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Executive Summary

The multiple-source drug reimbursement formula contained in the House-passed legislation to provide drugs under Medicare would inhibit price competition, Purdue University's Pharmaceutical Economics Research Center Director Stephen Schondelmeyer, PhD, concluded in a report prepared for the Senate Finance Committe. The House formula, based on 50% of the brandname product's published AWP, "is likely to inhibit price competition because it is a formula based on the pricing decision of a single drug manufacturer, the drug product originator," the report states. "By definition of the formula, the originator can never price in a manner to allow its product to be available at the reimbursement limit because the limit must be one-half" the originator's price. Furthermore, if a brand product was priced to compete with generic competitors, the report points out, the House reimbursement level "would be so low that pharmacists would not be able to purchase even one generic product at or below this limit." "This problem already exists for 11 of the top 100 multisource durg entities," Schondelmeyer maintained. For example, for theophylline 300 mg controlled release tablets, the brand AWP is $18.96/100 and the lowest generic AWP is $13.13/100. Consequently, he said, the House reimbursement would be $9.48/100, "which is $3.65 below the lowest AWP available to the pharmacist." Senate staffers are citing the Schondelmeyer findings to demonstrate the superiority of the Senate formula. House aides point out that the data do not account for lower-of provisions, which assure that reimbursements are not made when the formula produces a limit far above the usual and customary retail price. The Pharmaceutical Manufacturers Association and the Reagan Administration are committed to the Senate bill. The Generic Pharmaceutical Industry Association and the American Pharmaceutical Association, which generally favor the House measure, find the median AWP formula preferable to the Senate formula. However, APhA reportedly would rather see the median AWP plus 20%. The Schondelmeyer report defines the ratio of a reference product's AWP to the lowest generic's AWP as "an indication of the degree of competitiveness within each multisource drug entity category." Using that ratio, Schondelmeyer cited what he called "dramatic noncompetitive stances," by several brandname companies that face generic competition. The ratio is 28.8 to 1 for bethanechol chloride, 23.9 to 1 for meprobamate, 22.4 to 1 for meclizine, 17.9 to 1 for doxycycline, and 17.2 to 1 for diazepam. "Twenty of the top 100 multisource drug entity categories had ratios greater than 10 to 1," he reported. On the other hand, "other multisource drug entity categories have very narrow ratios of reference brand AWP to lowest AWP, indicating a more competitive market," the report states. "Ten multisource drug entity categories had ratios less than 2 to 1. The House formula "causes the most problems with respect to product availability at or below the established reimbursement limits," the report continues. The Senate formula represents an improvement over the House formula in terms of greater availability of products, the report maintains.

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