America's Bitter Pill

by Steven Brill

  That was because even in noncompetitive markets, insurers had to buy products from suppliers—hospitals, device makers, drug companies—that had been able in the past two decades to raise their prices with abandon.

  That’s not to say that the big insurers are managed well or that they haven’t reacted to the corner they have been forced into by taking it out on their customers. But it does mean they are the only industry players who, however unsympathetic, are on the customer and taxpayer side of the divide. Like us, they buy healthcare. Yet the White House healthcare reform policy team thought they should be the only players to have their profits capped. They were the bad guys.

  OBAMA LECTURES THE DRUGMAKERS

  On May 10, 2009, President Obama had his first meeting with health industry executives meant to be a substantive bargaining session. Despite the groundwork that had been laid, and although they weren’t from the insurance companies he had targeted during the campaign, the president treated them like bad guys, too.

  A group of five pharmaceutical industry CEOs, accompanied by PhRMA’s Billy Tauzin, trooped into the Roosevelt Room. With the president were DeParle, Rahm Emanuel, and deputy chief of staff Jim Messina, the political aide who had convened the meeting to get the drug companies to finance TV ads supporting reform.

  “They made me bring some CEOs because they didn’t want to meet with just a lobbyist,” recalled Tauzin in an account confirmed by two others who were there. “We figured this was just to go over what we had agreed to—the $80 billion. Instead the president went off on biosimilars”—the issue having to do with how long high-priced biologic drugs would receive patent-like protection. “The Senate had already agreed to twelve years, and we knew we had the votes in the House, too, although Waxman was at zero years,” Tauzin added, referring to the liberal California congressman who had made allowing biosimilars to thrive a pet cause.

  Obama insisted that it had to be seven years. “It was the only specific issue the president ever took a position with us on in all our conversations,” recalled one industry executive who was in the room. “He just kept hammering away at it, lecturing us.”

  Tauzin figured Obama was putting on a show because he wanted word to get back to Waxman, whose support Obama needed, that he was working hard on Waxman’s favorite issue. So he did not let the president’s lecture bother him. But his CEOs, particularly Merck’s Richard Clark, to whom Obama targeted much of his harangue, were surprised. They thought the meeting was about sealing the $80 billion deal.

  A $2 TRILLION DEAL?

  They were surprised still more the next day when they were called back to the White House with leaders of other healthcare industries to join an announcement by Obama that the industry as a whole had agreed to $2 trillion in cost cuts over the next ten years.

  Aside from a goal of reducing “the healthcare spending growth rate” by 1.5 percent a year for the next ten years, there were few specifics in the “fact sheet” that the White House press office distributed proclaiming the “historic” agreement to cut trillions from health spending. Each of the befuddled industry leaders standing next to Obama simply said he would try.

  The drug executives were now more nervous. Was their deal really a deal? Where had that $2 trillion number come from? Two trillion dollars was a long way from $80 billion. How much of the $2 trillion were they expected to chip in? Hadn’t they been assured by Baucus’s people that the White House was on board?

  The signals were, at best, confusing. Five days earlier, on May 6, 2009, one of the industry lobbyists had emailed a colleague about “our frustration with the lack of direct discourse inside the White House.” However, she continued, “Rahm’s calling Nancy Ann [DeParle], and knows Billy [Tauzin] is going to talk to Nancy Ann tonight. Rahm will make it clear that PhRMA needs a direct line of communication, separate and apart from any other coalition.”

  But the May 10 and May 11 White House meetings, coming as they did just after that email exchange, had only exacerbated the problem. Even as the ads they had financed began running across the country, the PhRMA people were nervous.

  On the evening of May 14, an article for the next day’s edition of The New York Times was posted online and generated a frenzy of panicked emails among the drug industry lobbyists. Veteran healthcare reporter Robert Pear’s front page report quoted officials from various state and national hospital associations and Ignagni from the insurance lobby as charging that “Obama had substantially overstated their promise earlier this week to reduce the growth of health spending.… They say they agreed to slow spending in a more gradual way and did not pledge specific year-by-year cuts.”

  To add to the confusion, Pear quoted DeParle as having called him to say, “ ‘The president misspoke’ when he described the industry’s commitment.” However, Pear reported in the same paragraph, DeParle had then called him back “an hour later to say ‘I don’t think he misspoke. His remarks correctly and accurately described the industry’s commitment.’ ”

  This fiasco had been orchestrated by the economic team, proving that neither side—neither DeParle’s health policy group nor the Orszag-Summers staff—had a monopoly on clumsiness. Orszag and Summers were anxious to get the president fully out front on costs and thought that by expressing the goal—which the president had articulated before on the campaign trail as allowing for a reduction in insurance costs of $2,500 per family—they would move things along.

  THE DRUG INDUSTRY GETS ITS DEAL

  “Buckle up for tomorrow,” emailed lobbyist Rick Smith to his colleagues at PhRMA, referring to the Robert Pear New York Times article. “This is unbelievable.… I suggest we strictly stick to a short script … something along the lines of ‘We will respect the confidentiality of our discussions with other associations working on this positive initiative.… We also look forward to working with the Administration and members of Congress toward passage of a bipartisan health reform bill.’ ”

  Bryant Hall, the senior PhRMA lobbyist on Tauzin’s team with the strongest ties to the Democratic side, saw danger: “Perfect timing to cut our deal [with] the White House as this is swirling,” he replied sarcastically.

  By the next afternoon the PhRMA people were under what Hall described in an email as intense pressure to knock down the Times scoop by signing a joint statement with the other industry sectors reaffirming their commitment to cut costs. Although the statement was bland, Tauzin did not want to sign it. He relented only after his deputy emailed him that “Rahm is already furious. The ire will be turned on us.”

  Actually, the ire was soon turned on everyone involved in these closed-door deals, as the press—its appetite whetted by the back-and-forth between industry officials and the White House coming out of the May 11 $2 trillion pledge—began asking what, if anything, had been pledged and to whom and by whom in what settings. Liberals on Capitol Hill, especially in the House, also wanted to know.

  On June 3, 2009, when some members of the House and Senate began talking openly about lifting the ban on buying drugs from Canada as part of the reform package, Nancy-Ann DeParle emailed PhRMA’s Hall to reconfirm that she and her White House colleagues had decided, “based on how constructive you guys have been, to oppose importation in this bill. It is my understanding that this is being conveyed [to Capitol Hill]—let me know if this is not the case.”

  But at another White House meeting with drug executives and lobbyists, on June 10—which included Rahm Emanuel, Messina, and DeParle, as well as Clapsis and Fowler from Baucus’s staff—the drug industry heard a tougher message. DeParle upped the ante from $80 billion to $120 billion. The Obama people were worried about a revolt in the House, led by Waxman, if they let the drugmakers off too easy. If they couldn’t get $120 billion, the more life-threatening reforms cutting into PhRMA’s revenues would be thrown into the package.

  Tauzin didn’t budge. He knew they could never get sixty votes in the Senate if the drugmakers switched sides and began financing a different set of ads, and he s
aid so.

  Within days DeParle and Emanuel sent out word that in an upcoming Saturday radio address, the president was going to call for radically more expensive cuts in how Medicaid and Medicare pay for drugs than were included even in her $120 billion demand. Tauzin still refused to cave, and his people pushed the Baucus staff to bring the White House on board, which is what they had promised was already the case.

  Finally, the drug lobbyists met with the Baucus Finance Committee staff and got back to the $80 billion deal, accompanied by what the Baucus people promised was really and truly the White House’s blessing. The next day Tauzin wrote to Messina at the White House that his “five principal CEOs have accepted the terms we discussed with the Committee yesterday.”

  THAT DAY, JUNE 15, 2009, Obama took to the stump, telling an American Medical Association convention that “we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.”

  Both DeParle’s shop and the economic team were nervous about those pledges. They knew that to make a mandate truly work to ensure that Americans had adequate insurance coverage, the reform bill was going to have to outlaw many of the policies like the one Emilia Gilbert in Connecticut had had when she arrived at the emergency room—which were cheap, and which people may have “liked” until they realized how badly they were protected. And, as the PowerPoint presentation to the president just two weeks before had made clear, insurers were going to be allowed, even encouraged, to create “narrow networks” that limited patients’ choices of doctors and hospitals in order to keep premiums low.

  However, the policy and economic teams didn’t write the president’s speeches and their comments about the drafts they saw were ignored. The speechwriting and politics staff told them these were technicalities—footnotes—that could not be fitted into an effective speech.

  Notably, the June 16 speech contained none of Obama’s campaign trail attacks on the drug companies or insurers. Instead, the president promised savings that could come through better electronic medical records, more efficient use of prescription drugs, and more coordinated care overall. All the players in healthcare were going to be asked to chip in, Obama said. But he didn’t criticize any of them. A deal was in the air.

  Three weeks later, on July 7, 2009, the drug company CEOs met in the White House with Rahm Emanuel, DeParle, and Baucus and shook hands on the deal. PhRMA’s public relations team then began drafting talking points for its members so that the drug industry could describe the deal without letting on exactly what they had gotten in return—how they had averted the “life-threatening” reforms the executives had feared. There would be no prescription drug importation. Medicare would not be set loose to negotiate drug prices. There would be no draconian cuts in Medicaid payments. And, yes, there would be twelve years of protection for biologics rather than Waxman’s zero years or Obama’s seven. However, the talking points, which went through multiple drafts, wouldn’t mention all of those dodged bullets. Rather, they would describe only what the drug companies had agreed to contribute in terms of new discounts for Medicaid and to reduce the Medicare doughnut hole.

  When the White House press office announced the PhRMA deal on July 20, it was called an agreement between Baucus’s Senate Finance Committee and the drugmakers. It, too, omitted the bullets PhRMA had been allowed to dodge.

  But Waxman knew. He soon attacked the deal and said it would not fly in the House.

  In early August, PhRMA got wind that The New York Times was preparing a story about a provision Waxman had drafted in his version of a reform bill that would allow Medicare to negotiate drug prices. The reporter was saying that PhRMA had told him that the drug companies had gotten a promise from Baucus that there would be no such provision. However, the reporter was also saying that no one at the White House was responding to his question about whether the Obama administration supported or opposed what it was still calling the Finance Committee deal. Other papers, including the Los Angeles Times, had already reported the same thing and were demanding to know what deals had been made or not made and whether the White House felt bound by them.

  The prior month an item had appeared in Congress Daily in which Waxman had claimed that the White House was not bound to honor any deals made by the Senate. That reporter had written that he had gotten a “no comment” from the White House. When that story appeared, a lobbyist for Novartis, the giant drug company, had emailed Bryant Hall, the Democratic-connected lobbyist at PhRMA, to ask if the White House was backing out of the deal. But he and other drug lobbyists had been satisfied when Hall emailed back that he had spoken directly to Rahm Emanuel after the story appeared and had been assured that Waxman’s claim was not true—that, of course, there was a deal.

  Now PhRMA wanted the Obama people to take a public stand. “Send the reporters to me,” White House deputy chief of staff Jim Messina replied in an email to Hall at PhRMA. The next day this story appeared, in which the White House finally came clean:

  Pressed by industry lobbyists, White House officials on Wednesday assured drug makers that the administration stood by a behind-the-scenes deal to block any Congressional effort to extract cost savings from them beyond an agreed-upon $80 billion.

  Drug industry lobbyists reacted with alarm this week to a House health care overhaul measure that would allow the government to negotiate drug prices and demand additional rebates from drug manufacturers.

  In response, the industry successfully demanded that the White House explicitly acknowledge for the first time that it had committed to protect drug makers from bearing further costs in the overhaul.…

  “We were assured: ‘We need somebody to come in first. If you come in first, you will have a rock-solid deal,’ ” Billy Tauzin, the former Republican House member from Louisiana who now leads the pharmaceutical trade group, said Wednesday. “Who is ever going to go into a deal with the White House again if they don’t keep their word? You are just going to duke it out instead.”

  A deputy White House chief of staff, Jim Messina, confirmed Mr. Tauzin’s account of the deal in an e-mail message on Wednesday night.

  “The president encouraged this approach,” Mr. Messina wrote. “He wanted to bring all the parties to the table to discuss health insurance reform.”

  This crisis might have been averted, PhRMA lobbyist Hall speculated to DeParle in an email, had White House operatives consulted more with the House leaders in the first place. DeParle didn’t buy it. “Maybe we would have never gotten anywhere if we had,” she replied. “I know this is tough for you guys,” she added. “It’s tough for us, too. I’m the one walking the halls in [the House office buildings] getting yelled at by members.”

  Meantime, an updated Goldman Sachs analyst’s report on how drug companies were likely to fare if the law passed was circulating on Wall Street. It confirmed Tauzin’s strategy: “Cost side of equation meaningfully offset by benefit from increased coverage,” the report was headlined.

  THE HOSPITALS GET THEIR DEAL

  To the Obama administration, hospitals apparently did not carry the baggage that the drug companies did. On July 8, 2009, Vice President Biden announced the $155 billion agreement with the hospitals. The White House, and certainly Biden, had had little to do with negotiating the hospitals deal; most of the bargaining sessions had been with Fowler, Clapsis, and the rest of the Baucus team, not at the White House. Yet, unlike the PhRMA deal, this one merited a White House imprimatur.

  Tellingly, the $155 billion in givebacks had to do with the hospitals accepting lower increases in Medicare payment rates, plus the penalties on readmissions. The hospitals did not agree to the kind of systemic reforms that the economic team coveted. “Kocher and Zeke kept talking about bundled payments,” said one member of the Senate negotiating team, “but we and the hospitals had trouble seeing that there was any there t
here.”

  By now conservative groups were getting wise to what was going on and were beginning to push back. Even the Heritage Foundation, which had provided the intellectual underpinning for the core of the reform package now taking shape, was manning the opposition barricades. USA Today reported that “Dennis Smith, a health care expert at the conservative Heritage Foundation, said hospitals will end up making money from a health care overhaul that costs the government $1 trillion. ‘These savings are really a mirage,’ he said. If Obama’s plan is enacted, ‘hospitals are likely to get more revenue than what they are pretending to give up.’ ”

  GETTING THE SIXTIETH SENATE DEMOCRAT

  Biden had done something important to advance healthcare reform beyond this ceremonial role in the hospitals deal. At the end of April, he had been instrumental in persuading Pennsylvania Republican senator Arlen Specter—a longtime friend and former Senate colleague facing a tough primary fight from a conservative challenger—to switch to the Democratic Party.

  On July 7, 2009, Specter’s switch became that much more important when Al Franken—the Saturday Night Live comedian turned Democratic Senate candidate in Minnesota—was sworn in following a recount battle that had lasted nine months.

  With the Democrats able to count on Vermont independent Bernie Sanders, they now had the sixty votes needed to get healthcare past a filibuster, provided they could corral all the Democrats.