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Obama Medicare rebate plan could hurt drug companies

U.S. President Barack Obama waves to reporters as he returns from a daytrip in North Carolina, to the White House in Washington, February 13
U.S. President Barack Obama waves to reporters as he returns from a daytrip in North Carolina, to the White House in Washington, February 13

By Bill Berkrot and David Morgan

(Reuters) - 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.

"I think this would be disastrous for patients. It would be disastrous for pharmaceutical research. We think it's bad policy and we are going to fight it," he told a biotech conference in New York on Monday.

Other major drug companies contacted by Reuters, including Merck & Co and Pfizer Inc, declined to comment on the potential impact.

Pharmaceutical Research and Manufacturers of America, the industry's chief Washington trade group, warned that the proposal could "up-end" the successful Medicare Part D program that allows beneficiaries to purchase private drug coverage priced through competition.

It was unclear whether the proposal would ever succeed as legislation, given a bitterly divided Congress and predictions by some lobbyists that Medicare would see reforms only under a broad agreement that would require Republicans to accept higher tax revenues.

But analysts say the President, who this week backed away from a separate proposal to raise Medicare's eligibility age to 67 from 65, has few alternatives for wringing fiscal savings from the program. One option is raising costs for wealthier Americans eligible for Medicare benefits, which he also highlighted in his speech on Tuesday.

"Those two ideas are among the most palatable ideas for getting savings from the Medicare program," said Drew Altman, president and chief executive of the nonpartisan Kaiser Family Foundation, which tracks healthcare issues.

(Reporting by David Morgan in Washington and by Bill Berkrot in New York; Editing by Jilian Mincer and Leslie Gevirtz)

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