says he backs "comprehensive health-care reform in this country" and is willing to make compromises. But he opposes a public insurance plan except for the poor who otherwise can't afford insurance, saying it would crowd out private insurers and take "the form of price controls" that fail to reward companies for their expensive and risky investments in drug development.

Of course, just extending health-insurance coverage to millions of uninsured Americans is likely to benefit drug makers. Les Funtleyder, an industry analyst at Miller Tabak & Co., estimates such a move could increase the $291 billion in annual U.S. prescription-drug sales by $15 billion to $18 billion.

To help accomplish their goals, the drug makers spent $47.4 million on lobbying in the first quarter, up 36% from a year earlier, according to company-disclosure reports filed with Congress and analyzed by the nonpartisan Center for Responsive Politics. Pfizer Inc. more than doubled its spending on lobbying in the period to $6.1 million.

Earlier this month, drug makers joined doctors, insurers and hospitals in a pledge to rein in health-care cost increases by $2 trillion over the next decade. Merck & Co. Chief Executive Richard Clark, who attended the White House announcement, said that the company was "ready to do our part to achieve" an overhaul.

Nonetheless, the drug makers have been pushing through hefty price increases. Prices for many drugs were up more than 15% in the first quarter from a year earlier, according to data from Credit Suisse.

Pharmaceutical companies say the increases are fair and necessary as drugs mature, but analysts say the companies are trying to eke out as much revenue from the treatments as they can before patents expire and health-care reform drives down prices.

Peter Rost, a former marketing executive at Pfizer who is now an industry critic, says the increases are a way to soften the impact of future price cuts. "Ahead of these give-backs, they dramatically raise prices," Dr. Rost says. "They always do that."

Meanwhile, drug-industry executives worry that an overhaul of the health-care system could lead to too much government intervention. In addition to possibly establishing a government-sponsored insurance plan, lawmakers might give Medicare -- the existing public program for the elderly and disabled -- the authority to negotiate the prices for drugs dispensed through its Part D benefit. That could limit the prices pharmaceutical companies can charge.

Pharmaceutical executives argue that such steps would hamper drug makers' ability to pay for costly research into new treatments. "It would knock our legs out," says Lilly's Dr. Lechleiter.

Linda Douglass, a spokeswoman for the Obama administration, says the administration isn't negotiating with drug companies or other health-care industries. Rather, it is focused on working with lawmakers who are writing legislation and trying to figure out such issues as how to finance an overhaul. Allowing Medicare to negotiate the price of drugs dispensed through the Part D program, for example, "just hasn't come up yet," she says.

But she praises the drug industry for wanting to play a role. The major components of the health-care industry, including pharmaceutical companies, "are agreeing we can no longer live with the status quo, and I can't emphasize enough how important that is because it wasn't that way 15 years ago," she says.

Write to Jonathan D. Rockoff at jonathan.rockoff@wsj.com

Printed in The Wall Street Journal, page B1