Overhaul Means Losses Now, Rewards Later For Drugmakers

Abbott Laboratories became the third pharmaceutical giant this week to say its earnings fell because of the health overhaul.

The company said yesterday the overhaul slashed its sales by $60 million, and required the firm to write down another $60 million - one time only - because of health law-related tax changes.

However, all is not bleak. Despite the immediate losses, drug companies acknowledge they will benefit from provisions in the new law.

The effects of the overhaul are still reverberating. Pfizer, the biggest of the drug giants, won't report its first quarter earnings until May 4.

But, earlier this week, Eli Lilly said its first quarter profit fell 5 percent because of the health law and Johnson and Johnson announced that the overhaul would cut its earnings by up to $500 million for the year.

But drugmakers admit they will be OK. " We expect that the new U.S. health care reform legislation, while not perfect, will help seniors in the Medicare system better afford their prescriptions and will provide greater access to our medicines for millions of Americans who are currently uninsured," the top Eli Lilly executive said in a statement accompanying his firm's earnings report Monday.

That could mean more customers in the future, despite "substantial costs" now.

Some of the health law changes that will cost drug companies include deeper discounts for state Medicaid programs that insure the poor and the extension for the first time of those discounts to drugs used by patients enrolled in Medicaid managed care plans. Both changes went into effect right away. Taken together, Abbott says that will cost them $60 million for the first quarter. (States may also lose money because of the changes, Kaiser Health News reported earlier this week).

A drug lobbyist told us Tuesday that the industry was concerned about the managed-care change. The pharmaceutical industry had accepted national price concessions for Medicaid in 1990, but managed-care was explicitly not included in that deal. Managed care companies save money on drugs by shifting many of their members to cheaper generics, which can be bad for business from a drugmaker's point of view.

Abbott's other $60 million loss comes from a separate change that will strip firms of a tax deduction for federal subsidies related to retiree drug coverage. That provision is affecting firms across the corporate landscape, from heavy-equipment manufacturer Caterpillar to telecom monolith AT&T.

Late last month, those firms incited a political standoff when they said they would lose millions because of the health law change to the tax deductions. But, the furor fizzled when lawmakers realized the companies were simply complying with standard accounting practices. Some of those companies apparently conceded that they could actually come out on top financially because of the overhaul, too.

Weaver is a reporter at Kaiser Health News, a nonprofit news service.