Drug Deal

'We'll have the negotiations televised on C-SPAN," then-presidential candidate Barack Obama explained, "so that people can see who is making arguments on behalf of their constituents, and who are making arguments on behalf of the drug companies or the insurance companies."

Those were heady times. It was September 2008, at a town hall in Virginia, where Obama was offering a preview of how he intended to conduct his presidency. He would change the way Washington works, make it transparent, and, in so doing, deliver what the American public needed--starting with affordable health insurance. But, just a few months later, Obama's team was doing exactly what he said his administration wouldn't do: negotiating behind closed doors. The subject, sure enough, was health reform. The partner was the drug industry. By June, they had a deal.

Exactly who agreed to what has been the subject of some controversy, even among parties to the negotiation. But the basics are not really in dispute. The drug industry promised to endorse reform, including initiatives that would reduce its bottom line by up to $80 billion over ten years. In return, the administration--and one of its key Senate allies--agreed to stop at $80 billion, at least as far as the drug industry was concerned.

It's the kind of quid pro quo that generally raises eyebrows, as more than one conservative was quick to note: "The press and congressional Dems would have gone nuts if we had tried anything remotely like this," said Tevi Troy, who was a health care official in the Bush administration. And, in fact, a few congressional Democrats have gone nuts. "We have all been focused on the debate in Congress, but perhaps the deal has already been cut," Representative Raul Grijalva, co-chairman of the Congressional Progressive Caucus, told The New York Times, which first broke the story. Beyond Capitol Hill, the reaction from liberals was even harsher. "When an industry gets secret concessions out of the White House in return for a promise to lend the industry's support to a key piece of legislation, we're in big trouble," former Labor Secretary Robert Reich wrote on his blog. "That's called extortion."

Extortion is a harsh word, but not an inaccurate one. By almost any reckoning, the drug industry demanded--and got--a sweetheart deal in exchange for its support. But were Obama and his allies wrong to go along with it? Not necessarily--at least, not if they really wanted to pass health reform. Good government and good policy make for great speeches. But, in the real world, they're not always so compatible.

The lineage of the deal with PhRMA, the drug-industry trade group, traces back to before Obama was even elected president. In the fall of 2008, representatives of the entire health care industry--pharmaceutical manufacturers, insurers, doctors, hospitals, device-makers--began holding regular meetings with key staff on Capitol Hill. The two senators leading the discussions, Ted Kennedy and later Max Baucus, made no secret of their mission. Instead of trying to fight these industries head on, they hoped to come up with a consensus version that at least some of the industries could live with, if not support outright. Once Obama took office, the conversation turned more concrete. Obama and his allies wanted to wring savings out of the health care system, in order to finance coverage expansions, and, over the long run, make medical care less expensive. Which industries, they asked, were prepared to help--to sacrifice some short-term earnings in order to make reform possible?

The drug industry was first in line, according to several sources familiar with the discussions. But its list of demands was long. It strongly opposed letting the federal government negotiate directly with drug companies over price, the way governments in other countries do; it didn't want to give the government rebates on drugs it purchased for Medicare recipients; and it didn't want to let Americans buy cheaper drugs overseas. All three positions ran counter to Democratic Party orthodoxy. (Later, the industry made clear its opposition to a public insurance option, as well.) Pressed to give up something, the drug-industry officials indicated that they would be willing to put up with several other changes designed to reduce its revenues--like giving the government a larger rebate on drugs purchased for Medicaid recipients--but only to the extent they reduced revenues by $50 billion over ten years. Anything more, they said, was unacceptable.