by Steven Brill
To Luntz, the bipartisan approach to healthcare being entertained by some Republicans was just talk—a show destined to have a short run before it got the hook. “We knew some guys like Grassley were talking about working with the Dems,” recalled Luntz. “The sense was that we’d let them play along but then come up with the arguments and polling that would get them to drop out.”
BY THE TIME OBAMA convened his March 5, 2009, pep rally in the East Room, another, broader political wave was forming that would propel the opposition that Luntz and his dinner companions hoped to build. On February 19, Rick Santelli, a CNBC correspondent in Chicago, had let loose with an on-air rant about government bailouts that, he argued, would again promote the risky behavior that had caused the economic crisis. Santelli had concluded by suggesting that people in Chicago should stage their own “tea party” to protest the government’s heavy hand.
Most political observers would later consider this the beginning of the Tea Party movement, the loosely organized assortment of grassroots groups of mostly conservative people that staged rallies across the country beginning in the spring of 2009 to protest all varieties of government interference and Washington crony capitalism.
By the summer of 2009, Washington’s idea of healthcare reform would become the Tea Party’s prime target. For as Santelli screamed into his microphone, a group of capital insiders representing multiple factions of America’s biggest industry—healthcare—was negotiating exactly the kinds of secret deals that would have made Santelli scream louder had he known about them.
CHAPTER 8
DEAL TIME
March–April 2009
FOR THE SENATE FINANCE COMMITTEE, THERE WAS A SILVER LINING in the collapse of Lehman Brothers that had accelerated the financial meltdown: Antonios “Tony” Clapsis, a bearded, wiry twenty-eight-year-old who loved crunching numbers.
When Lehman collapsed in September 2008, Clapsis had been working at the investment bank for about six years as a stock analyst concentrating on the healthcare industry. He managed to hang on for about six months, working for Barclays Bank, which had taken over many of Lehman’s businesses. By March 2009, though, he had been let go with a generous severance package.
Clapsis’s work for Lehman and Barclays involved what was called macroanalysis. His job was to keep track of policy changes emanating from Washington and predict how prospective legislative or regulatory changes might affect the earnings per share of various healthcare stocks, which, in turn, could be used to project the stocks’ future prices. For example, how much might a new regulation governing how hospitals were to be paid by Medicare for kidney dialysis affect the stock price of one of the dialysis equipment makers?
To do that, he had struck up friendships with members of the Finance Committee staff, including Liz Fowler. Clapsis, who had worked in the Massachusetts state senate while attending Boston University, had not lost his interest in government. With his severance from Barclays, he figured he had enough money to take a public service job for a while.
In March, Fowler offered him an intriguing one. He would be the Finance Committee’s best weapon in negotiating with the healthcare industry for givebacks in return for a healthcare reform law that would create millions of new customers for them—because he would be able to throw their own numbers back at them.
In the aftermath of Baucus’s “Call to Action” white paper and even more so when it became clear that the White House was standing aside while Baucus (with Kennedy’s committee working in parallel) plowed ahead, the Finance Committee staff had, indeed, become “everyone’s favorite date.” The most important suitors were the lobbyists from the key industry sectors who, as Tauzin had put it, wanted to sit at the table rather than be on the menu.
They each came offering deals—changes they would agree to that would help finance reform or otherwise further the goal of getting a reform bill passed. It was implicit, and it would gradually become explicit, that what they wanted in return was to avoid more radical reforms that would attack their bottom lines.
Clapsis became the black box that gave Baucus, Fowler, and the Finance Committee staff the information they needed in order to know how much to ask for—because in his prior life he had tracked how much expanding healthcare coverage was going to benefit each sector of the industry.
Getting the funds this way from the industry, rather than from a broader based tax, had become a priority for Baucus. Republican senator Olympia Snowe of Maine was insisting that she would support reform only if it were paid for without any such broader tax measures. Baucus was counting on Snowe, along with Grassley, as the two Republicans most likely to stick with him and give the bill bipartisan support.
Combining his own research with reports from stock analysts all over Wall Street that estimated how much of a boost Baucus’s Romneycare-like plan to create so many new customers would give to each industry sector, Clapsis armed Fowler and the rest of the Baucus team with real numbers.
First to the table, beginning in early March, were the pharmaceutical companies, represented by several of Tauzin’s deputies from PhRMA. These were preliminary talks; Tauzin and his board full of CEOs would come in later when a deal got close.
Clapsis had found analysts’ reports estimating that universal coverage would bring the drugmakers more than $200 billion over the first ten years. The Baucus staff asked for $130 billion back, in the form of reductions in drug prices paid through certain parts of the Medicare and Medicaid programs, as well as a new tax on drug company revenues. In return, Baucus might be willing to forgo other reforms that would cut more deeply into their bottom lines.
One potentially devastating cut involved a reform long proposed by Democrats and resisted by Republicans that would allow Medicare to negotiate the prices it paid for prescription drugs. In what had become an enduring monument to the lobbying power of the drug companies, in 2003 Congress had prohibited Medicare, the world’s largest drug buyer, from negotiating prices the way insurance companies were allowed to. Instead the government had to pay 106 percent of what the drugmakers reported to them was their “average wholesale price,” a straitjacket that cost taxpayers $40 billion a year. PhRMA’s highest priority, according to Tauzin, was preserving that law, even if it meant giving back some money to the federal government through discounts related to other Medicare and Medicaid payments.
A second potential killer was the perennially proposed, and perennially blocked, legislation that would allow consumers to buy drugs from Canada. Because Canada, like all other developed countries, enforced price controls on drugs, this could result in Americans buying the drugmakers’ high-margin products at 30 to 50 percent off current prices.
Still another point of attack that worried the PhRMA people was the comparative effectiveness research Baucus had mentioned in his white paper. In their view, if comparative effectiveness was pushed too far, it could ruin sales of some of their most profitable products because some “expert” might decree they were not worth the price.
With all of those potential threats looming, the Finance Committee negotiators thought that it seemed reasonable that the industry give back $130 billion in return for avoiding those more radical reforms and for getting $200 billion in new revenue from all the new business generated by a law that would dramatically expand health insurance coverage.
Tauzin’s people countered Clapsis’s numbers by presenting an elaborate economic model of their own, prepared by their consultants. This analysis purported to demonstrate that expanding coverage would actually cost the industry money or be revenue neutral. Clapsis was amazed, even insulted, that such smart economists and their lobbyists had tried to sell him this stuff. He responded by pulling out his collection of analysts’ reports that showed how reform would be a boon to the already-high-flying industry.
More than that, he referred to what CEOs had said in their conference calls with analysts, in which they tried to promote the value of their stocks: What they had seen and heard so far about the r
eform bills taking shape meant improved prospects for their bottom lines. Surely, their own CEOs must know what they are talking about, Clapsis argued. In fact, they would be violating securities laws if they were exaggerating these numbers in order to tout their stocks to the Wall Street analysts.
Clapsis, Fowler, and the others knew this was just PhRMA’s opening volley. The drugmakers would come around because Clapsis’s numbers were real, and because not making a deal would make them vulnerable on Medicare negotiation, importation, and a heavy-handed comparative effectiveness regime.
“Nothing concentrates the mind like a hanging,” recalled one drug company executive involved in the negotiations. “A lot of what some of the Democrats were talking about was literally life threatening to us. So it made sense to deal with Max and his people.”
By the second week in April, the Tauzin and Baucus staffs had reached a tentative deal. The drug industry would kick in givebacks worth $80 billion. The package included deeper discounts than those already provided for Medicaid’s prescription drug coverage of the poor; a tax (which was called a fee) on all drug companies (to be calculated based on their respective market shares); and a subsidy for senior citizens when they reached the point (the “doughnut hole”) where Medicare did not pay for their prescriptions.
A final element dealt with a complicated issue related to drugs called biosimilars, which are products derived from high-cost drugs known as biologics. Biologics are medicines created by living organisms, such as blood plasma, rather than by chemicals. The industry wanted their biologics to be protected from copying by biosimilars for twelve years—much the way patents protect drugmakers for a period of years from being copied with far less expensive generics. There was now no protection at all. However, because the legal issue was murky—it was possible copycats could be sued under existing patent law in some cases—even manufacturers of biosimilars had an interest in getting a law on the books, albeit with a far shorter time period for protection.
If you don’t understand this description of the issue, understand this: Depending on whether you were liberal congressman Henry Waxman or PhRMA’s Billy Tauzin, every year that biologics were protected involved billions in higher drug prices—or billions in the revenues necessary to finance the discovery of new miracle drugs.
Although most involved believed the biosimilars issue could be resolved, the deal on the $80 million in give-backs was not yet completely sealed. Tauzin and his board of drug company chief executives wanted to make sure the Obama White House was on board. In particular, they were worried about whether the president and Rahm Emanuel were committed to resisting opposition from the more liberal faction of the House, led by Waxman.
Waxman, a longtime industry nemesis, now chaired the House Energy and Commerce Committee, which shared jurisdiction over the bill. The drug lobbyists had been told by Baucus’s people that Rahm Emanuel and Nancy-Ann DeParle, the new White House healthcare policy chief, had been kept up to speed and were supportive. But they wanted to be sure.
More generally, no one had seen a draft of an actual bill, because one did not exist.
Yet the deal seemed likely enough that on April 15, 2009, an unusual meeting took place in a conference room at the Democratic Senatorial Campaign Committee headquarters near the Capitol. Among those attending were the PhRMA lobbying team and representatives from some leading unions.
The meeting had been convened by Baucus chief of staff Jon Selib and White House deputy chief of staff Jim Messina. Messina had worked for Baucus and was now the president’s chief political operative. (He would later manage the Obama 2012 reelection campaign.)
During their negotiations with the Baucus staff, the PhRMA people had talked vaguely about helping to get their $80 billion deal done by supporting a political action fund that would buy television ads supporting senators who favored reform and attacking those who didn’t or were wavering. Messina and Selib, aided by political consultant Nicholas Baldick, were now calling in that promise. They outlined a plan for PhRMA to become the main financier of two political action committees that would buy those ads, but which, under the law, would not have to reveal their donors. The funds had the kind of innocuous-sounding names that Obama had made fun of on the campaign trail when attacking special interest money polluting politics: Health Economy Now and Americans for Stable Quality Care.
PhRMA ultimately contributed $70 million to the two funds, while the unions and other left-of-center groups chipped in relatively token amounts. The Service Employees International Union’s Michelle Newar, who attended the April 15 meeting, explained the lopsided funding this way in an email to her colleagues, including SEIU boss Andy Stern: “They plan to hit up the ‘bad guys’ for most of the $.… They want us to put in just enough to be able to put our names on it—@100k.”
“It seems like the right framework—a little from us and a lot from them,” one of Newar’s colleagues replied. “Okay with me,” Stern chimed in.
Two weeks later, a solicitation letter went out to other groups seeking donations to buttress the cover story that the ads that would soon blanket the country supporting healthcare reform and pressuring senators who were on the fence were paid for by a broad-based collection of civic interests, not mostly by PhRMA.
Some of the PhRMA lobbyists, aware that they were the ad campaign’s chief financiers, later groused in email exchanges that the political consulting company that Obama senior adviser David Axelrod had co-owned before taking his White House job was the firm placing the ads and getting the fees for doing so. When a Bloomberg reporter started calling around asking about the connection between the Axelrod firm and PhRMA, Bryant Hall, a top PhRMA lobbyist, emailed Nicholas Baldick, the political consultant managing the fund, that “this is a big problem.” Baldick answered that he’d have a Health Economy Now press person talk to the reporter and deny any PhRMA connection.
“Yes, spin whatever,” Hall replied.
Depending on one’s view, this secret deal between Obama political operatives, PhRMA, staffers from the Senate Finance Committee who had just brokered a multibillion-dollar deal with PhRMA, major unions, and other liberal groups was proof that Washington was finally buckling down, coming together, and getting the peoples’ business done; or it was Washington at its worst: liberal groups selling out to big business to accommodate all the groups’ special interests.
Either way, with the secret meetings, cynical emails, and hidden contributions to political action funds, it was not the new way of doing business that Barack Obama had promised in his campaign. Then he had routinely vowed, as he put it during a town hall in Virginia, that in framing his healthcare reform bill, “We’ll have the negotiations televised on C-SPAN, 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.”
Instead, he had given the Tea Party activists exhibit A in crony capitalism—if they ever found out about it.
THE NONPROFITS’ PROFITS
The hospitals were next up at the Finance Committee negotiating table. More than 75 percent of America’s 5,700 hospitals were officially nonprofit institutions. So, they have no shareholders and, therefore, no stock analysts following them and issuing reports that Tony Clapsis could read. However, more than a thousand were run by for-profit companies, most of which had publicly held stocks that the analysts did follow. And Clapsis was attuned to one of the more surprising ironies of the American healthcare economy: The nonprofits—whether affiliated with universities, community charities, or spin-offs of religious organizations—typically had the same (or higher, when their tax-free status was accounted for) operating profit margins as the for-profits. So Clapsis could easily extrapolate information on the nonprofits from what the analysts said about how the for-profits would benefit from millions of newly insured customers, most of whom previously might not have come in for treatment or would be unable to pay their bills if they had.
The n
umbers were huge. Over the first ten years of universal coverage, Clapsis estimated that the hospitals would enjoy an extra $200 billion to $250 billion, maybe more.
When the lobbyists from the American Hospital Association began their meetings with the Baucus staff, Clapsis used not only these analysts’ reports but also data from the AHA itself. In an effort to demonstrate its members’ commitments to their communities, every year the hospital association publishes a “fact sheet” on uncompensated care. The association defines uncompensated care as the cost—not the chargemaster list prices, but the actual cost—of both the charity care that hospitals provided, as well as the cost of care given to patients who did not pay their bills.
The latest report, for 2008, had claimed $36 billion in uncompensated care. That represented only about 5 percent of all hospital revenue in 2008, but for Clapsis’s purposes it was compelling. He pointed out that even ignoring healthcare cost inflation and projecting the same $36 billion over ten years would produce a total of $360 billion, most of which would seemingly now be paid by insurance. The hospital lobbyists countered that no reform plan was going to insure everyone and get rid of charity care or bad debt completely.
But the Baucus team had made their point. The hospitals were going to have to pay a big bill.
By April the two sides had settled on $155 billion in givebacks that would mostly take the form of reduced annual increases in Medicare payment rates to the hospitals, and penalties to be paid for bad, costly results, such as when Medicare patients were readmitted to a hospital within thirty days of having been discharged.
HOSPITALS, INC.
That same month, an aggressive suit filed in a western Pennsylvania federal court provided an unusually vivid picture, if Clapsis had needed one, of how nonprofit hospitals had become hard-charging big businesses.