The White House’s new deficit plan has the drug industry crying foul, and that means Big Pharma may now join Big Insurers to push back on health reform.

Drug industry sources tell FOX Business the Administration is backtracking on what is called the “PhRMA deal” in health reform, a deal that was struck behind closed doors in late 2009 and early 2010 in order to get the industry to support and endorse health-care reform.

In the “PhRMA” deal, drug companies would fork over $80 billion in fees as well as give drug discounts to seniors in Medicare over 10 years, among other things. 

In exchange, the White House agreed, among other items, to not force the drug industry to accept rebates on drugs sold through Medicare Part D, a program launched under President George W. Bush to subsidize prescription drugs for seniors.

But President Barack Obama's new deficit push calls for those Medicare rebates, via the Simpson-Bowles plan. 

The deficit plan "has blown the deal to smithereens," says William S. Smith, managing director of Healthcare National Strategies, a D.C.-based government affairs consulting firm. “The Obama Administration has repudiated the PhRMA deal,” says Smith, a former vice president for US public affairs and policy at Pfizer (PFE). 

Pharmaceutical Research and Manufacturers of America (PhRMA) president and CEO John J. Castellani has also criticized the latest back tracking.

The White House did not return calls for comment.

The drug industry is also raising the alarms once again that the White House’s new moves could actually hurt advances in the drug industry, where it says better drugs curtail the need for hospitalizations and reduce health-care costs.

And it says the new deficit plan would introduce more price-fixing and government manipulation of prices in the drug industry, as the government's massive presence in the health care market will only grow under health reform.

Americans spent an estimated $250 billion on prescription drugs in 2009. Of that sum, the federal government paid $78 billion, or nearly one out of every three dollars spent on prescription drugs. 

Health care and drug costs have been soaring over the last 20 years, and often can bankrupt consumers stricken with chronic illnesses. Trying to address and curtail the drug cost inflation problem via health reform so as to protect taxpayers' wallets in government-subsidized programs like Medicare and Medicaid has proved devilishly hard, if not nearly impossible. 

Economists have warned that taxpayers simply cannot foot the bill for a la carte, all you can eat fast food health care, and that government-subsidized health care can cause prices to spike higher (it's either going to be rationing by insurers or by the government).

A Government Accountability Office [GAO] study commissioned by Democrats in Congress had found that prescription drug prices rose steadily, between 25% and 33% cumulatively, from 2006 to 2010. 

The GAO also found that prescription drug costs continue to rise faster than overall health-care inflation. 

To try and stop that, the White House wrangled up to 50% discounts on drugs to seniors who fall through what's called the Medicare part D donut hole, a Medicare anomaly where seniors lose coverage. Along with those discounts, the White House got the industry to pony up a total of $80 billion in fees and other price cuts as well, (course, there was no written contract on this agreement, notes Smith, underscoring how tenuous President Barack Obama's claims are, that health reform is paid for and won't add "one dime" to the deficit).

In exchange, the drug industry says the White House agreed to not pursue rebates on drugs in Medicare Part D.

The industry also says the White House agreed to not use Medicare’s “purchasing power,” meaning its colossal leverage to haggle with drug makers in various ways to get cheaper drugs. 

The drug industry added that the Administration said it would oppose future Congressional efforts to re-import cheaper generics or other drugs from foreign countries like Canada. 

And the industry says the White House agreed to block Congressional efforts to repeal Medicare’s “non-interference” law, which prohibits the government from interfering in the price negotiations between drug companies and commercial insurers who provide the Medicare Part D drug benefit, among other things. 

“Liberals hated this ‘non-interference’ clause in the Part D law and wanted the government to be able to fix prices in the Part D program,” Smith says. 

But “the biggest win for the industry in the deal was there would be no rebates in Part D of Medicare," Smith adds.

Drug companies had feared they would have to pay drug rebates similar to the rebates they pay back to government Medicaid drug programs.

“PhRMA got an $80 billion deal, and in return for which they ran $150 million worth of ads in favor of health reform,” Republican Senator and former presidential candidate John McCain said at a meeting with the President in February 2010.

But a disconnect quickly arose. The problem on Part D rebates has to do with low-income seniors who are eligible for both Medicare and Medicaid. 

Prior to the debut of Medicare Part D in 2006, low-income seniors got their prescription drugs through Medicaid.

But those drug prices in Medicaid were reduced via rebates that the government demanded from the drug companies. 

However, a number of studies had showed that the prices for the same drugs offered in Medicaid were higher in Medicare Part D. 

Members of Congress, including Rep. Henry Waxman (D-Calif.), who wanted this non-interference clause repealed, had requested these studies, Smith says.

So now, the Bowles-Simpson Commission recommended that drug companies pay rebates on Medicare Part D drugs for this “dual-eligible” population, who can get drugs in Medicaid. 

That population is estimated to number six million seniors, says Smith. “Low income seniors tend to use a lot of medicine, it’s a big, important part of the market,” he adds.

So, to fix that problem, the President’s new deficit plan now potentially calls for a fresh $49 billion more in drug rebates in Medicare Part D. 

And the president's deficit plan backtracks on the original deal in other ways. The plan now calls for the "purchasing power" of Medicare to be used to cut drug costs and accelerate cheaper generic brands into the market.

In his recent deficit speech at George Washington University, the President said:

“But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending.”

The White House fact sheet on the President’s new plan to cut $4 trillion over 12 years has this bullet point:

Cutting unnecessary prescription drug spending: The framework would limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power – similar to what was called for by the bipartisan Fiscal Commission. It would speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs.

The Bowles-Simpson report calls for rebates in the Part D program that total $49 billion. On page 38 of the report it reads:

“3.3.4 Extend Medicaid drug rebate to dual eligibles in Part D. (Saves $7 billion in 2015, $49 billion through 2020) Drug companies are required to provide substantial rebates for prescription drugs purchased by Medicaid beneficiaries. We recommend extending these rebates to Medicaid beneficiaries who are also eligible for Medicare (individuals known as “dual eligibles”) and who receive prescription drug coverage through the Medicare Part D program.”

(The CBO has reported that those $80 billion in health reform's drug industry fees and costs may be passed along to customers anyway, in the form of higher drug prices. (See EMac's Bottom Line, "CBO Says Health Reform Causes Drug Costs to Rise")

Pharmaceutical Research and Manufacturers of America (PhRMA) president and CEO John J. Castellani.said in a statement: “Specifically, proposals to expand rebates, saddle seniors with higher premiums and slash data protection for biologics are bad for patients and are bad for innovation."

Castellani adds: “Since its inception, Medicare Part D has provided seniors and disabled Americans with unprecedented access to medicines at affordable costs. Thus far, more than 27 million enrollees have joined the program and benefited from the negotiated discounts between biopharmaceutical research companies and Part D plans.”

He continues: “Implementing government price controls in the Medicare prescription drug program would not achieve better patient care, sustainably cut the deficit, foster the development of future medical advances or grow the economy. A strategy of reducing the deficit by simply cutting existing Medicare funding will adversely impact American jobs and medical innovation.”

Castellani also says that it “should be noted that the Congressional Budget Office has stated that imposing price controls in Part D could ‘reduce the amount of funds that manufacturers invest in research and development of new products.’ CBO has also stated that price controls in the program will lead to higher premiums for Medicare beneficiaries.” 

Castellani also noted that already “Part D also is coming in about 40% below projected costs. According to the Medicare Trustees’ annual report, Part D spending projections are lower in part due to a reduction in the projected growth in prescription drug spending in the U.S. for the next 10 years.”

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007 and is the author of Skirting Heresy: The Life and Times of Margery Kempe (Franciscan Media, June 2014).
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.