President Barack Obama Announces Agreement with Drug Companies to Offset Medicare Costs

President Barack Obama announced an agreement with the pharmaceutical industry on Monday to help Medicare close its gap in medical coverage.

Pharmaceutical companies agreed to spend $80 billion over the next decade to help reduce the cost of drugs for seniors and pay for a portion of Obama's health care legislation, according to Associated Press.

Obama made the announcement while in the White House's Diplomatic Room on Monday afternoon. He was joined by Sen. Max Baucus, D-MT, the chairman of the Senate Finance Committee who struck the deal with the White House; Sen. Chris Dodd, D-CT, and Barry Rand, head of the senior citizens' advocacy group AARP.

Obama said the move on Medicare will help correct the “doughnut hole” in the current program that provides a prescription drug benefit through the government health care program for the elderly and disabled.

The “doughnut hole” refers to a feature of the current drug program that requires beneficiaries to pay the entire cost of prescriptions after initial coverage is exhausted but before catastrophic coverage begins.

Under the deal, drug companies will pay part of the cost of brand name drugs for lower and middle-income older people in the so-called "doughnut hole."

Obama said some Medicare beneficiaries will find at least a 50 percent discount on prescription drugs. Obama says drug companies stand to benefit when more Americans can afford prescription drugs.

Under the agreement Obama discussed Monday, part of the $80 billion would be used to halve the cost of brand name drugs for Medicare recipients when they are in a coverage gap of the program. AARP, which represents 40 million older Americans, has long lobbied to eliminate that coverage gap completely.

The deal would affect about 26 million low- and middle-income recipients of the program's enrollees, AARP said. It would apply to brand name and biologic drugs, but not generics, the group said, and likely take effect in July 2010, assuming drug overhaul legislation becomes law.

Under Medicare's Part D prescription drug program, recipients pay about 25 percent of the cost of their drugs until they and the government have paid $2,700.

At that point, beneficiaries must cover the full cost of drugs until they have spent $4,350 from their own pockets. When they reach that amount, Medicare's catastrophic drug benefit takes effect, and recipients only pay 5 percent of their drugs' costs until the end of the year.

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