Look for the Union Label

Did you see that big acquisition that could change everything about the US pharma business? No, I’m not talking about AstraZeneca buying MedImmune, though it will be fun to watch AZ try to make that one pay off. (Chris Morrison and the IN VIVO crew can help you make sense of that.) I’m not even talking about the on-again, off-again talk of a Bristol-Myers Squibb/Sanofi Aventis link up. (Look for that one to be on again in about a month.)

No, I’m talking about the purchase of Chrysler by the private equity firm Cerberus Capital Management.

That deal means more to Big Pharma than you might think. Sure, it may put Chrysler back on the list for company cars at firms with Buy American policies. (Are there any companies like that left?)

But it could also go a long way toward redefining the landscape for pharmacy benefits in the US.

Assuming Cerberus (named for the three-headed hound that guards the gates of hell) lives up to its reputation, you can bet there are big cuts coming at Chrysler. And, as Steven Pearlstein points out in the Washington Post, that means a time of reckoning for the United Auto Workers union.

This looks like a watershed moment for labor relations in the US—and that has big implications for Big Pharma. Why? Because the “Big Three” union contracts go a long way towards defining the national standard for pharmacy benefits.

Some of the effect is direct. The automaker each decided to carve out their pharmacy benefits in the 1980s to help control drug costs, and in the process helped the fledgling pharmacy benefit management business take off. Chrysler, interestingly, recently moved its big PBM contract out of the hands of one of the US giants and awarded it to CVS Corp.’s Pharmacare division. But that business will end up with Caremark Rx again now that CVS has acquired the largest PBM in the US.

That contract covers about 280,000 lives (employees, retirees and dependents). That in itself is a lot of buying power. And Chrysler is the smallest of the "Big Three," so those contracts together add up to a lot of clout.

But the impact of the union deals is bigger than that. There is a direct feedback loop between the contracts—and especially the pharmacy benefit component—and federal policies in healthcare.

Unions are not the political force they once were, but they remain a vital constituency for the Democratic Party. And the “Big Three” are not the unstoppable symbol of American industry they once were, but when the CEO of an automaker has an issue to raise, you can bet he can talk to anyone he wants in Washington. What’s good for General Motors may or may not be good for America, but what General Motors gives its employees in health benefits sets a standard that it is hard for the government to ignore.

For almost two decades now, state Medicaid directors have complained that overly generous pharmacy benefits packages included in union contracts have tied their hands in trying to rein in drug costs. If the UAW negotiates an open formulary, it is hard for Medicaid to insist on a closed one. On the other hand, if the UAW agrees to a mandatory mail service provision, other benefit managers will be sure to adopt them too.

The power of union contracts to frame the health care debate is undeniable. Even President Bush’s seemingly progressive proposal to tax employer health plans that exceed $7,500 in value has to be understood in that context. On paper, the proposal looks like a tax on high wage earners with gold-standard health benefits. In reality, union workers are about the only people in America with a health plan that rich.

So when Cerberus sits down with the UAW, the pharmaceutical industry has a lot at stake. Maybe it will be business as usual, with nothing more than tinkering at the margins on the pharmacy benefit. But the time could be ripe for radical surgery. Medicare now offers a prescription drug benefit. Will Cerberus push for a new contract that dumps its retirees on the new program? Will the union agree to more aggressively managed benefits, with tighter formularies and even stronger incentives to choose generics?

One thing is certain: in the current political climate, the union can and will turn to Congress if it feels too squeezed. That could put Big Pharma in an interesting position: unions are not naturally allies of the drug industry, but if unions are fighting to protect generous drug benefits, Big Pharma may start to preach solidarity.