Obama’s Biggest Health Reform Blunder

How Big Pharma’s Billy Tauzin conned the White House out of $76 billion.

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Billy Tauzin

Billy Tauzin, president of the Pharmaceutical Research and Manufacturers of America, has cut a secret deal on health reform with the White House. Tauzin told Tom Hamburger of the Los Angeles Times  that in exchange for the much-touted $80 billion in savings that PhRMA volunteered in June to help cover the uninsured and reduce drug prices for some senior citizens, the White House had promised to block any congressional effort to allow the government to negotiate Medicare drug prices. Tauzin is from Louisiana, where tall tales grow like weeds, and at first his assertion seemed wildly implausible. But two days after the L.A. Times scoop, the New York Times got White House confirmation. “The president encouraged this approach,” White House deputy chief of staff Jim Messina said in an e-mail. “He wanted to bring all parties to the table to discuss health insurance reform.”

President Obama’s handshake with Tauzin is easily the dumbest mistake he’s made in shepherding health reform through Congress.

Tauzin revealed the deal out of pique that the House energy and commerce committee, in breaking its logjam with Blue Dog Democrats, amended the health reform bill to allow Medicare drug negotiation. “Who is ever going to go into a deal with the White House again if they don’t keep their word?” he sputtered. “You are just going to duke it out instead.”

It’s pretty rich that Tauzin should be lecturing anybody about steadfastness. He entered the House as a Democrat but jumped to the Republican Party in 1995. He told the Baton Rouge Advocate in June 2003 that he would “complete my term and run for re-election,” but in December 2004 he quit the House to become president of PhRMA, a job he reportedly leveraged with a somewhat less lucrative offer to become chairman of the Motion Picture Association of America. Tauzin is legally bound by House ethics rules not to make

with the intent to influence, any communication to or appearance before any officer or employee of any department, agency, court, or court-martial of the United States or the District of Columbia, on behalf of any other person (except the United States or the District of Columbia) in connection with a particular matter … in which the person participated personally and substantially as such officer or employee, and … which involved a specific party or specific parties at the time of such participation.

Yet Tauzin, six years prior to securing the White House’s promise not to let the government negotiate Medicare drug prices, was instrumental in writing the 2003 bill that created a Medicare drug benefit … but barred the government from negotiating drug prices! (At the time, Tauzin was chairman of the House energy and commerce committee.) Unlike some other House ethics rules, the prohibition against lobbying on anything “in which the person participated personally and substantially” is supposed to be permanent. It would seem not to be worth the paper it’s written on.

Why is the White House’s PhRMA deal a bad bargain? Because in securing $80 billion in savings over 10 years, the White House is forgoing what could be as much as $156 billion over the same time period. That’s what a 2008 report by energy and commerce’s investigations subcommittee calculated to be the savings if Medicare were permitted to buy drugs at the same rates negotiated by the (much smaller) Medicaid program.

So Tauzin conned the White House out of $76 billion. Granted, the provision agreed to by energy and commerce would raise nowhere near that amount, largely because it prohibits Medicare from creating a drug formulary to deny coverage to drugs it deems ineffective or cost-inefficient. (Instead, private insurers who administer the drug benefit establish their own formularies.)

In striking the bargain with PhRMA, Obama broke a not-insignificant campaign promise (“Obama will repeal the ban on direct negotiation with drug companies and use the resulting savings … to further invest in improving health care coverage and quality”). Candidate Obama, citing a paper by Roger Hickey, Jeff Cruz, and Dean Baker of the Institute for America’s Future, put the savings at $30 billion a year, which over a decade would be roughly twice the $156 billion savings envisioned by the energy and commerce committee. (Hickey, Cruz, and Baker proposed matching not Medicaid drug prices but those negotiated by the more straightforwardly socialist  Veterans Administration.) By this reckoning, Tauzin swindled not $76 billion from President Obama but $220 billion. That’s nearly half what the House health reform bill expects to raise with its proposed surtax on incomes above $350,000!

It’s often noted that Obama’s strategy on health reform is the opposite of Hillary Clinton’s in 1994. (See, for example, “The Ghosts of Clintoncare” by Ezra Klein in the Washington Post.) Instead of hiring Ira Magaziner to draft a bill and then shoving that bill down Congress’ throat, the Obama White House is letting Congress write the health reform bill. This strikes me as a reasonably shrewd strategy. But when you very deliberately aren’t controlling the legislative process, it doesn’t make a lot of sense to cut deals with special interests about what that legislation will contain. Health reform has a thousand interconnected parts. Give in on something here, and you have to make alterations on something there. That’s why Senate finance Chairman Max Baucus keeps saying, “Everything is on the table” (even though that isn’t strictly true).

Obama has taken tens and perhaps hundreds of billions of dollars off the table by ruling out an elementary cost-saving measure whose rejection by the Republican congressional majority back in 2003 is an ongoing scandal. What did he get in return? The hope that other sectors in the health care industry would get onboard with reform. But health reform’s principal target—the insurance companies—not only refuses to endorse the creation of a public-option government health insurance program, the one essential component to major health care reform; it refuses even to stop hunting for trivial reasons to cancel insurance for policyholders after they develop expensive-to-treat illnesses. (See “Why You Can’t Trust Your Health Insurer.”) Mr. President, you’ve been played for a sucker.

[Update, 7:40 p.m.: Asked at today’s White House briefing about the contradiction between the Tauzin deal and what the energy and commerce committee passed, Press Secretary Robert Gibbs said: “I do think—look, I think the goal of all of those at the table, particularly the president, is to see costs come down and to see progress made on that.  But I don’t want to get ahead of negotiating what might be bill differences.” This at least allows for the possibility that the White House will renege on its ill-advised bargain with PhRMA.]

[Update, Aug. 7: The White House has graduated to making Clintonian-sounding distinctions about the meaning of its bargain with PhRMA. Bloomburg’s James Rowley reports that White House deputy chief of staff Jim Messina told a meeting of Senate Democrats yesterday that the Tauzin deal (what follows is Rowley’s paraphrase) “didn’t require Obama to discourage Congress from requiring price negotiations for the Medicare program.” Huh? The bottom line remains that it would be better for the White House to welsh than to honor this atrocious deal.]

[Update, Aug. 8: “Obama Reverses Stand on Drug-Industry Deal” reads a headline in today’s New York Times. The story, alas, doesn’t support that conclusion. “White House officials,” reports the Times’s David Kirkpatrick, “said Friday that Mr. Messina, the deputy chief of staff who sent the e-mail message, had not intended to confirm that the deal ruled out price negotiations.” Possibly not. But the White House saying it did not intend to confirm something sidesteps the question of whether that something was true.

Meanwhile PhRMA, Kirkpatrick reports, has stopped complaining about being double-crossed by the House energy and commerce vote, “perhaps satisfied that the White House had at least ruled out the price rebates in the House bill.” Does that mean the White House will take rebates out of the House bill? If so, that isn’t much of a reversal; drug rebates aren’t in the Senate health committee bill. (The Senate finance bill was still being written when the Senate broke yesterday for recess.) Also, Kirkpatrick’s use of the word “perhaps” is difficult to parse. Is the Times reporter relating his own speculation, speculation coming out of the White House or PhRMA, or something a White House or PhRMA source told him off the record (“You can report this but make it sound like your own speculation”)?

White House Press Secretary Robert Gibbs, when asked  about the Tauzin deal once again on Aug. 7, contiued to dodge the question. But he did say, “[W]e feel like $80 billion [in savings from the drug industry] is an appropriate amount, and I think the—I don’t have the statistic in front of me, but I think the House bill has $85 billion in it. So I would argue that we’re all in the same ballpark.” Translation: “Never mind whether there’s a deal to keep PhRMA’s health-reform contribution to its promised $80 billion. All we want is $80 billion!” That doesn’t sound like to me like the White House is reversing its stand.

In today’s radio address, Obama said, “Let me start by dispelling the outlandish rumors that that reform will promote euthanasia, cut Medicaid or bring about a government takeover of health care. That’s simply not true.” Missing from Obama’s litany was the accusation that the White House cut a secret deal with the pharmaceutical industry. Instead, Obama repeated his familiar refrain, “Drug companies have agreed to make prescription drugs more affordable for seniors.” Yes, we know. But what will they get in return?]