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Drug Spending Targeted in Obama’s $320 Billion Health Cut

President Barack Obama’s deficit- trimming proposal would cut $320 billion from U.S. health programs in prescription drug and nursing home spending and by increasing individuals’ payments for Medicare coverage.

The biggest reduction is $135 billion in drug prices the government pays companies led by New York-based Pfizer Inc. (PFE) and Merck & Co. of Whitehouse Station, New Jersey, for low-income beneficiaries. The White House released its plan today.

“We will reform Medicare and Medicaid, but we will not abandon the fundamental commitment that this country has kept for generations,” Obama said in a speech at the White House. In total, $248 billion of the savings would come from Medicare, with another $72 billion from Medicaid.

The health-care proposals are part of a $3 trillion package of spending cuts and tax increases designed to trim the U.S. budget deficit and extend the solvency of entitlement programs. Republican leaders in Congress, such as House Speaker John Boehner, said they wouldn’t accept tax increases and urged a congressional debt panel to scale back entitlement programs such as Medicare.

The health policy changes are a mix of old and relatively new proposals. Obama has previously proposed similar changes for drugs used by enrollees eligible for both programs.

Republican Support Sought

Other changes would require senior citizens to pay more to get Medicare services. Obama vowed that any increases there would only happen when Republicans agree to tax increases.

“The President will veto any bill that takes one dime from the Medicare benefits seniors rely on without asking the wealthiest Americans and biggest corporations to pay their fair share,” according to a description of the plan.

Under Obama’s proposal, seniors new to the Medicare program would pay $25 more for physician insurance, starting in 2017. Another proposal would limit insurance plans that eliminate or reduce co-payments and deductibles, by adding a premium of about 15 percent to Medicare coverage for people who buy such plans.

The Medicare changes would save the government about $3.9 billion from 2017 to 2021. An additional proposal would have high-income people in the program pay more in premiums, a $20 billion savings, according to the White House summary.

Nursing homes, including Sun Healthcare Group Inc. (SUNH) and Skilled Healthcare Group Inc. (SKH), would also be targeted. Homes that had high rates of patients readmitted after being discharged would have their Medicare payments cut by 3 percent starting in 2015, according to the White House.

Drugmaker Cuts

The drugmaker cuts come from two areas. For low-income Medicare beneficiaries who get a subsidy to pay for coverage, makers of brand-name drugs would be asked to give a 23 percent rebate to the government, said two senior administration officials who described the program on condition of anonymity. Generic drugmakers would have to give a 13 percent rebate, the officials said on a conference call.

Obama’s plan would also reduce to seven years, from 12 years, the window of market exclusivity for biotechnology drugmakers led by Amgen Inc. (AMGN) and Gilead Sciences Inc. (GILD)

States would have less money go to their Medicaid programs from the U.S. under Obama’s proposals.

Of the $72 billion in Medicaid cuts, the largest is a $26.3 billion proposal to limit a state taxation technique used to boost the share the federal government pays for the program.

Medicaid Changes

Under the tactic, a state taxes hospitals and doctors and then pays the money back to them in Medicaid reimbursements, generating more matching dollars from the U.S. government. Starting in 2015, the Obama proposal would limit that technique.

Two other changes would save $29.5 billion in a decade by simplifying the formula by which the U.S. pays states for its share of the program, and by including U.S. Social Security payments in deciding whether families will be subsidized by the government in new health insurance markets that start in 2014.

Poor families would take the brunt of Medicaid cuts, said Ron Pollack, executive director of consumer health lobbying group Families USA. “Most of the cuts are not real cost efficiencies; instead they are merely cost shifts to the states,” Pollack said in a statement.

Other health-care lobbying groups announced opposition. AARP, the group for seniors, opposes Obama’s plan because “the President and Congress should be thinking of ways to restore middle-class prosperity, not weaken it through cuts,” said Nancy LeaMond, executive vice president.

Pharmaceutical Research and Manufacturers of America, a drugmaker advocate group opposed the concept, saying federal drug programs were under budget.

Hospitals oppose the cuts, said Rich Umbdenstock, chief executive officer of the American Hospital Association.

Obama’s proposal would save $20 billion by having Medicare pay less money to make up for patients’ non-payment of co- payments and cost sharing. Instead of paying 70 percent of the costs, the plan would cut payments to 25 percent. The plan would trim spending on rural and education subsidies by $15 billion.

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.

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