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MERCK PROPOSES "BEST PRICE" REBATES FOR MEDICAID ON SINGLE-SOURCE DRUGS: DISCOUNTS WOULD BE TIED TO ASSURED COVERAGE FOR ALL MSD EXCLUSIVE PRODUCTS

Executive Summary

Merck is offering to make its federal government contract discount prices for single-source MSD products available to any state Medicaid program. According to a discount program unveiled by Merck Sharp & Dohme in an April 19 letter to state Medicaid directors, MSD is willing to match its federal government contract price to state programs in return for assurrances that no single-source MSD products will be excluded from reimbursement. The federal contract price refers to the price paid by Veterans Affairs Department hospitals and the military through either the Federal Supply Schedule or a negotiated contract price with the Defense Personnel Support Center (DPSC). MSD's federal prices are generally believed by trade sources to fall toward the lower end of the industry discounts. Politically, the Merck proposal is a preemptive discount plan. The company is enticing the state Medicaid programs to turn away from their interest in bid programs and accept instead MSD discounts on its substantial line of patent protected products. The attraction to the states is a quick way out of the current impasse of competitive bid proposals. The states continue to try to extract bids from single-source manufacturers but are not getting any takers among the major brandname providers. Merck can reap a number of benefits from deflecting the interest in state bidding programs. Primarily, Merck would reduce the risk of facing multiple bidding battles with a number of different state programs and/or consortia of programs over specific drug prices. Those bidding fights could lead to an ever-downward ratcheting of price and could encourage states to seek competing bids on different products within a therapeutic class, i.e. therapeutic substitution. Instead of the numerous bids, MSD is offering to negotiate charitable/public service discounts with one buyer, the DPSC. That discounted price would then be made available to different state programs with the caveat that the full MSD line be covered. Anticipating concerns that the discounts may be viewed as meaningless if tied to ever-escalating private market prices, Merck cites its recent price increase restraints ("The Pink Sheet," April 9, T&G-2) and says "MSD will strive to continue this historical trend in the future." * If Merck is successful in cooling the ardor of the states for bidding, it simultaneously may take the fire out of Sen. Pryor's federal legislative effort to force the creation of state buying groups and the establishment of a national formulary committee. In an April 20 response, Sen. Pryor (D-Ark.) commended the program but showed no sign of interest in dropping the subject of drug prices and Medicaid expenditures. "It is to Merck's credit that they have responded to our debate, rather than wait for economic incentives to reduce prices," Pryor declared. "But until we create a truly competitive market as I will propose in legislation shortly, I have my doubts that there are many other firms that will follow Merck down this responsible road." The removal of restrictions to some MSD single-source products also would be an obvious gain for MSD. The company stands to pick up extra sales through the inclusion of MSD products in state programs that now exclude or delay Medicaid coverage. About a dozen states exclude or restrict access to major MSD single-source products. Mevacor, for example, is not covered by five state programs more than 30 months following approval by FDA. The important Medi-Cal program is one of the holdouts on Mevacor coverage. However, the firm says that the short-term impact of the discounts and new business will be a net cost to Merck and substantial savings to the states. MSD would not disclose a specific estimate on the impact of the program but the letter to state administrators says "the savings made possible through this program are projected to be in the millions of dollars." The company estimates that Medicaid represents about 8% of its drug business in the U.S. The discount program is described by MSD officials as foremost a long-term strategic move to keep the Medicaid market open to future MSD single-source products and not in tactical terms to break open new markets for existing items. "In closed or restrictive formulary states," MSD said in the April 19 advisory, "we will provide our best prices if the state reimburses for all MSD single-source products." Open formulary states will receive the MSD "'best price' as long as they continue to operate an open formulary." MSD will not offer best price deals on multi-source products (with generic or co-marketing competition). MSD maintained that there is little pressure for them to discount their multi-source products, because those items are already available to state programs from other sources at low-cost levels. * While the Merck program is specifically designed to open state programs for all MSD single-source products, the company declares that it is not attempting to freeze out products from other manufacturers. "In no case," the company asserts "will MSD support any proposal that will exclude the products of its competitors, since our overriding objective is to assure patients' equal access to medicines regardless of their source." However, the proposal can be expected to raise eyebrows throughout the industry as a lone-wolf action. Sen. Pryor anticipated that type of response commenting: "Merck will undoubtedly be criticized by other manufacturers for breaking up a united industry 'front' with its constructive initiative." Pryor encouraged Merck to view "sniping from one's competition [as] a sign that you must be doing something right." MSD is making its proposal with the power and leverage of its position as the leading U.S. pharmaceutical marketer (with between 9-10% of the current U.S. drug business). Because of its size and the extent of its patent protected line, Merck has the potential to attract state programs. MSD also is in such a strong, and undiscounted, position with the private market segment that it can afford to take relatively small losses from discounting the state programs. MSD has a tightly managed one-price policy for the private business, including large HMOs and buying groups. Companies that are actively discounting to large private sector buying groups would be in a more difficult position if they tried to match, and made public, "best prices" to state programs. The MSD proposal may also make the coordinated industry arguments against state programs, primarily those mounted by the Pharmaceutical Manufacturers Association, more difficult to sustain. PMA's arguments have focused on such issues as cost effectiveness of drugs and the cost to state programs from inappropriate utilization controls (see related story, page 7). Those arguments are less appealing if the largest U.S. drug company is willing to talk about discount prices. MSD's implicit acknowledgement of the necessity of a price break for strapped Medicaid programs also may undercut PMA's arguments. Observing that the drug industry has come in for political attacks for having private sector prices below Medicaid levels, MSD contends that there have been good reasons for those discrepancies. Merck declares, however, that "there is still the overriding sense that Medicaid programs for needy Americans deserve the best prices available in the marketplace." MSD continues to support some of the traditional industry positions on pricing. It explains the discount offer with a classic reference to the reinvested profits. "MSD benefits because its products are not barred from use through various restrictive formularies," the April 19 advisory paper says. "The public benefits because this helps maintain important research so critical to future health care." The current MSD discounts for single-source products are believed to range up to about 15% below the company's current direct prices. Pepcid, which faces the multi-brand competition in the H2 antagonist category, appears to carry a current 15% discount at the DPSC price to Merck's February 1990 direct price. Merck's prices were increased as of April 1. The Pepcid federal government discount is not representative of the company's overall discount policy. It is probably higher than most MSD single-source best prices because of the competitive category and the date of the contract. The Pepcid price reportedly was negotiated over three years ago and the size of discount to the current price has crept up over the length of the contract. The Veterans Affairs Department Pharmaceutical Products Division Chief Dennis Styrsky described a range of current industry discounts to his program during a hearing chaired by Sen. Pryor last summer ("The Pink Sheet" July 24, p. 5). That range of discounts ran from 22% to 90% off average wholesale price for single-source products. Calculated off the AWP for Pepcid, the DPSC price is now discounted closer to 30%. MSD does not publish an AWP price. That price is constructed by Red Book through its surveys and recalculations. MSD will offer the Medicaid discount through "equalization" payments made by the company to the states on a "quarterly basis, or less frequently if preferred by the state." MSD noted that it has concerns about the reliability of Medicaid utilization data but said it "will work with state officials to arrive at a mutually agreeable procedure for assuring data accuracy prior to implementation of the plan." The company is beginning to contact state Medicaid officials and legislators about the program. The company has drafted a model bill, one version designed for California, to suggest legislated changes where necessary to implement the discount program. The California model bill is written to encourage manufacturers to "cooperate" by "permitting Medi-Cal to have the benefit of their best prices." The suggested bill states: "the legislature intends that this overall objective be achieved by including in the Medi-Cal Drug Formulary, in addition to any drugs included pursuant to the existing provisions of law, all single-source products of any manufacturer that has agreed to make an equalization payment to the State of the difference at any point in time, if any, between the price available from the manufacturer to its wholesalers and the lowest price available to any customer in the U.S." A potential attack on the MSD program could arise from its noblesse oblige nature. Merck, in essence, is saying it is willing to break up the stalemate between state programs and the brandname companies to strike a deal that it determines to be good for the commonweal and Merck. That approach is similar to a deal that Merck spearheaded for the drug industry in Canada several years ago. That deal attempted to get a temporary relaxation of compulsory licensing requirements in return for a commitment by the drug industry to increase investment in R&D conducted in Canada. Merck's Canadian operations at the time were headed by John Zabriskie, currently the MSD president in the U.S. Merck has been living up to its part of the Canadian deal and is just finishing a major R&D building campaign for a respiratory therapy center at its Merck-Frosst headquarters in Montreal. The attempt to shape a trade of interests in the larger and more complicated U.S. political arena may be more difficult for Merck than its experience in Canada. Pryor, for example, immediately tried to keep pharmacy away from support for the plan. He pointed out "the Merck proposal is notable for what it does not do." Pryor maintained "it does little to help the beleaguered community pharmacist, who is being squeezed by rising wholesale prices and decreasing government reimbursement."
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