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What Will Drug Companies Do Without Medical Insurance Reform?
Posted on 7/16/2010 at 10:19:58 PM
What Will Drug Companies Do Without Medical Insurance Reform?
Major drug companies are probably reminiscing about the days when Democratic-led healthcare reform appeared inevitable. They didn’t escape that legislation scot-free; it forced pharmaceutical firms to pay billion worth of fees and discounts to health insurance consumers on their products. That agreement was set to decrease their revenues, at least in the short term. However, it promised to bring up to 30 million new medical insurance consumers into the fold, while offering drug companies virtual immunity from some regulatory issues. All they had to do was publicly pledge their support through television advertising.
Now, the Pfizers and Merecks of the world are worried. Last month’s special election in Massachusetts upended the industry’s plans. Democrats lost their super-majority in the Senate, preventing them from pushing through the healthcare reform legislation previously negotiated. Public anger over back-room horse trading among industries and politicians has contributed to opposition, and the agreement struck with the drug companies last year is a perfect example of it.
While the prescription drug industry offered some concessions, it also received some sweetheart deals from the government. Several proposals, which would simultaneously reduce health care costs and be popular with most Americans, had the potential to cut into their profits. Many Americans, especially senior citizens, have been acquiring drugs from nations like Canada–where safety regulations are similar, but prices are significantly lower. Doing so is technically illegal, but some politicians were considering formalizing the legal importation of medications. Drug companies dodged a major bullet when that option was shelved in order to gain their support for the expansion of low cost medical insurance.
Another option initially presented was little more palatable. It would allow the government’s Medicare insurance program to negotiate prices with each pharmaceutical company. Medicare would probably have more leverage than private health insurance companies to exert downward pressure on price. That, too, was eliminated by the Obama administration. With the future of the comprehensive healthcare reform bill in doubt, both proposals may come back with a vengeance.
Drug companies must also begin worrying about taxes on their offshore accounts and holdings. In 2008, the four major drug manufacturers received over 40% of their revenue from overseas sources. That is a significant increase from the previous decade, which also coincides with soaring prescription drug–and individual health insurance–costs. Democrats in Congress assured them that such a tax was off the table, but President Obama’s new budget for the next fiscal year has put it back on.
Profits from certain intangible assets, such as patents, that are held overseas will be subject to a new tax. The provision is intended to target the drug industry, which is one of the biggest industries to utilize tax havens in foreign countries to avoid paying American corporate taxes. The current tax rate for corporations is 35%, which is a serious hit to drug companies that projected zero taxes on these holdings. Their stock prices have slumped as a result of this news.
Above all, the unpredictability of medical insurance reform passed piecemeal (which looks more likely by the day) hurts drug insurance companies, because they are unable to plan and prepare their shareholders. It being an election year makes their predicament even worse: vilifying the drug companies is not a significant political risk, and fits into the new wisdom that Democrats should move more slowly on the issue. A handful of Republicans may even consider the regulations for their deficit-reduction potential, although business tax increases of any sort are not very popular with the party.
(Image: striatic under CC 2.0)