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Obama Medicare rebate plan could hurt drug companies

Obama Medicare rebate plan could hurt drug companies

President Barack Obama’s decision to spotlight drug rebates as a way to save money on Medicare is likely to be opposed by the pharmaceutical industry, which could potentially lose billions of dollars in profits.

In his annual State of the Union speech on Tuesday, Obama said he would “reduce taxpayer subsidies to prescription drug companies” to rein in the rising cost of Medicare, the $600 billion healthcare program for the elderly and disabled.

Administration officials say the President was talking about requiring pharmaceutical manufacturers to offer rebates on drugs for 10 million people known as “dual eligibles” because they qualify for Medicare and Medicaid, and receive drug benefits through

Medicare’s Part D prescription drug program. Medicaid is the federal and state funded healthcare program for the poor.

The nonpartisan Congressional Budget Office estimates that requiring rebates for dual eligibles would save $137 billion in Medicare spending. Often the oldest and sickest beneficiaries, dual eligibles account for fewer than 20 percent of Medicare beneficiaries, but more than 30 percent of program spending.

Damien Conover, an analyst with the Morningstar investment research firm, said requiring Medicaid-level rebates for dual eligibles could trim 2 percent to 7 percent from the profits of drug manufacturers. The impact would vary depending on how much of a company’s business is in the United States and how much is dependent on Medicare reimbursement, he said.

The U.S. pharmaceutical industry takes in about $300 billion a year in revenue.

“For most companies, it’s probably a couple of percent hit to earnings, which is something clearly negative for the industry but manageable,” said Barbara Ryan, a long-term pharmaceutical industry analyst, who now runs her own consulting firm. “Whether it could happen or not is another question, but it’s unequivocally going to be the hot potato that’s thrown around for the industry.”

The rebate proposal, which has been circulating among policymakers and think tanks in Washington for years, had drawn industry ire before Obama’s remarks on Tuesday.

Eli Lilly & Co Chief Executive John Lechleiter estimated it would cost the industry $112 billion over 10 years and reduce the number of new drugs developed.