The Scam of U.S. Healthcare Reform (Circa 2009)

This week, NPR reported that one of the most powerful players in health care is PhRMA, which as I've noted before, stands for the Pharmaceutical Research and Manufacturers of America. PhRMA is a trade organization that represents some 32 brand-name drug companies, and NPR also reported that this organization now has so much influence in Washington, that when Congress passes a bill, PhRMA almost ALWAYS gets its way, and we're all picking up the tab (except, perhaps, for big pharma's shareholders). Listen to the story here:



PhRMA Lobbying Efforts Lead to Costly Corporate Welfare

We need look no further to the Medicare Drug Bill, which was one of the biggest pieces of corporate welfare to emerge in the U.S. since the great depression (and without serious efforts to reform to this over the long-run, it COULD potentially make the current Troubled Asset Relief Program [TARP] given to banks look comparatively cheap by comparison). A quick refresher on the Medicare Drug program: On January 1, 2006, Congress passed a bill and then-President Bush signed into law new legislation that authorized the government-run healthcare plan for senior citizens known as Medicare to provide an new optional prescription drug benefit. While the merits of that law bill are well known, the cost is an effective sinkhole (growing rapidly with a massive baby boom now entering retirement), and to make matters worse, Medicare cannot negotiate for lower prescription drug prices directly with prescription drug manufacturers!

To cite an example under the U.S. Government umbrella that proves that the current Medicare drug program is corporate welfare, we need look no further to the U.S. Veteran's Administration (VA) for a lesson. The VA has negotiated drug prices that are 20% to 30% lower than the price of drugs available through the 50 or so private plans that currently provide Medicare Part D coverage, and yet no one from the industry is crying they cannot make any money as a result of of the VA's move. The current system is pure corporate welfare. Governments around the world already negotiating prices, but in the U.S., Medicare can't do the same thing. The current system keeps the profit model going for all groups involved (except U.S. taxpayers, of course), including insurance companies, pharmacies, pharmacy benefits managers (PBMs), drug wholesalers just to name a few of the groups who skims a profit from the current system.

Bills have been introduced repeatedly for the past few years to try and address this "little" issue with the law, yet somehow never seem to make it out of committee, let alone be voted on. The drug industry argues that changing the current system would lead to government price fixing, cost shifting and eventual drug rationing, yet these arguments are fictitious without any real evidence to back them. Countries with nationalized healthcare systems routinely negotiate drug prices, yet I've never heard of a shortage of a blockbuster drug like Lipitor which lead to rationing of that drug anywhere on earth.

Former President Bill Clinton was somewhat more diplomatic about it, but he argues that the U.S. effectively subsidizes the rest of the world's drug prices. In an an interview with Larry King earlier this year, the former President said:

"... We have made a bargain with our pharmaceutical companies. We've said to them for decades now, we love having you in America. We're proud of you. We know you have to spend a lot of money on research and then you market the drugs and all.

So we will eat your research and development costs in American prices so that you can sell exactly the same drugs you sell to us for less money in Canada and Europe.

Even our -- for example, our AIDS clinic down the street here in Harlem, the taxpayers pay $10,000 a year to treat people with the big pharmaceutical companies' AIDS medicine. That medicine costs about $3,500 a year in Canada and Europe -- countries with per capita incomes as high as America."

If the Congress is talking healthcare REFORM, we MUST change that business model, but as I'll demonstrate, that isn't happening thanks to groups like PhRMA.

PhRMA Diabetes Industry Players

Among the better-known members of PhRMA in the diabetes industry include: Abbott, Amylin Pharmaceuticals, Bayer HealthCare, Johnson & Johnson, Eli Lilly & Co., Sanofi-Aventis U.S., and Novo Nordisk Inc., as well as most of the largest drug companies (Pfizer, Merck, Bristol Myers-Squibb, Novartis, etc.). Recently, Roche decided to leave PhRMA to another trade group known as the Biotechnology Industry Organization ("BIO"), which is a biotechnology industry trade group with more than 1,200 members worldwide (see here for details). I have similar view of both PhRMA and BIO, and more often than not, BIO and PhRMA seek the same things from Congress. Of note is the fact that many diabetes companies, including Abbott, Bayer Healthcare, Johnson & Johnson, Eli Lilly & Co., Sanofi-Aventis, Novo Nordisk, Pfizer, Merck just to name a few are actually members of BOTH organizations.

In any event, according to the Center for Responsible Politics, PhRMA is the 6th largest lobbyist in Washington based on total dollars spent over the past decade. As I've reported in the past, the Center for Responsible Politics also rates the Pharmaceutical/Health Products industry (including efforts from both PhRMA AND BIO) as the single biggest lobbying group based on total dollars spent among all of 121 different industry and interest group categories the organization profiles, spending a whopping $1,629,694,750 on K-Street lobbying activity between 1998 and 2009.

The influence of an industry trade organization isn't the only way these companies are influencing government policy, or in the U.S. healthcare reform debate for that matter. In fact, many of big Pharma's biggest names (Pfizer, GlaxoSmithKline, Eli Lilly & Co. and Bristol-Myers Squibb) are also each named among the top 200 all-time donors in political contributions.

As I've written previously, pharmaceutical companies are best described as "fair-weather" friends to whichever party is in power at a given time, readily switching their loyalties (and dollars) between Republican and Democratic candidates with almost no hesitation.

Addressing the Cost of Home Diagnostics?

No doubt, my readers heard that there was a bit of conflict when Roche was confronted about the high costs of testing supplies. In essence, the company executive said he was not at liberty to discuss the issue. While participant Kelly Close did note that her own business estimates that the profit margins on testing supplies were declining (she didn't say this, but I can tell you that this is mainly because managed care providers are demanding - and getting - price cuts from the industry). For a box of 100 test strips, while the low-price retail cost is somewhere around $90 to $100, but by some estimates, insurance companies are probably now paying anywhere from $38 to $60 for these items, depending on how much of a volume-based discount the companies can get. But whether the markup is 900% or only 100%, whether they cost a mere $0.10, $0.60 or even $0.75/strip to make, there is little doubt that this business is one hell of a cash-cow.

As a number of diabetes bloggers have written, when Roche Diabetes was confronted by some patient advocates about the cost of test strips, the company evaded the issue. I, for one, was surprised they didn't have a prepared statement to address that issue. Roche claimed they were not at liberty to disclose that information (although truth be told, the U.S. Food and Drug Administration has little to do with their unwillingness to discuss profit margins; this is a business decision not to disclose this information). It should also be noted that Roche's investors might find this information to be valuable to help assess and determine whether the business is healthy. Which raises the question:

Just Who Owns and Controls Roche?

I couldn't find all of details, but it is known cross-town rival Novartis tried to seek a merger with Roche back in 2004 (according to Bloomberg, Novartis AG owns a 33% stake in the company) -- a move that the descendants of company founder Fritz Hoffman-La Roche did not approve. Apparently, in January 2009, the family agreed to keep its stake in a single voting pool for an unlimited period (their voting pact was to have expired at the end of 2009). The family members' agreement includes provisions on the pool's use of its voting rights and restrictions on the sale of its bearer shares -- which is important because sometimes wealthy families bicker and disagree on how to vote. On January 28, 2009, Bruno Dallo, the family representative at Scobag Privatbank AG, said in a statement that the family pool owns slightly more than 50% of the bearer shares in the Basel-based company. Collectively, this amounts around 84% of the company's shares.

This means that any push for more disclosure on the diabetes business would have to be presented and approved to these two very important shareholder groups, which seems highly unlikely unless there is collective pressure to sell this portion of the business, and given its cash-cow status (albiet the business which is not growing as much as it could in the U.S., but its certainly profitable), so it seem unlikely that a movement to influence the key shareholder groups would yield much in terms of disclosure here.

By comparison, other companies such as Abbott or Johnson & Johnson are largely controlled by big institutional investors (for example, in the case of J&J, State Street Global Advisors US is the biggest institutional shareholder, followed more distantly by Barclays Global Investors, Vanguard Group, Fidelity Management & Research, and State Farm Insurance Companies to name a few of the biggies, while Abbott is controlled by State Street Global Advisors US, Barclays Global Investors, Vanguard Group, Fidelity Management & Research and State Farm Insurance Companies -- although these institutional investors' shares are more even in size than JNJ's are).

Disclosure My Personal Holdings

Now, if you really want to know, a bit more than half of my personal investments are largely in the form of mutual funds, which consist of American Funds New Perspective Fund Class A shares, as well as American Funds Investment Company of America Fund Class A shares, and American Funds New Economy Fund Class A shares. The specific stocks these particular funds hold is a matter of public record if you really care to know. These funds do own a chunk of Novo Nordisk (one of the larger holdings, FYI), Teva, Lilly, GlaxoSmithKline and yes, even Roche, but I would hardly consider this a conflict-of-interest. Also, aside from my recent trip to Indianapolis, I've never received any form of compensation and am not about to change my opinion of the pharmaceutical industry's behavior because of a single event.

Ted Kennedy: A Lifelong Passion? Maybe (Not)

Ironically, in a recent essay in Newsweek, Massachusetts Senator Ted Kennedy, who says he has championed health care reform for much of his long career, writes:

"I believe the [healthcare reform] bill will pass, and we will end the disgrace of America as the only major industrialized nation in the world that doesn't guarantee health care for all of its people - And I am resolved to see to it this year that we create a system to ensure that someday, when there is a cure for the disease I now have, no American who needs it will be denied it."

But as the NPR story I shared suggests, there are legitimate questions about what exectly will come out of Congress.

It is a known fact that the healthcare industry, consisting of countless players including drug companies, insurance companies, pharmacy benefits managers, hospitals, doctors and nurse associations, even individuals who do medical billing and coding for work, have a strong interest in preserving the status quo.

Their livelihoods are at stake.

But the money being spent by PhRMA is obscene, and has already shifted the focus away from actually reforming the healthcare "system" (a term I use loosely) to merely one of covering more people. The healthcare industry stands to benefit handsomely from this part of the equation, which explains why they are suddenly willing to "negotiate" as part of this discussion. With this money, some of the old players are back, like Harry and Louise, that nice middle-class couple that was invented by the health insurance industry to dismember the Clinton plan back in the 1990's. Only this time around, Harry and Louise have switched sides and now sound optimistic about an overhaul that provides "good coverage that people can afford."

NPR reports that Harry and Louise still have deep-pocketed friends in the healthcare industry. The ad is jointly sponsored by Families USA, a pro-reform group, and ... surprise ... by PhRMA! Together, they're spending about $4 million. But as my conversation on this subject at the Roche summit demonstrated (and Roche admitted), so far, there is really no discussion of true "reform" going on in Congress. Its all about covering more people. To be sure, that's important, but it's not reforming what doesn't work with the current arrangement.

Ted Kennedy can easily afford the best medical care on earth. He went to North Carolina to have brain surgery from one of the best. But even if he wasn't sitting on a family fortune, he'd still have what some are now calling "gold-plated" healthcare plans, because Congressmen and women are covered by one of the best plans available anywhere, and for the rest of their lives, no less. They'll never have to live within the laws they're considering now because they've exempted themselves from it.

Some in Congress ARE trying to address this issue. For example, Republican U.S. Representative John Fleming from Louisiana (who is a physician, by the way), is fighting to introduce a resolution that would require members of Congress and the Senate to accept the same healthcare regime that they mandate for the public. Fleming has also placed a petition on his website, http://www.fleming.house.gov/.

Fleming's website has a short narrative explaining his resolution on his home page, and a link to the actual resolution. It's brief and easy to understand. While Fleming makes condescending jabs at the idea of a government-run healthcare plan, at least his bill would mandate that our Congressmen and women live by the same rules they're proposing to mandate on everyone else. At the very least, his simple bill deserves consideration, but so far, most of Congress isn't running to co-sponsor the bill (any ideas why?).

Buying Influence to Preserve the Status Quo

As the NPR story previously noted details, Jerry Avorn, a professor at Harvard Medical School and author of the book about drugs and health care called "Powerful Medicines" says just look at what's NOT on the table during the healthcare reform debate if you want to know what PhRMA is getting:

- Drug re-importation from Canada? Off the table.

- Government-negotiated drug prices? Off the table.

"A lot of those seem to have been resolved even before the public discussion begins," says Avorn. "And usually, as with the other interest groups involved, they seem to have been resolved in favor of the interest groups, rather than in favor of the public."

Real healthcare reform ... Off the table?

So far, all that is being talked about is how to insure and get more people into the system. There is little (if any) real conversation about reform.

Having said this, we need to start someplace. Congress has failed to do anything about the many problems our healthcare "system" faces, and we can always start someplace and then worry about revising it later. But we need to speak about REFORM, not simply how to make more companies with vested interests even richer on an already broken system.