-Caveat Lector-
December 25, 1999--NYTimes
Clinton Officials Warn Drug
Firms of Price Control
By ROBERT PEAR
WASHINGTON, Dec. 24 -- Brandishing new data
showing that the drug industry earns higher
profits and pays lower taxes than most other industries,
White House officials say drug companies may bring
price controls on themselves if they continue to resist
President Clinton's plan to have Medicare provide
pharmaceutical benefits.
Mr. Clinton has repeatedly said that his proposal for
Medicare drug benefits does not envision federal
regulation of drug prices, and such a measure is highly
unlikely. But the statements from the officials suggest
that the White House is taking a harder line as an
election year approaches.
"There is a rising tide politically in this country of
strong antagonism against the pharmaceutical industry
on the dimension of prices," said Daniel N. Mendelson,
associate director of the White House Office of
Management and Budget, who is preparing the budget
request that Mr. Clinton will send Congress next month.
"My personal view, and I think the view of some others
in the administration, is that if we don't do something
about that now, by expanding access and availability to
insurance, price controls are an inevitable outcome."
Mr. Mendelson's comments were made to an audience
full of drug company and health care executives, at a
recent conference in Arlington, Va., where he spoke as
an official representative of the Clinton administration.
In interviews this week, other administration officials
said the president deserved credit for resisting pressure
from liberal Democrats in Congress who want to
impose price controls.
Price controls could be imposed only through
legislation, and while some Democrats have expressed
an interest in them, Republicans oppose the idea and
many Democrats have little appetite for them.
Mr. Clinton, members of Congress and drug companies
are preparing for an election-year battle over
prescription drugs.
"This is possibly the hottest issue up for debate in
Congress, certainly one of the two or three most heated
issues," said Senator Ron Wyden, Democrat of Oregon.
"If some cool heads can step in and be practical here,
there's an opportunity for a breakthrough. But the
opportunity will last only a few months. After that, the
campaigns will accelerate, advertising will flow from
all directions and factions will be polarized."
Medicare, the federal health insurance program for the
elderly and the disabled, generally does not cover
drugs outside the hospital, even though drugs are an
essential tool of modern medicine, used not only to
treat but also to prevent many debilitating illnesses.
In June, Mr. Clinton unveiled a proposal to offer drug
coverage to all 39 million Medicare beneficiaries.
White House officials said Mr. Clinton would resubmit
the proposal when he sends his budget request to
Congress next month. But, they said, there will be some
changes:
¶The cost, initially put at $118 billion over 10 years,
will be higher because the use and the price of drugs
have been rising briskly as doctors write more
prescriptions and dozens of new medications win
approval from the Food and Drug Administration.
¶Mr. Clinton will revise his proposal in an effort to
reduce medical errors, including medication mistakes
of the type highlighted in a recent report from the
National Academy of Sciences. Before dispensing
drugs to Medicare beneficiaries, pharmacists would
have to check via computer to confirm that the dosage
was appropriate and to check for dangerous
interactions with other drugs the patient might be taking.
¶Administration officials will not insist that drug
benefits be supervised or administered by the agency
that runs the rest of the Medicare program. Lawmakers
often criticize the agency, the Health Care Financing
Administration, as heavy-handed and bureaucratic, and
Republicans refuse to give it a larger role.
"It's no secret at this point that there is a very strong
anti-H.C.F.A. sentiment on Capitol Hill," said Mr.
Mendelson, the White House budget official.
Mr. Mendelson said that proposals to provide drug
coverage to Medicare beneficiaries through competing
private health plans "deserve full consideration." He
said the administration was looking carefully at two
such proposals with bipartisan pedigrees. One was
offered by Senators Wyden and Olympia J. Snowe,
Republican of Maine. The other was introduced by
Senators John B. Breaux, Democrat of Louisiana, and
Bill Frist, Republican of Tennessee.
The clamor for Medicare drug benefits has prompted
new attention to the finances of the pharmaceutical
industry. The study of drug company profits and taxes
was done by the nonpartisan Congressional Research
Service.
"Domestic sales of pharmaceutical products and drug
industry profits rose rapidly" in recent years, but "the
drug industry's profits are taxed more lightly than those"
of other major industries, said the study, requested by
Representative Pete Stark, Democrat of California.
The study measured the tax burden for each industry by
computing its average effective tax rate, defined as the
ratio of its United States income tax liability to its
worldwide taxable income.
The effective tax rate was 16 percent for the drug
industry, as against an average of 27 percent for all
industries, 23 percent for manufacturing companies, and
31 percent for wholesale and retail trade, financial
services, insurance and real estate.
At the same time, the study said, after-tax profits for the
pharmaceutical industry averaged 17 percent of sales,
about three times the average for all industries, which
was 5 percent.
The study, based on data from the Internal Revenue
Service, did not suggest that drug companies were
improperly evading taxes. Rather, it said, they had
reduced their tax liabilities by claiming a variety of tax
credits. These include a special tax credit for
companies with factories in Puerto Rico; a general tax
credit for research expenses; the foreign tax credit,
which prevents double taxation of income earned
abroad, and a special tax credit for developers of drugs
to treat rare diseases, known as orphan drugs.
Jeffrey L. Trewhitt, a spokesman for the Pharmaceutical
Research and Manufacturers of America, a trade
association, said: "We have earned these tax savings
because we spend huge sums on research and
development. We are one of the most innovative
industries in the country."
Under Mr. Clinton's proposal, the government would
pay half the drug costs incurred by a Medicare
beneficiary, with the maximum federal payment starting
at $1,000 a year and rising gradually to $2,500 in 2008.
Mr. Mendelson said the cost of Mr. Clinton's proposal
was going up because "the price and the volume of
pharmaceuticals are going up."
In re-estimating the cost, federal officials have
analyzed data from other health plans, in the belief that
their experience provides some indication of what
Medicare could expect.
The Department of Veterans Affairs says its drug
spending rose 19 percent, to $1.85 billion, in the fiscal
year that ended Sept. 30.
Kaiser Permanente, one of the nation's largest health
maintenance organizations, with 8.5 million members,
says its drug spending rose 16 percent, to $1.5 billion,
in the last year.
Anthony A. Barrueta, a lawyer at Kaiser Permanente,
said the increases were larger for certain types of
drugs: 17 percent for antidepressants, 45 percent for
antihistamines and 23 percent for anti-ulcer drugs.
Mr. Clinton's new interest in patient safety follows a
recent report from the National Academy of Sciences,
which said that 7,000 people a year died because of
medication errors.
Mr. Mendelson said that anyone managing drug benefits
for the elderly should be required to use computer
technology to screen prescriptions and to identify
potential problems in drug therapy. Such "drug
utilization review would be a positive thing for the
health of Medicare beneficiaries because it would
reduce drug-drug interactions," he said.
Elizabeth Dichter, executive vice president of PCS
Health Systems, a pharmacy benefits manager based in
Scottsdale, Ariz., said, "Drug utilization review would
be a big advantage for the elderly, who take so many
medications."
Elderly people take more than one-third of all
prescription drugs sold in the United States. One doctor
does not necessarily know what drugs a patient may
have received from other doctors. But online systems
operated by companies like PCS can keep track of all
the prescriptions filled by a patient at drugstores across
the country.
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