Drug, Insurance Firms Cry Foul, But Still May Profit : Medicine: Clinton’s villains of reform may end up with a sympathetic Congress and a healthy bottom line.

In the national health care debate, President Clinton repeatedly casts the health insurance and pharmaceutical manufacturing industries as the villains.

He tells tragic stories of their victims--a woman who was forced to quit a $50,000-a-year job and go on welfare to get care for her sick child because private insurers refused to cover her; an elderly New Hampshire couple who could not afford food because they spent so much money for routine prescription drugs.

Under his plan, insurance companies would face limits on increases in premiums so strict that the industry complains that it would have trouble raising the capital it would need to attract new business. Drug companies would be saddled with indirect price controls and a $2.5-billion-a-year payment to the government--at a time when industry earnings are already sagging.

Some executives in the two industries accuse Clinton of scheming to destroy their profitability and to force some companies out of business.

“The President has fit us for a black hat, and we don’t deserve it,” said former Rep. Bill Gradison, now president of the Health Insurance Assn. of America.

But behind the cross-fire, one of the best-kept secrets of the President’s proposal is that it also offers these “black hats” some extraordinary opportunities. Some drug and insurance firms could profit handsomely from reform, especially if--as expected--they persuade Congress to ease up on the most onerous features proposed by the White House.

Under those circumstances, even Gradison admitted: “We’ll do OK.”

Clinton’s proposal to guarantee health coverage for all Americans could bring the insurance industry a staggering 60 million new customers.

Drug manufacturers would benefit from Clinton’s proposal to include prescription drugs for the first time in Medicare coverage for the elderly, and they surely would sell more of their products to the millions of newly insured Americans under 65.

“The idea that these guys are going to get killed by health care reform is wrong, even though there is some truth to what they are telling us about the problems it will create for them,” said John Shiels, health economist for the northern Virginia consulting firm of Lewin-VHI.

The President’s reasons for singling out the insurance and drug industries for public criticism are no secret. Polls show that Americans blame insurers and drug companies for skyrocketing medical costs.

“We are perceived as being vulnerable, and so is the insurance industry,” admitted Jeffrey L. Trewhitt, spokesman for the Pharmaceutical Manufacturers Assn.

Yet even the President’s health policy advisers readily admit that every sector of the nation’s health care system has contributed to the problem of rising costs. In fact, health insurance premiums and drug prices account for less than 15% of what the average American spends for health care.

For insurers, Clinton has prescribed a system in which all Americans, except those on Medicare, would be required to have private insurance. This includes an estimated 37 million people who now have no insurance and about 20 million who are now insured through the joint federal-state Medicaid program.

Insurers would be required to sell their services exclusively through quasi-governmental agencies known as regional health alliances, which would act as clearinghouses to help consumers choose the best plan for them. Premium increases would be limited, never to exceed the overall inflation rate starting in 1999.

For the pharmaceutical companies, the Clinton proposal would stimulate sales by providing all Americans--including Medicare beneficiaries--with a generous drug benefit.

But in exchange, the government wants the industry to pay a rebate estimated at $2.5 billion a year to help cover the cost of the drug benefit for Medicare participants. In addition, the government could indirectly influence pharmaceutical pricing by banning from Medicare coverage any drug deemed to be “excessively or inappropriately priced.”

In the view of both the drug and insurance industries, the price restraints built into these proposals could easily rob them of any advantage they might get from the increased sales from universal coverage and other changes.

The insurance industry has been particularly outspoken. Gradison argues that most insurers would have difficulty competing with premium caps and mandatory participation in the health alliances.

“Our critics say we’re interested in profiteering, but all we are asking for is the right to compete, and the structure of these mandatory alliances and these premium controls make it impossible to compete,” he said.

Increased emphasis on managed care--health maintenance organizations and less formal networks of doctors and hospitals agreeing to control costs--is expected to drive many health insurers out of the business, especially those that still write only indemnity policies, which reimburse any doctor a percentage of the fee of any service. Many small companies would be forced to merge with others.

Gradison predicted that hundreds of companies could simply be forced to leave the health insurance business. But he noted that many of these departures would be virtually unnoticed because, of the 1,500 companies in the business, 275 of them now provide 94% of the coverage.

John Kleiman, insurance industry analyst for Conning & Co., a research firm in Hartford, Conn., says because premium caps are expected to restrict profits, insurers would have trouble luring investors to provide the estimated $10 billion to $15 billion in new capital that the industry would need to handle their millions of new customers.

“This is a genuine bug in the program,” Shiels added.

Yet some well-positioned insurers--the larger managed-care companies such as Cigna, the Blue Cross/Blue Shield insurers and the smaller companies that enjoy a large market share in certain metropolitan areas--are expected to thrive under the Clinton plan.

“Opportunities will abound,” said a new Conning & Co. estimate of reform’s impact on the insurance industry. “In fact, one thing that will remain a constant in the coming era of health reform will be that good management of the present business and forward-looking selection of possible favorable future investment opportunities will benefit those companies under the various likely aspects of the Clinton plan.”

Among other things, the new health care system would offer opportunities for insurers to provide new kinds of coverage that would compensate for the gaps in the Clinton plan, such as adult dental coverage and the substantial costs--in the form of deductibles and co-payments--that consumers would still face.

The pharmaceutical industry, like the insurers, has lashed out at the President’s plan. The Pharmaceutical Manufacturers Assn. contends that it would have a “devastating impact” on most drug companies.

Mariola B. Haggard, pharmaceutical analyst for Salomon Bros., said the industry would also suffer from Clinton’s proposal for “global budgeting”--limiting the nation’s total payments for health insurance--as well as from the requirement that drug companies pay rebates into the Medicare system.

“What universal access gives with one hand, global budgeting takes away with the other hand,” Haggard said. “When you add in the rebate, it comes out to a net negative for the drug manufacturers.”

Haggard estimated that the Medicare rebate, which is patterned on an existing rebate program under the Medicaid system, would reduce the average earnings of the top 10 drug manufacturers by about 2% a year.

Although the U.S. drug industry has been enormously profitable in recent years, current market forces are already driving down drug prices and profits. Even without price controls, many managed-care companies and other bulk purchasers are now able to demand large discounts from the drug manufacturers.

In addition, in an effort to stem the criticism of soaring drug prices, 17 major drug firms have joined in a voluntary program organized by their association to hold price increases to the general rate of inflation. As a result, according to the organization, drug prices rose 3.9% over the last year, down from nearly 10% in 1991.

Some experts predict that drug companies, if their drugs could be banned by the government as too costly, would be reluctant to undertake the kind of expensive research and development projects that often produce breakthrough medications. Shiels questions why drugs are singled out for such strict controls, which would not apply to other medical services.

While some companies would be hurt by these price strictures, Haggard noted that there are still some exceptionally profitable manufacturers, such as Pfizer and Schering-Plough, that would probably continue to make substantial profits under the President’s plan. In addition, she added, some complacent drug firms could benefit from the challenge posed by reform.

“These companies have many options open to them,” she said. “They have a lot of cash. They can enter into strategic ventures, diversify or downsize. They can become more cost-effective competitors.”

Perhaps the best news that the drug and insurance industries have heard so far is that many members of Congress share their opposition to the price and premium controls in the Clinton plan. Both industries have launched aggressive lobbying drives to ease these provisions in the final legislation.

At the same time, both industries have also launched multimillion-dollar advertising campaigns to improve their public image. As Gradison noted, they realize that it will be harder to persuade Congress to help them unless they can shed the “black hats” that Clinton has placed so firmly on their heads.