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Executive Summary

An agreement to seek the deferral of vaccine compensation payments for at least six months after implementation of a user fee program was the key factor in winning the White House's approval for the omnibus health care bill of 1986. President Reagan signed the bill (S 1744) on Nov. 14 -- enacting the drug industry's top legislative priority for the 99th Congress, drug export legislation. The idea of using a delayed start for the compensation program as a way to establish a pay-as-you-go system was fashioned by the Office of Management & Budget and an industry coalition consisting of Lilly, Merck, Schering-Plough and the Industrial Biotechnology Association. As written in S 1744, the vaccine compensation program will not start until a separate funding bill is passed by the upcoming 100th Congress. OMB and the industry group have agreed to press during the upcoming funding debate for the deferral of first payments. The legislative planning for funding of the vaccine compensation part of the bill provided the final drama in the saga of S 1744, but the major import of the bill to the drug and biotechnology industries is clearly contained in the drug export provisions ("The Pink Sheet" Oct. 27, p. 3). The Pharmaceutical Manufacturers Association, for example, made no reference to the vaccine issue, choosing instead to focus on the bill's export provisions. "The pharmaceutical exports legislation signed by President Reagan today as part of the Omnibus Health Package greatly strengthens the ability of the U.S. pharmaceutical industry to compete in international markets." The bill could have significant effects in the near term on some of the developing biotechnology companies. Biogen's closest proprietary product, for instance, is gamma interferon (Immuneron), which is being studied for rheumatoid arthritis in West Germany. With the export provisions, the company will have the option of making gamma interferon in the U.S. for export to Europe. The export bill could, in fact, accelerate the time to a revenue flow from product sales for biotech companies. It could open up European markets for U.S. biotechnology firms without requiring major capital investments overseas. To date, the rDNA/monoclonal products have made their first market entries in the U.S. Reagan's statement on the bill further highlighted the drug export provisions. The President noted objections to the mental health planning grant provisions of the bill and to a separate funding mechanism for Alzheimer's disease. He called the export provisions "the centerpiece" of the legislation. "I cannot emphasize too strongly," Reagan said, "the positive effects of this provision. It will increase the competitiveness of the American pharmaceutical industry abroad, create jobs, foster biotechnology and aid other nations." On the vaccine compensation plan, Reagan pointed out the objections within the Administration to the possibility that the vaccine bill could become another federally funded entitlement program. He referred indirectly to the agreement to seek a deferred start to compensation payments. "A major factor in my decision to approve S 1744," the President said, "is that the bill provides that the vaccine compensation program . . . will not be effective until a separate measure funding the program is enacted." He pointed out that reconsideration of the funding mechanism as a separate bill next year "offers the opportunity to ensure that any funding measure enacted by the next Congress to implement the compensation feature of Title III will not call for any part of the cost to be born by the federal taxpayer." The President criticized the establishment of a court-administered program to compensate persons injured as a result of receiving childhood vaccines. Giving the power to award compensation to the courts will perpetuate the large awards to which manufacturers are now exposed, the White House asserted. "The Administration has been greatly concerned for some time that unpredictable tort liability has caused many vaccine manufacturers to abandon production of childhood vaccines," he said. Specifically, Reagan recommended that Congress modify Title III to ensure: that there will be an acceptable resolution to the separation of power concerns raised by the bill vis a vis the executive and judiciary branches; and that no funding of a vaccine compensation program will be provided by the U.S. Treasury. In a recent letter to OMB on behalf of the industry coalition, the Washington law firm of Royer, Shacknai & Mehle alluded to the payment deferral compromise. The law firm proposed several features for the self-funding, user-fee program. "The delay could be for a set period (e.g. six months after the fee provisions take effect) or for a period to be determined by an administrative official, based on a finding that sufficient funds have been accumulated to pay claims," the letter states. The delay approach counters an earlier suggestion by Rep. Waxman (D-Calif.) that a $40 mil. Treasury loan fund the program. Second, a trust fund established under Title III of the bill should not have the authority to borrow from the U.S. Treasury, according to the industry group. Should a deficit in the fund be projected, an administrator could suspend or pro-rate payments until sufficient funds were accumulated. A pro-rating formula would be established, giving preference to actual medical and rehabilitation over noneconomic damage awards. Third, the user fee for each legally required childhood vaccine should be adjusted annually based on actuarial experience with the vaccine. The variable user fee is a concept pushed by Merck ("The Pink Sheet" Nov. 3, p.11). Fourth, expenses should be paid as incurred, with future losses deferred until actually realized. "After the initial phase-in period (e.g. five to seven years), awards for projected future expenses could be made in lump sum payments, reduced to present value, that could be used to purchase annuities," the letter explains. "This will avoid an accumulation of obligations for awards made in prior years that must be paid from current user fee revenues." Finally, the coalition recommended that the program be administered by an executive agency rather than the federal courts, with awards made by administrative law judges subject to regular judicial review. The industry group contended that its proposals are consistent with the spirit of the legislation, since Title III already includes cost-control provisions. For example, awards for future medical expenses and lost income are to be paid prospectively, on an annual basis, and awards, which are subject to periodic audits and readjustment, must be reduced by amounts received from collateral sources, such as health insurance. In addition, pre-enactment injury awards are limited to 3,500 claims and to actual, unreimbursable medical and rehabilitation expenses incurred after the date of the award, or a $250,000 death benefit.

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