In retrospect, will the pharmaceutical industry’s support of the Medicare drug benefit be revealed as a modern-day Faustian bargain?

Conventional wisdom, particularly inside the Beltway, says that the Bush Administration is in the pocket of pharmaceutical manufacturers. Indeed, this knee-jerk assumption is a virtual article of faith among health policy wonks, the media, and others on the Left. They immediately point to the Medicare prescription drug benefit as their “evidence.”

But is this accurate? Will the Medicare drug benefit ultimately help or hurt the pharmaceutical industry? Or is Medicare Part D merely a lesser of two evils for the manufacturers?

Not if you look at how the Medicare drug benefit is playing out. Every day, as we get closer to launch of the massive new $800 billion program, pharma companies face significant new challenges.

In January 2006, Medicare as a purchaser will jump from about 2 percent of the prescription drug market to over 25 percent. By 2008, the government – Medicare and Medicaid combined – will buy over half of all prescription drugs. If you take into account beneficiary cost-sharing and federal drug benefit subsidies to employers, the government will drive about three-quarters of the drug supply chain by 2008.

If the history of Medicare teaches us anything, Congress will not be able to resist the temptation to regulate, micromanage, and administer prices. Unfortunately, the pharma industry faces an inevitable increase in government regulation.

History also tells us that Medicare will cost shift to commercial buyers of prescription drugs, including employers, hospitals, and the uninsured. Again, bad but likely inevitable.

Notwithstanding the downsides of regulation and bureaucracy, some pharma players will win in this new environment, particularly in the early years. This includes generic drug makers as at-risk Medicare drug plans drive seniors from brand drugs to low-cost generics.

Other winners will likely include manufacturers specializing in drugs for diabetes, heart failure, hypertension, and high cholesterol – areas where Medicare Part D will unleash pent-up demand. And drug makers with robust pipelines will win, provided it is a pipeline of vale-added products and not more “me-too” drugs.

Ultimately, to win the new world of government-driven drug benefits, pharma manufacturers will need to understand the market is changing. The old rules, strategies, and tools are no longer enough.