Pharma to Feds: Hands Off Our Medicare -- and That $4.2B in Tax Breaks
Pfizer (PFE), Merck (MRK), Bristol-Myers Squibb (BMY) and Eli Lilly (LLY)are all lobbying against cuts to Medicare made as part of the debt ceiling deal. They aren't doing this because they're worried about the health benefits of the old and the poor. These companies are highly dependent on reimbursements from Medicare. At some drug companies, government funding is as much as 66 percent of all revenues.
Pfizer CEO Ian Read's argument seems like a reasonable one at first glance: When President Obama signed the healthcare reform act, drug companies agreed to give up $112 billion in discounts and refunds to fund it. Now the government is back for more. All they want is for the government to stick to the original deal. (And Read, of course, has personal reasons for wanting Medicare to be as generous as possible -- that's his employees' retirement plan.) But the companies are making less noise about the billions in generous tax benefits they began getting in 2011, and the true source of the $112 billion they agreed to pay to fund healthcare reform.
The healthcare reform money isn't an extra payment coming from the industry. Rather, companies merely agreed to give up one of their existing Medicare tax breaks, as Pfizer explained in its 2010 annual report:
Companies currently are permitted to take a deduction for federal income tax purposes in an amount equal to the subsidy received from the federal government related to their provision of prescription drug coverage to Medicare-eligible retirees. Under the U.S. Healthcare Legislation, effective for tax years beginning after December 31, 2012, companies will no longer be able to take that deduction.This year, Big Pharma gained a new tax deduction: The R&D tax credit. This bill has lowered drug companies' taxes by billions of dollars. Standard effective tax rates for corporations are supposed to be about 35 percent. But for the first six months of this year, the R&D tax credit plus other maneuvers have left drug companies paying tax rates as low as 8 percent. Merck made no expenses for taxes in Q2 2011 -- it managed to get the equivalent of a $382 million tax refund, according to its quarterly statements.
Here's a look at five of the largest drug companies in the U.S. and how the R&D credit has lowered their bills in the first six months of 2011:
- Pfizer
2011; 2010
Total revenues: $33.5 billion; $33.7 billion
Taxable revenue: $6.8 billion; $7.1 billion
Tax expense: $1.9 billion; $2.6 billion
Effective tax rate: 29.2%; 36.9%
Savings: ~$700 million - Merck
2011; 2010
Total revenues: $23.7 billion; $22.8 billion
Taxable revenue: $3.4 billion; $1.9 billion
Tax expense: $276 million; $746 million
Effective tax rate: 8.1%; 40.2%
Savings: ~$500 million - J&J
2011; 2010
Total revenues: $32.8 billion; $30.9 billion
Taxable revenue: $7.9 billion; $10.5 billion
Tax expense: $1.7 billion; $2.5 billion
Effective tax rate: 21.1%; 24%
Savings: ~$800 million - Lilly
2011; 2010 Total revenues: $12.1 billion; $11.2 billion
Taxable revenue: $2.8 billion; $3.4 billion
Tax expense: $552 million; $847 million
Effective tax rate: 19.7%; 24.6%
Savings: ~$295 million - BMS
2011; 2010
Total revenues: 10.4 billion; $9.6 billion
Taxable revenue:$3.6 billion; $3 billion
Tax expense: $883 million; $675 million
Effective tax rate: 24.8%; 22.2%
Extra taxes paid: ~$208 million
If these numbers keep their pattern, these five companies alone will save $4.2 billion a year in tax payments.