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Executive Summary

A Medi-Cal state chargeback plan for drug discounts was introduced in the state legislature by Sen. Maddy (R) on May 22. The bill, SB 2451, has the support of the California Department of Health Services. SB 2451 "would eliminate the provisions regarding the Medi-Cal drug formulary, and would instead authorize the department to contract with manufacturers of drugs on a bid or nonbid basis" for each therapeutic category, according to the bill. The contractual agreements do not apply to pharmacies. The bill is scheduled for a hearing in the California Senate Health and Human Services Committee on May 30. Pennsylvania has a similar bill that would require manufacturers that sell pharmaceuticals to the state to offer their best prices. Because Pennsylvania currently has an open formulary, the state is expected to accept Merck's offer of price rebates in exchange for full access. California's recently established Drug Discount Program recommended that the department support the chargeback plan after considering four alternative approaches to drug discounts. The other three alternatives considered by the state program were a "brokerage" direct volume purchasing plan ("The Pink Sheet" April 30, T&G-4), a stock replacement plan and a wholesaler chargeback plan. The drug discount program expects to issue a report on the chargeback plan in the next two weeks. The California bill is the type of program that Sen. Pryor (D-Ark.) is looking to encourage with the Medicaid drug purchasing legislation he introduced on May 10. The Pryor bill would require drug manufacturers to negotiate reduced prices for supplier contracts with state Medicaid agencies ("The Pink Sheet" May 14, p. 3). The Maddy bill is strongly opposed by the Pharmaceutical Manufacturers Association. The Maddy proposal states that drugs included on the Medi-Cal formulary "as of Jan. 1, 1991 shall be included on the list of contract least until the respective therapeutic category has been reviewed." Manufacturers of drugs in selected categories will be notified about the opportunity for bidding by the department. If no contract has been executed for a drug on the contract list after 120 days of notification, the department may delete the drug from the list. Drugs in selected categories will be retained on the list or may be added to the list if contracts are executed within 120 days. Under the bill, the department would be permitted to establish different contracting schedules for single-source and multiple-source drugs within a given therapeutic category. The department is instructed to "complete the initial contracting process for each major therapeutic category by Jan. 1, 1994." Medi-Cal would be seeking from manufacturers either the manufacturers' "best price," a negotiated price or the lowest price made available by the manufacturer to other classes of trade or entities. Medi-Cal contracts are to provide for an "equalization payment amount" to be remitted to the department quarterly. The bill explains that the "equalization" amount is the difference between the purchase price and the amount "negotiated between the manufacturer and the department for reimbursement by the manufacturer." The department is directed to submit an invoice to each manufacturer for the equalization payment amount, based on utilization data from the department's prescription drug paid claims. Under the bill, Medi-Cal will not reimburse for a drug that "is found to be overpriced in comparison with another drug which has an equivalent therapeutic effect, unless the director [of Health Services] determines that the drug is vital to the program and no acceptable substitute is found." Recommendations on a drug's therapeutic equivalence to other drugs or on whether a therapy is vital to the program will be made by a Medi-Cal Contract Drug Advisory Committee, formed to replace the existing Medical Therapeutics and Drug Advisory Committee. Manufacturers of single-source drugs denied a contract may file an appeal, which will be reviewed by the Contract Drug Advisory Committee. The new committee will also be responsible for reviewing drugs in the list of contract drugs and writing recommendations to the director on the addition or deletion of a drug from the list. The committee is to include at least one physician, one pharmacist and one pharmacy school member. A separate bill sponsored by Maddy was amended May 17 in the California Assembly to allow Medi-Cal to accept the April 19 proposal by Merck to make its federal government contract discount prices for single-source MSD products available to any state Medicaid program ("The Pink Sheet" April 23, p. 3). Originally introduced March 9, another Maddy bill (SB 1218) was amended in the state assembly's Ways & Means Committee on May 17 to incorporate the Merck proposal. No further hearings have been scheduled. Under that bill, Medi-Cal would continue to operate with a formulary system. Maddy's SB 2451 would replace the formulary. SB 1218 would add single-source drugs to the Medi-Cal drug formulary if the manufacturer or distributor of the single-source drug contracts with the state to pay an equalization payment if the cost "exceeds the lowest price the manufacturer has made the drug available to any customer in the United States." The bill also would authorize "the addition of those single-source drugs to the Medi-Cal formulary without the procedural requirements applicable to other drugs." Pennsylvania's legislature will consider a bill, also introduced May 22, to require that manufacturers that sell pharmaceuticals to the state to match the best price they offer any other customer. The legislation was introduced for Governor Casey by state Rep. Bill DeWeese (D-Green County). The state's Medicaid program is expected to accept Merck's offer for price rebates. Pennsylvania, unlike California, has an open formulary and therefore does not sacrifice added expense involved in paying for drugs currently restricted. Pennsylvania also asked Merck to extend its offer to the state's Pharmaceutical Assistance Contract for the Elderly (PACE); Merck declined. The firm presumably believed that extending the price discount offer to PACE would establish a precedent requiring Merck to extend the offer to non-Medicaid programs in other states.

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