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Executive Summary

The Health Care Financing Administration (HCFA) should consider nonprice differences between drug products in devising a new Medicaid Rx drug reimbursement reform system, the Federal Trade Commission maintained in Oct. 20 comments to HHS on drug payment reform. FTC maintained that any new system implemented by HCFA "should not hinder new product introduction, brand name differences and other non-price dimensions of competition." The commission said that all three of HCFA's published program options ignore nonprice differences between drugs. The FTC maintained that "by focusing on price as the only important difference among drug products, HCFA may discourage the development of therapeutically equivalent drugs that differ in important dimensions to consumers." Lower incidence of annoying side effects was one important nonprice difference for consumers noted by the FTC. Medicaid consumers should be allowed "to register their preferences for a particular version of a drug," FTC asserted. The agency recommended that any new Medicaid reimbursement system should "permit Medicaid consumers to purchase the version of a drug they prefer if they are willing to pay the difference between the price of the preferred version and the reimbursement level determined by HCFA." FTC also indicated support for Rx advertising to the general public. The incentive to develop brand name reputations, FTC said, provides motivation for companies "to develop product attributes that consumers value and to compete along these and other non-price dimensions, for example . . . by advertising," FTC said. Information contained in advertising, the agency noted, "is valuable to consumers not only directly but also indirectly because it may facilitate entry by new suppliers and thus advances competition." FTC also said that in designing a new program, HCFA should balance govt. cost with recipient accessibility to services. "The optimum distribution system is one that just balances the additional government reimbursement costs of increasing the number and type of participating pharmacies with the additional benefits of increasing Medicaid customers' access to participating pharmacies," FTC declared. A Medicaid drug distribution system that includes most operating pharmacies "may result in excessively high reimbursement costs," the FTC asserted. The agency recommended that after a Medicaid program is chosen, "attention should then be directed to selecting the reimbursement level that will induce the most efficient number and types of pharmacies to participate in the program." In its Oct. 20 comments, the Justice Dept. suggested that HCFA move the administration of the Medicaid drug reimbursement system to the private sector on a contract basis. Justice said that selective use of private contractors would be the "optimal approach" to reimbursement reform. Justice urged HCFA to consider a preferred provider reimbursement system based on contracts between each state Medicaid agency and a limited group of providers. "These contracts would be awarded through a competitive bidding process," explained the department, "with payment preferably being made from the state agency to the contract administrator upon a capitated basis." Economic and administrative efficiency in providing medical services to the poor is a major criterion for evaluating Medicaid alternatives, the Justice Department said. The department stressed that the purpose of Medicaid is not to benefit health providers, adding "whether the program is 'fair' to a particular type of provider, or whether it purportedly leads to cost-shifting to other classes of purchasers is not relevant." The use of selective contracting "maximizes the reduction in administrative costs for HHS and state agencies." The plan would eliminate need for federal or state Medicaid agency fee setting or price auditing. Use of market forces, capitation incentives and generic mandates, the department continued, would "maximize reductions in program costs" and "cause fewer distortions to the market-place" than the options proposed by HCFA.

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