Claiming Implausible Discounts And Rebates

C. PRICE OF MEDICATIONS 7. CLAIMING IMPLAUSIBLE DISCOUNTS AND REBATES HRP WINDFALL PROFITS REPORT: We estimated that discounts and rebates under the new law would average 15 percent of posted retail charges, about what they appear to average today. The law would leave the job of bargaining over prices with drug manufacturers to the several plans in each of numerous regions. The decision to shatter Medicare’s buying power deliberately throws away the chance to use the massive buying power of the whole Medicare population to negotiate substantial drug price reductions. The nation’s purchasing power would be intentionally fragmented among many plans, just as it is today in the private health insurance market—and as the industry urged.41 So there is no rationale for expecting discounts any greater than those given to the “private health insurance plans [that] are widely-recognized to have failed to contain drug price for either Medicare HMO enrollees or for the wider array of American workers, families, and employers” (HRP, p. 1). PRI/PwC: Their critique offers a muddled picture which confuses estimates of overall savings with estimates of price cuts. (The terms “discounts” and “rebates” also often appear to be used interchangeably in this critique.) Whether price reductions or savings, the estimates are unsubstantiated. Offering no evidence for this conclusion, the PRI/PwC critique simply asserts that the plans “will be able to purchase drugs at discounts of around 25 percent, compared to discounts of 15 percent under current employer plans.” (PRI/PwC, p. 4) They attribute this estimate to CBO. The PRI/PwC report criticizes us for failing to accept CBO’s estimate that the new plans operating under the Medicare drug benefit will win prices that are 10 percentage points lower than those obtained by PBMs today. Elsewhere, however, they assert that “savings, termed the ‘cost management factor’,…will be about 10 percentage points higher than under current….employer plans.” (PRI/PwC, p. 6) There, they “assume that the savings estimated by CBO are one-half rebate and onehalf increases in other factors,” including generic substitution, utilization review, narrower pharmacy networks, and “other methods used by PBMs to reduce costs.” (p. 6) There is no explicit mention here of restrictive formularies, but that may be what is intended by “other methods.” They conclude that drug maker rebates would rise by 4-8 percentage points. (p. 7) Earlier, they asserted that use of broad pharmacy networks limits plans’ ability to win discounts from pharmacies (p. 4), yet their estimates assume that restricting pharmacy selection will be the source of some savings (p. 6). Mainly, they claim, without attribution, “Most analysts expect manufacturer rebates to increase under the new benefit, as plan providers compete for enrollees.” (PRI/PwC, p.4) REPLY: All these somewhat contradictory PRI/PwC statements assume that private plans will save more than they now do for employers. All such statements are unsupported. No evidence is offered that private plans can win larger discounts and rebates than they have done until now. And this assertion flies in the face of the willful fragmenting of buying power required by the new bill. Similarly, when CBO was asked recently to address the relative effects of relying on private plans or allowing Medicare to negotiate drug prices, the agency wrote that there would be “negligible” difference, as CBO estimates that substantial savings will be obtained by the private plans…. Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs…and to attract enrollees.42 But CBO, too, simply asserted this claim, without supporting evidence. That view appears to contradict expectations of some knowledgeable observers. For example, the previous administrator of the Medicare agency, Bruce Vladeck, observed last year that "`A slew of private health plans would have nowhere near the negotiating power that Medicare would have if there was national drug benefit…’" 43 The PRI/PwC and CBO claim also contradicts the apparent expectations of the pharmaceutical industry itself. The industry had, as just noted, sought to face fragmented private purchasing and strongly resisted earlier proposals for Medicare to directly administer a drug benefit. As the Wall Street Journal put it, “The benefit would be administered through private insurance plans or pharmacy benefit managers. Drug makers believe individual private buyers are less able to push down prices than a centralized government purchaser with a pool of 40 million patients….” And therefore, ”For the drug 44 industry, the legislation is good news, at least in the short run.” Further, if private plans do have the ability to get greater discounts, why have they not yet done so for employers? With double-digit drug spending increases reported over the past three years (reflecting both price and volume trends), some observers suggest that today’s strategies “just aren’t curbing costs.”45 Might Medicare plans win larger discounts under the new law because Medicare covers so many people? That is implausible, since the law would hand the job to new competing private regional plans. The largest pharmaceutical benefit manager firms have claimed to represent 40, 60, even 70 million “covered lives” 46 – far more than the future Medicare drug plans are likely to enroll. Anticipating a “fragmented market” under this law, the editor of The Pink Sheet observed that the program may divide the nation into as many as 50 regions.47 Indeed, the new Medicare law specifies that prescription drug plan regions shall be, “to the extent practicable,” the same as those for Medicare Advantage plans 48 – for which “There shall be no fewer than 10 regions, and no more than 50 regions.” 49 Consider the precedent of market fragmentation in the new drug discount cards to be offered in mid-2004. CMS has just approved 28 card issuers, along with 43 more cards from Medicare HMOs.50 The large number approved may be spurred by hope that “competition” between discount card plans will drive down costs. But as discount card plans multiply, the Medicare population and its purchasing power are divided. Merely wanting to attract Medicare enrollees will not give plans the power to “extract greater discounts” (PRI/PwC, p. 3) from drug makers, especially since multiple small private plans would be negotiating with large monopolistic or oligopolistic makers of patented drugs. We regard the CBO assumption of increased discounts as unsubstantiated and therefore as unrealistically optimistic. Because we assumed that price discounts would resemble those under current PBM programs, our study retained the manufacturer/wholesaler/retail split of the pharmaceutical dollar that prevails today. The PRI/PwC report also seems to intermingle references to price discounts and rebates with references to savings from “efficient plans,” which could exert substantial utilization review and the like. The latter are not price discounts. As just noted, there is no evident reason why drug makers would be motivated to give larger discounts or rebates than they give to today’s large PBMs purely because the new plans and insurance companies are competing for enrollees. Adopting severely restrictive lists of covered drugs, however, could perhaps enable the new private plans to win greater discounts from drug makers. If that method of leverage is assumed, though, it goes largely unmentioned. PRI/PwC’s “background” section suggests that plans with “rich benefit packages and lax formularies” may face “competition [that] will force [them] out of the market.” (p.3) But the PRI/PwC discussion of the claimed 25 percent discounts does not prominently make that argument for restrictive drug lists, perhaps for reasons such as these: (a) PRI elsewhere has stated opposition to use of formularies, proposing (with some reason) that the choice of drug generally should be left to prescribers and patients. 51 (b) Restrictive formularies would limit plans’ ability to attract enrollees. PRI/PwC and the CBO state that plans will win lower prices from drug makers in order to compete for members (without ever saying how), but many patients are concerned about access to particular drugs as well as about price. If narrow formularies are to be the fragmented new plans’ main means of cutting drug prices, the plans indeed will face a dilemma in trying to attract patients. (c) The law somewhat limits plans’ ability to restrict their formularies by requiring inclusion of drugs in each of a large array of categories. If an assumed reliance on highly restrictive formularies underlies the belief that this Medicare law will boost drug discounts and rebates, that assumption is not prominently featured in promotion of the law—perhaps because it would be unpopular with patients and physicians. (Patient advocacy groups are, however, cautioning seniors that plans may change the covered drug lists often, and that patient spending would not count towards the out-of-pocket limit if it goes to buy drugs not on the formulary for the patient’s plan.) But even if plans can use restrictive drug lists to win discounts of 25 percent, that would not lower the drug makers’ new profits greatly, because the prices that the Medicare plans pay would still vastly exceed the incremental manufacturing and distribution cost discussed earlier. (This is presumably why some Wall Street analysts who believe that 25 percent discounts are likely, nonetheless conclude that resulting ”volume increases would more than offset that” revenue loss.52 ) Further, as discussed elsewhere, some mix of two things is likely to happen to the money saved through discounts, whether these are 15 percent or 25 percent. First, insurers would recycle the savings from discounts to underwrite the purchase of more medications, which would boost drug makers’ revenues still higher, allowing them to garner still higher additional profits, since marginal costs remain extremely low. Second, insurers would retain some of the discounts in the form of higher profits, which would amount to a transfer of drug makers’ profits (and also benefits to patients) to insurers’ profits. Thus, absent the leverage of the Medicare program negotiating as a whole, taxpayers will finance huge windfall profits. As U.S. Representative Dan Burton (R, Indiana) has said, “‘That is unconscionable. The government of the United States negotiates prices in the Defense Department, in every area of government….And here we are, going to spend billions and billions and billions and probably trillions of dollars on pharmaceutical products. And we cannot negotiate the prices with the pharmaceutical industry. That's just not right.’ “53 D. PROFITS 8. CLAIMING IMPLAUSIBLE OVERALL EFFECTS HRP WINDFALL PROFITS REPORT: Our report concluded that $400 billion in new federal spending under the Medicare drug benefit would pay in substantial part for new prescriptions, increase drug makers’ revenues, and result in $139 billion in new profits over eight years. PRI/PwC: The PRI/PwC critique states its intent to “calculate alternative estimates of the impact … on pharmaceutical industry revenue,” and that they “establish a range … of the potential changes to drug industry revenues and profits,” which “can even be negative.” It concludes, “the Medicare drug benefit could range between an increase in drug industry revenues (net of additional rebates) of 3.2 percent at most to a decrease in drug industry revenues of 1 percent.” (PRI/PwC, p. 1, 8, 9, emphasis added.) REPLY: This is astonishing. Is that what was sought through a new $400 billion program? CBO now projects that total baseline spending on retail prescription drugs for Medicare patients would equal about $1.6 trillion from 2006 to 2013.54 Ignoring discounts for now, this means that the new $400 billion would yield a 24.8 percent rise in spending on behalf of Medicare beneficiaries if all of the added revenue bought new prescriptions. The surprising achievement of PRI/PwC is to make almost all of this money disappear. What does it buy? Very little, apparently. PRI/PwC’s calculation is achieved only by heroic assumptions of a very low priceelasticity of demand and a very high discount. In other words, a great share of the money replaces existing spending. PRI/PwC never offer an estimate of the share of the $400 billion that replaces existing spending. In still other words—and shifting now to manufacturers’ $300 billion share of the $400 billion—remarkably high discounts, somehow extracted from manufacturers by fragmented buyers, consume almost all of the remaining money. As a result, claims PRI/PwC, drug makers’ total revenues would either fall a little or rise a little. As noted earlier, both of these assumptions are poorly substantiated; their contention that the industry might lose revenue under the law despite $400 billion in new federal spending is attributed only to anonymous sources within the pharmaceutical industry (PRI/PwC, note 4). (A disturbing inconsistency also muddies the PRI/PwC estimates. The text, as quoted above, and press release repeatedly say that the –1.0 to 3.2 percent range refers to changes in “drug industry revenues.” A table on p. 9 calls those figures the percentage change in “Drug Industry Revenues from the Medicare Population” alone.) The PRI/PwC calculation fails to clearly follow the trail of its own discounts/rebates. If discounts/ rebates actually do rise to 25 percent, who gets to keep them? This is money that reduces the prices paid to manufacturers, and therefore manufacturers’ total revenues, so it must reduce someone else’s cost of doing business. The likely candidates are the HMOs, PPOs, insurers, and other entities that operate the new Medicare drug benefit. They could respond by retaining the savings and thereby boosting their own profits, other things equal. Or they may share some of the savings with patients by improving benefits, as PRI/PwC say is “expected” (p.7). If the former, some of the profits we calculated for drug makers are simply transferred to a different set of entities. But if the latter, as the PRI/PwC critique assumes, they never explore the implications for profits. They don’t take the next steps. Higher discounts/rebates mean lower prices, so patients will be spurred to fill more of their prescriptions (as PRI/PwC mention in note xxviii), and drug makers will sell more drugs (at a tiny marginal cost). Thus, higher discounts/rebates are likely to recycle back to drug makers. And they will retain as higher profits the bulk of these recycled dollars—a point not noted by PRI/PwC. Although we conservatively did not include the profits from this recycling in the $139 billion, we had estimated, "On the first round of recycling, $5.3 billion of this sum accrues to drug maker profit. Successive rounds would add sharply diminishing sums." (HRP, p. 10) Although PRI/PwC concedes (footnote xxviii) that “additional discounts lead to additional induced demand” they never provide a clear, explicit, or integrated display of their own calculations of either induced demand or drug makers’ revenue. Simply, PRI/PwC fail to follow the money. And their implausible conclusion contradicts the verdict of the investors. Many observers noted that, as the law neared passage with its bans on importing and Medicare price negotiation, and with only limited expansion of generic drugs’ market access, pharmaceutical stocks rose sharply.55 The view appears widespread that, at least in the near term, the law will have a positive effect on drug makers’ bottom lines. Some do suggest that, over the longer term, drug makers may face a squeeze, but those suggestions generally appear to reflect a belief that soaring costs will force changes in policy and law eventually, including possible implementation of price controls. 56 Our October 2003 study ignored such responses to high profits because it aimed to measure the effects of the legislation then under discussion. 9. REFUSING TO ESTIMATE PROFITS HRP WINDFALL PROFIT REPORT: We stated clearly our estimate that under the Medicare bills before Congress, from the $400 billion in projected federal net cost, drug makers appeared likely to garner $139 billion in increased profits. Our report title contained another main finding: 61 Percent of Medicare’s New Prescription Drug Subsidy is Windfall Profit to Drug Makers. PRI/PwC: The PRI/PwC critique declares that its focus is our estimate of profits, and claims repeatedly that our analysis “significantly overstates the potential increase….” But it never offers a dollar figure for the change in profits. It offers numerous estimates of the percentage rise—or even fall—in revenues, and a few comments on the projected percentage rise in profits. PRI/PwC begins by asserting that our “results stand in stark contrast to the opinion of financial analysts who track developments in the pharmaceutical industry. [emphasis added]” (p. 2), and are “well outside the range generally accepted by …private sector analysts.” (p. 1) The PRI/PwC section on “Presentation of Alternative Estimates” begins by stating, “Our estimates present a more comprehensive picture of the potential change in drug industry revenues and profits.” (p. 8) But no estimates of profits are presented there. The final assertion about profits is that the “modest change in revenues” that they foresee “could not cause the significant change in profits estimated in the Sager-Socolar study.” (p. 10) REPLY: The PRI/PwC critique avoids grappling with the probable size of drug makers’ profits under the law, simply asserting that ours is an overestimate. Despite its opening declaration that our estimates deviate from those of analysts who “track developments in the pharmaceutical industry,” the critique offers little impartial evidence. It mentions just one estimate from an organization that tracks industry developments, Merrill Lynch. The other two PRI/PwC citations are both from the pharmaceutical industry itself : The critique says “[s]everal drug companies have informed the investment community that the impact of the legislation would be neutral in terms of the benefits or costs to the industry.” It also refers in a footnote to losses predicted anonymously in “unpublished, private conversations by the authors with analysts and strategic planners who work in the pharmaceutical industry.” (PRI/PwC, p. 2 and note 4). Our earlier sections addressed numerous problems in the PRI/PwC estimates of the law’s impact on drug makers’ revenues. Those disjointed and often undocumented or irrelevant estimates undermine any conclusions that readers of the PRI/PwC critique might draw about profits. So does the total absence from the PRI/PwC critique of any discussion of drug makers’ incremental costs of producing a higher volume of drugs (since determining profits requires knowing costs as well as revenues). As noted earlier, however, we are grateful to PRI/PwC (p. 7) for calling our attention to one miscalculation, in the percentage rise in drug makers' profits (even though they accidentally made a mistake that mirrored our own miscalculation). In calculating the percentage increase in profits from the law, we compared the $139 billion estimated rise to a baseline figure that understated the industry’s expected baseline profits—the profits that drug makers would gain after 2006 in the absence of the law. We therefore overstated the percentage rise for the law’s first eight years. The $17 billion annual average would be a 38 percent rise over prescription drug makers’ projected profits of $45.3 billion in 2006 without the new law. But projecting drug makers’ baseline profits forward from 2006 to 2013 (at the same 6 percent annual rate used to project from 2002 to 2006) would mean cumulative eight-year drug industry baseline profits of $448.4 billion. So the added $139 billion profit from the new federal Medicare subsidy would be a 31 percent rise from the industry’s $448 billion in projected baseline profits over eight years in the absence of the law. In the PRI/PwC critique (p. 7), their correction appears to reflect a similar error in the opposite direction, using the high end of the eight-year period for the baseline while we had used the first year. They suggest that our profit estimates (which they dispute) would mean a 26 percent rise. They do not disclose their calculations, but the 26 percent figure appears to derive from dividing $17 billion by projected 2013 baseline profits, and referring to the result as if it applied to the full eight years, understating the percentage rise. Again, the $139 billion over eight years amounts to a 31 percent rise in profits. Finally, it’s worth noting the implications of these estimates for total profits in this industry which is already the nation’s most profitable: With $448.4 billion in baseline profits over eight years, plus $139.2 billion in new profits from the federal subsidy for the Medicare drug benefit, total industry profits for the law’s first eight years would be at least $587.6 billion. And the total would probably exceed that level, because our $139 billion estimate was conservative, as discussed elsewhere. We did not attempt to tally several sources of possible increased profits under the law. E. OTHER PROBLEMS IN PRI/PwC CRITIQUE 10. IGNORING CONSERVATISM OF HRP ESTIMATES HRP WINDFALL PROFIT REPORT: Section C of our report identified several factors not considered in our estimates, each of which would tend to increase the actual level of drug makers’ profits resulting from the proposed Medicare law. Thus, the estimates of the rise in manufacturers’ profits offered in our study were conservative. PRI/PwC: The PRI/PwC critique generally ignores this conservatism. REPLY: The estimates in our report were conservative in at least four ways. First, we did not factor in the increase in drug-buying and therefore in drug makers’ profits associated with recycling the savings won through actual new discounts on replacement prescriptions. That is, we factored in a reduction in drug makers’ profits because of discounts on replacement medications. But those discounts, as noted above, will enable patients to buy still more medications, giving drug makers additional revenues and profits, which we did not count in the $139 billion figure. (HRP, p. 10) Second, we noted but did not tally the likely loss of discounts and rebates associated with the switch of dually-eligible Medicaid patients to Medicare. Medicaid programs obtain price reductions that are typically somewhat higher than those won by PBMs or insurers today. The switch is therefore likely to increase drug makers’ profits somewhat. (p. 10) Analysts at Goldman Sachs and elsewhere concur that the private plans operating the Medicare benefit are likely to pay higher prices than Medicaid has been paying.57 PRI/PwC criticize that we did not analyze the impact of that switch as they claim to have done. (PRI/PwC, p. 8, and note ix) Yet they never mention its impact on the prices paid, never disclose their calculations or results, and never even explicitly state whether the Medicaid-Medicare switch will positively or negatively affect drug makers’ revenues. Third, we did not estimate drug makers’ increased revenue and profits on patients who may switch to Medicare coverage but previously used steeply discounted drugs at VA and community health center pharmacies, or who previously used samples or free drugs under drug makers’ patient assistance programs. (p. 10) Fourth, we did not consider the drug makers’ higher sales that would be financed by the new Medicare premiums or co-payments, or the profits that would be earned on this increase in volume. (pp. 10-11) Some of this would be replacement spending but, especially for patients who were previously uninsured and were not filling prescriptions, even the drugs paid for out of premium revenues likely reflect substantial new spending. We focused only on the profit impact of the $400 billion in new federal spending. Strikingly, one brief comment in the PRI/PwC critique appears to recognize that our estimates were conservative in some respects. They claim to have prepared “a more comprehensive picture,” including analysis of the Medicaid-Medicare switch (which, as discussed above, they address only in hidden calculations). They note then that “most of the changes omitted from the Sager-Socolar calculations increase pharmaceutical revenues….” (PRI/PwC, p. 8, emphasis added) But this point—that on some scores we under-estimated drug makers’ gains—is alluded to only in passing. Finally, PRI/PwC ignores our provision of a range of estimates on two key measures. Our report’s main analysis assumed that the split between new and old prescriptions was 60/40. This assumed a targeted program that helped measurably to address the great suffering that many Medicare beneficiaries endure because they cannot afford their medications. We also assumed a marginal manufacturing cost equal to 5.9 percent of manufacturers’ average price. Our Section C included a contingency table (Exhibit 3) for those who make different assumptions on the split between replacement and new prescriptions, on the marginal cost, or both. The PRI/PwC critique mentions neither this table nor the range of estimates it offered. 11. UNQUESTIONING ACCEPTANCE OF CBO ESTIMATES PRI/PwC: Their critique repeatedly claims that their estimates are consistent with CBO estimates and ours are not, and seems to suggest that disputing CBO estimates exiled us from civilized discourse. The PRI/PwC critique also appears to suggest that we should not make use of the $400 billion figure because we differ with some of the assumptions it was based on. REPLY: There is no reason why we must accept the CBO estimates. Indeed, the recent estimates from CMS that the law will cost $534 billion (one-third more than CBO estimated) did not accept the CBO estimates on many points. These points include differences on the cost per participant (about 4 percent higher in the CMS estimates than the CBO estimates). CMS also assumed a higher participation rate in the drug benefit and a greater cost for low-income subsidies. 58 Further, we know that Republican leadership writing the bill in Congress had promised not to exceed $400 billion for the drug bill over the coming decade (a total sum that the president approved and administration endorsed even just before the law passed59). We know that the CBO works for Congress. And now, in March 2004, we know (from recent widespread news reports and publication of internal email messages) that key CMS staff report having been threatened if they released higher estimates before Congress passed the bill. We worry that the CBO’s staff may have faced parallel pressure to develop an estimate consistent with the $400 billion target cost. Independence is desirable but may be hard to achieve. CBO analysts are doubtless good, honest, conscientious people. We can imagine, however, the kind of pressure they may have faced in the Congressional Budget Office. In our analysis, as discussed earlier, we did take the CBO estimate of total net federal cost as a starting point, even though the law does not appropriate a flat $400 billion over the eight years from 2006 to 2013, and that sum is not a cap on spending. That may not be what the law will wind up costing—again, as the differing CMS estimate shows. Further, it is very possible that the law will never be implemented as originally passed and signed. But the $400 billion figure was being used widely as the estimated federal cost, so that is what our report addressed. We aimed to show, if $400 billion in federal money were spent under the terms proposed in the House and Senate bills then under discussion, how it would likely be distributed. We found that it would go heavily to drug makers' profits, because of the likely rise in volume at virtually unrestrained prices combined with the low real cost of making more drugs. 12. IGNORING NEED FOR NEW SOLUTIONS AND A PEACE TREATY HRP WINDFALL PROFITS REPORT: We urged the view that a regime of substantially lower prices, offset by higher volume, is essential to protecting American patients, payers, and even drug makers’ ability to finance research. We argued for a prescription drug peace treaty, whereby prices are lowered substantially, but with public guarantees to offset both the revenue lost through lower prices and the cost of manufacturing of added amounts of medications. This makes all needed medications affordable for all Americans with no damage to either profits or pharmaceutical research—at the low added burden of covering the low marginal cost of manufacturing more medications. PRI/PwC: Their critique ignored our description of the need for a prescription drug peace treaty and of the feasibility of obtaining it. PRI, in other work, appears to enthusiastically approve of higher drug prices because they are deemed essential to financing research, and because of dislike of public efforts to interfere with what PRI perceives as a free market. 60 REPLY: The PRI/PwC critique assumes both a) that today’s regime of high drug prices can persist, and b) that the main purpose and actual function of the new Medicare drug benefit is to buttress that regime by substituting most of the new $400 billion in public dollars for existing private dollars. This is a political and human fantasy and, as we have argued above, it is not supported financially by relevant evidence on price-elasticity of demand. An alternative regime of lower prices and high volume is not only possible,61 but vitally needed. Too many Americans suffer to pay high drug prices. This has been arousing intense political anger against the drug makers. If not addressed seriously, that fury will help to elect the angriest Congress in the history of the nation, one whose first legislation will be to gut drug prices without regard to the consequences for research. Prescription drugs can and must be made affordable for all Americans, using methods that preserve and enhance breakthrough research, as we wrote in our 31 October report on windfall profits under the Medicare bills then under consideration. A prescription drug peace treaty is essential to meet the needs of patients, of taxpayers and others who pay for prescription drugs, and of drug makers.62 Drug prices would be sharply cut for all Americans, under federal law. If nothing else changed, drug makers’ revenues and profits would fall substantially. But two things do change. First, lower prices will raise private sales volume substantially as prices fall, offsetting much or most of the price cut’s effects on industry revenues and profits. Second, the peace treaty would guarantee that expanded public programs replace any remaining revenue and profit loss by subsidizing drug purchases for patients who can’t afford even the newly discounted prices. Public funds would also pay manufacturers’ actual added cost of making more pills, and pharmacies’ added dispensing cost—an estimated total of around $10 billion yearly. This could finance a one-third rise in prescriptions to address today’s unmet need. Under this treaty, drug makers fill all doctors’ prescriptions for all Americans, and drug makers’ own profits and ability to finance research are preserved. This treaty requires trust among drug makers, public and private payers, patients, and voters. It requires public leadership and also abandonment of fantasies that the market can somehow win affordable drugs for all, adequate research funding, and sustainable profits. Drugs’ patent monopolies and other obstacles hinder creation of a free market. A central element of the peace treaty is that lower prices would benefit drug makers as well as patients and payers. Drug makers would shift to a business plan based on lower prices and higher volume from their current business plan of high prices combined with limits on use.63 This will benefit drug makers in the long run—and even in the mid-run—as their current business plan—resting on both high prices and very rapid revenue growth—is absolutely not sustainable. Over the longer term, as we have described elsewhere, other reforms are also needed to foster innovation (rather than copycat research), to provide caregivers and patients with reliable information on drugs’ relative effectiveness and cost, and to fairly allocate drug costs internationally, by nations’ abilities to pay.64 These steps are not only essential to win adequate and affordable coverage today, they are our obligation to future generations. If Medicare continues to pay high prices, the enormous sums that we would be choosing to throw away in windfall profits for drug makers would not even be our money. Given the size of the federal deficit, the federal government’s share of the cost will all be borrowed—borrowed from our grandchildren. The proposals now before Congress would increase the deficit to enrich drug manufacturers while leaving seniors struggling. Both the House and Senate bills intentionally diffuse Medicare’s buying power in order to preclude substantial discounts. Instead, let us allow government to act, to hold back the windfall. If we do, we can affordably provide comprehensive drug coverage for sick and vulnerable Medicare patients—and indeed all Americans—while protecting drug makers’ current profits and their ability to finance research. The drug industry is committed to a regime of high prices and sustained rapid revenue growth as a vehicle for financing profits and research, and appears likely to obtain a Medicare drug bill that fosters those aims. Were this bill to pass, it would offer substantial short-term benefits to the industry, as discussed in this report, but these short-term benefits would sustain the industry’s business model of high prices and rapid revenue growth in the United States for only a few more years. Indeed, this business model is not sustainable. Depending on revenue growth that doubles every five - six years is not a durable method of protecting research, profits, or stock prices. The drug industry should re-think every aspect of its present business model—pricing, research financing, marketing, and the rest. For the nation, the main choice is among suffering and dying for lack of needed drugs, paying much more, and reform. Congress and the drug industry can shape a bill that addresses the core needs of patients, payers, and the industry. They have not yet done so.