Obama's Speech Offers Lucrative New Universe for Big Pharma

President Obama's speech on Wednesday night laid down clear battle lines in the healthcare reform debate: drug companies are on Obama's side, health insurers (and Republicans) are on the other. It will be interesting to see who has the more powerful lobbyists, Big Pharma or Big Managed Care. The speech itself made four basic proposals:

Leave employer health insurance in place.
A public option for health insurance.
Mandatory health insurance in the same way there's mandatory auto insurance.
An insurance exchange to give individuals and small business mass buying power.

Note that none of these reforms in any way threatens the drug companies. In fact, notably absent from the speech was any mention of the one reasonable reform which would affect the drug industry, allowing Medicare to negotiate drug prices. There was only an oblique reference by Obama to that in his speech:

... the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies

Unsurprisingly, PhRMA is firmly behind the president, while stocks in healthcare insurers are on a rollercoaster ride.

PhRMA's pledge to support the Obama plan is heavily dependent on an agreement that the industry will give up $80 billion to help pay for it.

It will be interesting to see if PhRMA continues to support the president even if Democrats slip a Medicare negotiation clause into the eventual bill that passes. Drug companies might want to think carefully before abandoning the plan if that happens. Here's why:

Look at the four pieces of Obama's plan. It leaves in place the current system (which has been enormously profitable for drug companies) but adds three new systems in which consumers can get prescription coverage. That, right there, is several billion in extra revenues for drug companies.

Secondly, and in the long-term more importantly, the new institutions Obama proposes will have to do the same things that the old ones -- insurers and the government -- have been doing: negotiate drug prices with drug companies.

In drug price negotiations, drug companies always have the advantage. The companies have to negotiate with all the institutions, but each institution only has the knowledge of their own negotiations. In other words, the new market that Obama proposes creates a larger group of consumers who are more splintered when it comes to negotiating prices; and they will face drug companies who will have a complete knowledge of the entire universe of drug -price negotiation.

In betting who gets the better deal out of those negotiations, my money will be on the drug companies, Medicare price negotiations or no.

Photo by Flickr user Jon Person, CC.

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