WASHINGTON —The drug industry’s storied lobbying group isn’t accustomed to bad news — and with its small army of well-connected advocates, it’s even less familiar with surprises.

For PhRMA, the news last winter was both.

On Feb. 7, the group’s board — made up of dozens of the CEOs of major pharmaceutical companies including Amgen, Johnson & Johnson, and Sanofi — was gathered for a meeting to welcome its new chairman. Suddenly, the gathered crew had something far more threatening to discuss: Congress had just laid out a plan to force drug makers to pay far more into Medicare — a policy change none of pharma’s lobbyists had seen coming.

A source familiar with what happened at the meeting described the atmosphere succinctly: panic.

The group — its board members, its 30 internal lobbyists, and its 150 contracted ones — sprung into action, scrambling to convince Congress not to enact the change. That two-day blitzkrieg was only the first in a series of sustained campaigns to find a way to reverse its loss — campaigns that saw the powerful group make concessions on policies it otherwise opposed and even reach out to would-be adversaries.

But all that maneuvering was for naught. On Tuesday, it became official: A change took effect that will cost the industry nearly $12 billion over the next 10 years.

“This might well be the biggest political loss that PhRMA has suffered in a decade,” Daniel Carpenter, a professor of government at Harvard, told STAT.

STAT spoke with key members of Congress, congressional staffers, experts, and lobbyists both within the drug industry and outside it to piece together the inside story of how the drug industry finally lost — big — in Washington. The account, some of which is reported here for the first time, details just how flat-footed PhRMA was caught by the policy, how it spun together multiple lobbying strategies to advance its “fix,” and how close it came to getting its way.

The account underscores, too, just how vulnerable the group, once thought invincible, has become, as newly empowered Democrats pledge to work with President Trump to lower drug prices. That PhRMA’s quest failed — despite the potentially record-breaking sums it spent on lobbying, despite its myopic, monthslong focus on the issue, despite its untouchable reputation in Washington — could be the first, early sign that the industry’s towering influence is waning.

Pill bottles and money

Back in early February, before the call came, the outlook for PhRMA was relatively sunny. Sure, Trump had recently derided the drug industry for “getting away with murder.” But the administrative action he promised hadn’t come —  the regulatory changes coming out of Health and Human Services under former Secretary Tom Price were more often favorable to the industry than not. His replacement, former Eli Lilly executive Alex Azar, seemed just as friendly. Republicans, the party with which PhRMA has often enjoyed a cozier relationship, still controlled both the House and Senate.

Unbeknownst to PhRMA, however, some of those Republicans had been working alongside Democrats for weeks, endeavoring to hammer out a tiny policy change with massive consequences for pharma.

Slipped into less than half a page of the 250-page bill — the whole section is only 168 words — the new policy requires drug makers to pay a larger share of a Medicare beneficiaries prescription costs when that person is in something known as the “donut hole.” Beneficiaries pay 100 percent of their drug costs until they meet their deductible, and insurers pick up a portion of the tab in the initial coverage phase, until someone has spent about $3,750 in drug costs. Beneficiaries pay even less once they hit the catastrophic phase, after they’ve spent $5,000. In between, though, patients, drug makers, and insurers are together responsible.

Before February, drug makers paid 50 percent of those costs. Now, however, they’ll pay 70 percent — an increase that, spread across the 43 million people who have Medicare drug coverage, adds up to billions in extra funding from pharma.

The broad outlines for the change — which was also included in President Obama’s 2016 and 2017 budgets — came from the four most powerful lawmakers in Congress: Senate Majority Leader Mitch McConnell of Kentucky, Minority Leader Chuck Schumer of New York, then-Speaker Paul Ryan of Wisconsin, and Minority Leader Nancy Pelosi. Staff on all four major health committees, in both chambers, helped draft the technical legislative language.

There was a conscious effort, several congressional staffers told STAT, to make sure PhRMA didn’t catch wind of the idea in the weeks leading up to its rollout. Even the Trump administration knew about the change and managed to keep it quiet, a senior administration official told STAT.

At the time, the lawmakers considered it a “haircut” for the industry, a way to make them cough up a little extra cash to help pay for the rest of the $400 billion budget deal, which dedicated funds to rebuilding Puerto Rico after Hurricane Maria and fighting the opioid crisis, among a host of other issues.

It’s a time-honored tradition for Congress to turn to industry to help pay for other legislative spending. Hospitals might see certain Medicare payments dwindle as a “pay for” for other health priorities. Congress will sometimes build in a direct excise tax, like the one it placed on medical devices as a way to offset other costs in the Affordable Care Act.

But no one — neither PhRMA nor the drug pricing advocates who so often work against it — expected congressional Republicans to deliver on an Obama-era priority that would hurt the drug industry.

“We were surprised by the magnitude of the policy change initially,” PhRMA CEO Steve Ubl told The Hill in May.

Even now, months later, Washington hasn’t coalesced around a single explanation for McConnell and Ryan’s decision to give pharma that “haircut.” Several sources inside and outside the government suggested Republicans were fed up with the industry and ready to send a message they weren’t invincible anymore. Others say Republican staffers didn’t know quite how big a policy change they were putting forward. Many pointed to the high-pressure budget negotiations and the need to find something — anything — to pay for February’s spending deal.

“You need a pay-for for your bill, you have [all four congressional leaders] agreeing to it. Why would you give PhRMA a call to have them screw it up?” one staffer asked. “It’s not like they’re going to be like, ‘OK, thank you.’”

(McConnell and Ryan’s offices both did not respond to request for comment on this topic.)

Part of the reason PhRMA was flat-footed: They thought Congress was working to push an entirely different policy, the congressional staffer explained. Several prominent lawmakers, mostly in the Democratic party, had been eyeing the CREATES Act, a bill that would allow generic drug companies to sue their brand competitors when they’re allegedly blocking competition. The bill had long been opposed by PhRMA, but it wasn’t nearly as consequential as the donut hole change that made its way into the bill.

And once the policy was out in the public eye, the drama of that early February board meeting didn’t fade fast.

PhRMA was “twisting every arm, trying to use the influence of their campaign contributions in both parties,” Rep. Lloyd Doggett (D-Texas),  one of the most vocal advocates for lower prescription drug prices in Congress, told STAT in late December.

The group went “berserk,” as one lobbyist for PhRMA put it.

PhRMA’s members were gobsmacked that the group could be surprised by such a big change, especially when Republicans were in control. “We pay you guys so much goddamn money in dues to be our eyes and ears,” a second drug industry lobbyist griped. “How could you let this happen?”

“It was kind of a watershed moment, [a realization] that we can no longer rely on a solid red line of support,” the second drug industry lobbyist added, referring to Republicans.

Pill bottles and money

PhRMA didn’t give up on its pushback when Trump signed the February budget deal into law. Congress, after all, has a rich history of making retroactive changes to benefit a particularly powerful industry group. It’s possible even now that the donut hole policy could be rolled back later this year, though with Democrats in the House it looks unlikely.

Before the ink was even dry on that February deal, the industry was formulating a new strategy: an argument that the “haircut” Congress had intended had shorn off a bit more than anyone expected.

Originally, the Congressional Budget Office, a wonky, nonpartisan outfit that evaluates how much a given legislative agenda item will cost taxpayers, estimated that the donut hole change would save taxpayers (and therefore cost drug makers) $7.7 billion.

PhRMA’s policy wonks and actuaries had crunched their own numbers: The CBO’s estimate was massively off, by more than $4 billion. (The CBO ultimately admitted its error and agreed with PhRMA, acknowledging in May that the change will actually save taxpayers $11.8 billion.)

The group’s new argument, then, was clear: This was a mistake, and Congress should fix it.

“If you make policy for purely budgetary reasons you usually make bad policy, if you do it super fast you usually make it worse and they did both of those things,” said Doug Holtz-Eakin, president of the American Action Forum, a conservative think tank that is closely aligned with PhRMA.

Republicans quickly began shirking responsibility for the change. They hadn’t wanted to cut this deal, they said, but Democrats had demanded it.

“Do I think that we would’ve agreed to some of the changes that were made last week if it wasn’t a large part of a larger budget deal? Probably not,” said Nick Uehlecke, a Republican staffer for the Ways and Means Committee, at an event just a week after the budget deal was signed into law.

Pill bottles and money

PhRMA’s first attempt at getting the policy reversed was about quintessentially Washington as go-go music. All the group had to do was sneak a few sentences into a 2,000 page, $1.3 trillion spending bill that Congress was considering in late March. In the parlance of Washington, a “rider,” on a “Christmas tree” of a spending package.

PhRMA played its cards carefully: It focused on Republican lawmakers like Ryan and McConnell, pressuring them to plead their case with Democrats like Pelosi and Schumer who were much less open to the change. And it tried not to be too greedy: Industry pushed to roll back the percentage it would have to pay from 70 percent to somewhere between 60 and 64 percent, not to revert all the way back to the 50 percent they would have been paying before the February law.

But PhRMA wasn’t so lucky. Democrats didn’t budge, and Republicans didn’t push it.

Drug industry lobbyists told STAT PhRMA’s asks weren’t solidified yet — the group never agreed on exactly what percentage, between 60 and 64 percent, that it should be asking for.

“It wasn’t ready for prime time,” the second lobbyist said.

Drug pricing advocates, too, demanded that a slew of Democratic drug pricing priorities — like cracking down on pay for delay deals and abuse of FDA safety systems — be coupled with any rollback to the donut hole change.

Pill bottles and money

Undeterred by its failure in March, PhRMA regrouped and began to rev up its lobbying machine. By the end of the first quarter it had already spent nearly $10 million lobbying Congress — a number that would more than double by September, to $21 million — figures that put it on pace to spend more than it has ever spent in a single year.

At the center of its new strategy, starting in May 2018: a clever new legislative proposal to couple the donut hole change with a more bipartisan and popular Medicare fix and brand the entire thing as a way to shore up Medicare. That other, unrelated policy would address a so-called “impending Medicare cliff” that won’t take effect until 2020.

On Capitol Hill, PhRMA gave the idea an uncontroversial name: “the alternative proposal.”

“The alternative proposal consists of both lower manufacturer coverage gap discounts and a policy to address the scheduled increase in the out-of-pocket threshold required to reach catastrophic coverage in 2020,” reads a wonky handout from PhRMA obtained by STAT and never before made public. “Seniors with high drug costs will be better off under the proposed alternative policy than they would under the [February law].”

PhRMA pushed the idea in radio, digital, and print ads, too, in health care and politics-focused publications across Washington and more broadly. One recent report showed that PhRMA sponsored more than 70 percent of POLITICO’s Pulse newsletter in 2018.

They recruited allies to press their case, too. A slew of groups including the National Hispanic Council on Aging, the National Minority Quality Forum, and even the National Grange all sent letters to Congress with a message eerily similar to PhRMA’s: fix the Medicare cliff and lower drug makers’ share of donut hole discounts.

And Congress listened — at least, at first. In May, more than 200 House members — nearly half the body — wrote to congressional leadership calling for Congress to address both issues together. Democrats and Republicans sent separate letters but their message was unified: move on PhRMA’s alternative proposal. (A spokesperson for PhRMA told STAT the organization “didn’t know the letters were coming,” but acknowledged the group was “doing a lot of education” on the issue.)

The letters put supporters of the February change on high alert. AARP, which emerged as one of the strongest opponents to PhRMA on this issue, cut straight to the chase in a letter to Democrats: “We are very concerned that you recently signed onto a letter that called for this beneficiary improvement to be re-visited,” they wrote. Patients for Affordable Drugs also pushed back, blasting Democrats for supporting “Big Pharma” in its own strongly worded letter.

Pill bottles and money

PhRMA’s last, most serious attempt came in late September, as Congress took up a long-sought legislative package to address the opioid epidemic.

It was a shockingly Machiavellian move, even for an organization known for its ruthless negotiation tactics.

The logic: No lawmaker, no matter how anti-PhRMA, could vote against the opioid package. Congress had spent the better half of the year crafting a sweeping package to reform the nation’s addiction treatment infrastructure, and it was expected to sail through both chambers of Congress. If PhRMA could get its donut hole fix into the package, it would would virtually guarantee both parties would vote to enact it into law.

But once word came from the hill that PhRMA was hoping to get its donut hole change looped into the package, advocates pounced, brandishing the policy as a big PhRMA bailout.

“We all rallied around the same message — singing from the same song sheet,” Lauren Blair, communications director for the Coalition for Sustainable Rx Pricing, said.

Soon, top Democrats were also chastising PhRMA for its tactics.“Leader Pelosi opposes this Republican attempt to hijack a bipartisan effort on opioids funding to ram through a multi-billion dollar handout to Big Pharma,” Pelosi spokesman Henry Connelly told The Hill.

While advocates take the credit for sinking the package, the debate over the CREATES Act, the generic industry-backed bill being considered back in February, was still simmering, and clearly played a role in failure of both sides to reach a deal on the donut hole, lobbyists on both sides of the issue told STAT.

Despite its long-held opposition to the policy, PhRMA had been sending signals, even as early as March, that it might be willing to trade the policy in exchange for getting the donut hole change reversed.

That month, House Speaker Paul Ryan personally directed the House Judiciary and Energy and Commerce Committees to write a version of the policy that everyone, including the drug industry, could support. Those negotiations began to heat up in May when Ryan touted the policy at a Washington health care conference.

And when it became clear that PhRMA also needed help getting top Democrats like Schumer and Pelosi on board, PhRMA turned to an unlikely ally: the generics industry, which goes up against its brand counterparts far more often than it works alongside them. It said it would make a deal on the CREATES Act if the generics industry could help get Democrats on board with the donut hole change.

“I sat there with my mouth agape,” a lobbyist close to the negotiations told STAT. “I have been really surprised how little strategic sense they had of how to deal with the Democrats over the last year … it seems to me Pelosi and Schumer were almost an afterthought to them.”

Those negotiations, however, eventually fell apart. The answer to why depends on who you ask. Lobbyists for both sides blamed each other for the stalemate, frequently accusing the other of acting in bad faith.

Pill bottles and money

PhRMA never again got so close to getting the fix it so desperately wanted. Industry lobbyists kept pushing through the fall, suggesting the policy could advance in this way or that, but no solid effort materialized. It never came up in end-of-year spending bill negotiations.

Ways and Means Committee Chairman Kevin Brady (R-Texas) told STAT in late December there simply wasn’t “bipartisan consensus,” to make the change. He, like many others, emphasized that it had been a priority for Ryan, who’d pulled for pharma across all four attempts. Democrats, he said, were just more successful.

“I get the impression that PhRMA/BIO and their member companies have come to accept the fact that the Part D change is here to stay,” the second drug industry lobbyist told STAT in an email. “Most, in fact, have already factored the Part [D] change into their earnings expectations – and cut employees and made other reductions.”

Now, after a midterm election season that focused more on drug prices than any before it, Democrats control the House of Representatives, along with the gavels of key committees with jurisdiction over health care policies like drug pricing. That could make it much harder for PhRMA to advance any of its priorities, let alone the donut hole fix Democrats spent the last 10 months opposing.

“Overturning the coverage gap policy gets much harder once it has gone into effect and once Pelosi is Speaker,” said one health care consultant.

It’s still possible, however, the industry’s coveted “fix” could come before Congress this year, and could even retroactively reverse the cost, lobbyists both within and outside the drug industry said. Though the House is now controlled by Democrats, the impending Medicare cliff, for example, will still need to be addressed, meaning PhRMA’s “alternative proposal” could still become a reality, the second drug industry lobbyist told STAT.

The fix could also come up as a trade if Trump works with Democrats to enact some of the drug pricing reforms he and health secretary Alex Azar have been pushing since May, some suggested to the Washington Post. The Trump administration, for example, has urged Congress to write legislation that would shore up its authority to peg drug prices to what other countries pay, and to require drug prices be included in TV ads.

There are already signs that PhRMA’s members may be less willing, in 2019, to let the issue control PhRMA’s agenda. After all, House Democrats are already readying subpoenas, the Trump administration is becoming more antagonistic toward the industry by the day,  and drug companies themselves have already written the new expense into their balance sheets.

As the health care consultant explained: “There’s a lot of conflicting points of view within industry [on] whether this should be their big ask.”

Lev Facher contributed reporting.

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  • Blaming Pharma for high prices is not 100% correct. The PBM industry with their deceptive practices need to be reviewed and close oversight initiated. Their mandated rebates to PhARMA should be eliminated and then PhARMA could lower their pricing by 40% without affecting PhARMAs bottom line. PBMs power must be controlled.

  • I’m very excited to hear this, as yes I’d expected Pharma to succeed. The details you recount — and which I had no idea about though I was aware of the measure — are fascinating. This makes me so happy! (tentatively, as you note, what happens in the future in uncertain)

    Great to see them stymied for once! Thanks for this fantastic coverage.

  • How much income do drug companies receive each year due to Part D drug spending? Knowing that would put the $12 billion decrease into perspective.

  • It seems that drug companies could reduce the amount of money they have to pay by pricing the drugs lower and taking less profit. It even seems cheaper that way for them.

    • Agree with Rob. Reducing the price actually lengthens how long they have to pay the discount in the donut hole for beneficiaries on their drug that end up there. For very expensive drugs that get a beneficiary into the catastrophic phase very quickly, the discount is actually relatively modest (they are only required to provide the discount for a distinct phase, not for the entire cost of the drug). I think the policy will lead to more drug price inflation, not less. The only way to tamp down on that perverse incentive in my opinion is to require manufacturer discounts in the catastrophic phase.

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