Congress Has Its Brain on Drug Benefits

By Jeffrey H. Birnbaum, Fortune

 January 7, 2003

With heart and lung surgeon Bill Frist as the Senate's new majority leader, medical matters will get a lot of attention in Washington--especially a prescription-drug benefit as part of Medicare. President Bush has made enacting such a program a priority in 2003, and during the midterm elections lawmakers of both parties vowed to help him do so.

It won't be easy. A drug benefit would cost at least $300 billion over ten years. Democrats want a program administered by Uncle Sam with strict price controls. Republicans want insurance companies to run things without price caps and only light guidance from bureaucrats. With the GOP in control of Congress, a privately operated drug benefit is likely if a program passes.

Lawmakers will begin to work out the details as soon as they return in January. "The odds of success are fifty-fifty or better in 2003 or 2004," says Norm Fidel, health-care analyst for Alliance Capital Management. "And that's a lot higher than it's been in the past."

As long as price caps are absent, analysts say that virtually all pharmaceutical companies would be aided by a prescription-drug benefit. Even though drugs would probably be discounted initially--perhaps 15%--that would be more than offset by higher volume. Companies that do big business in drugs for seniors would do particularly well. Herman Saftlas, an investment officer at Standard & Poor's, says Pfizer and Merck would win big because they are major players in heart and arthritis drugs. Firms that don't rely heavily on such medications, like Schering-Plough and GlaxoSmithKline, won't have the same exposure, says Todd Lebor of Morningstar.

Analysts worry, however, that the program's cost will escalate over time, putting pressure on government to slash drug prices. "Over a longer period you should expect efforts to rein in rising costs," warns Paul Heldman, health analyst at Schwab Washington Research Group. "That's the overall danger." In other words, be wary of anything that comes from Washington and claims to help you.