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Executive Summary

Merck's "best price" discounts for the California Medi-Cal program will go into effect when the state succeeds in adding four currently restricted MSD products to its formulary coverage. The state officially accepted Merck's single-source product discount offer on June 18 at a Sacramento press conference. The accord between the state and Merck was reached rapidly, almost two months to the day after Merck publicly disclosed its discount-for-open-formulary offer. The company began floating its discount program with a letter to state Medicaid directors on March 19. The four MSD single-source products not currently included on the Medi-Cal formulary are Mevacor (lovastatin), Dolobid (diflunisal), Losec (omeprazole), and Noroxin (norfloxacin). Mevacor, the short-term impetus behind MSD's discount offer, may be the easiest administratively for California to add. The product already has reportedly cleared the pertinent state advisory committee (the Medical Therapeutics and Drug Advisory Committee) which is a prerequisite for inclusion on the state formulary. The routes to coverage for the other three products are more problematic: Losec and one other currently excluded product have not cleared the committee. Merck has consistently downplayed the importance of getting Mevacor onto the state formulary as a motivation for the offer to California. However, the attractions of the potentially large lipid-lowering market for Medicaid patients is reflected by Warner-Lambert's simultaneous efforts to break a deadlock in the state on acceptance of its product Lopid (gemfibrozil). The company won a decision in California superior court on March 29 against the state's delay in implementing the recommendation to add Lopid to the formulary. Merck's June 19 announcement of the "best price" agreement says the accord will become effective July 1. The actual starting date for calculating the discount rebates, however, will occur later -- presumably after the state completes its listing procedures and notifications for the four restricted products. The discounts to the state on MSD single-source products will be effected through a rebate (equalization payment) plan. California will be assured that the ingredient cost that Medi-Cal pays will be no more than Merck's lowest current price (its DPSC price to the Defense Department). California estimates the first-year savings from Merck's discounts to the state at $2.8 mil. The state does not address the potential added costs from the four new MSD products that will be added to the state formulary. For the contract to represent a net savings to the state, California will have to use the Merck program as a lever for dealing with other companies. Merck has been careful to try to keep its program from becoming the first step in a competitive bidding program between companies. In fact, from the company's point of view, the nature of the discount program as an "offer" from Merck to the state and not as a "bid" in response to state pressure has to be considered one of the strong points. Merck will continue to maintain control of its price and will, in effect, be negotiating with only one party, the DPSC. The contract is described as a multi-year agreement. Both parties have the ability to opt out of the contract under limited circumstances. To keep its offer from deteriorating into a competitive bidding arrangement, Merck has said that it will stop the discount program in a state if that state acts to delete the products of another manufacturer from a formulary based on Merck's discounts. The company has declared it will not participate in a program that "excludes the products of our competitors." "This agreement," California state health director Kenneth Kizer declared, "signals the beginning of a new era in California's approach to drug purchases for the California Medi-Cal program. It also provides a model for other states which seek to reduce their Medicaid drug program expenditures, and it may influence drug prices paid by Federal programs, as well." Kizer's role in the price negotiations in California may have an interesting long-term impact on the industry. He is one of a handful of prominent health officials who has been mentioned as a possible candidate for the commissioner of FDA (see related item, T&G-1). California maintained that the MSD discussions are paving the way for other price cuts. The state claims it is "holding similar negotiations with other pharmaceutical companies." When the Pharmaceutical Manufacturers Association board reviewed legislation based on the Merck offer in early May, at least three other companies indicated that they favor a discount approach to the Medicaid business. Those other companies were Bristol-Myers Squibb, Burroughs-Wellcome and Procter & Gamble. State Medicaid officials from several regions of the country indicate that a number of companies have been initiating discussions on pricing issues related to the delivery of drugs to the poor. Among the companies frequently mentioned by Medicaid officials in those discussions are Searle, Ciba-Geigy, Bristol-Myers Squibb and Schering. None of the companies will confirm the existence of special price discount discussions with the state programs. Searle notes that its product give-away programs for indigent patients act as a de facto subsidy of patients who might otherwise be in the Medicaid program. Searle has had the patient-in-need program to provide free products for indigent patients for about three years. The company recently added a new beta blocker, Kerlone (betaxolol), to its give-away program and its discussions with the states apparently focus on the value of those give-aways to patients who otherwise might be part of the Medicaid population. The Searle patient-in-need program now covers nine products. Similarly, Lederle recently has offered a high-visibility indigent give-away program for Suprax (cefixime) and could use that as a discount approach for Medicaid programs. Lederle is about to try to crack the difficult calcium channel blocker market with a sustained-release verapamil, Verelan, which might also be suitable for a program like the Suprax introductory promotion. Bristol-Myers Squibb reiterates its support for the Merck discount concept in principle. Bristol has to be cautious about the Merck offer and watch its effect on the ACE inhibitor class. If the acceptance of Merck's discount on Vasotec leads states to reconsider the ACE inhibitor class, Bristol may be pushed to respond to protect Capoten. Schering says it has "no comment" on discussions with state Medicaid agencies at the current time. Schering discount discussions would be particularly interesting for two reasons: (1) Schering-Plough President Richard Kogan is the current chairman of the PMA; and (2) because of Schering's branded competition with Glaxo in the asthma field; discounts by Schering could put pressure on Glaxo to consider discussions with the states. Ciba-Geigy indicates that it is still looking at the Merck program. The company disclaims any initial contacts on discounts for the Medicaid programs. Sen. Pryor (D-Ark.) noted the potential snowball effect of the Merck-California agreement in a June 19 comment. "Other states are in the process of attempting to negotiate similar agreements with this and other drug companies," Pryor said. The Arkansas Democrat further commented: "It is certainly unfortunate that most people familiar with the prescription drug industry already have concluded that most manufacturers won't offer similar concessions to government programs." Merck previously had reported the acceptance of its discount offer by Utah ("The Pink Sheet" May 31, p. 3). Other states close to acceptance at that point were South Carolina, Delaware and Arkansas. Florida, Massachusetts, Pennsylvania and Texas also are reportedly close to signing the agreement. Several states have been delayed from accepting the program because it is viewed as a contract with an individual manufacturer and requires legal review by the state contracting agencies. One state official, however, commented that Merck has made it very easy for the program to be accepted and has indicated that the program can be quickly cancelled and reinitiated if the circumstances require changes. * The California Health Department noted that in accepting the Merck offer administratively the state is adopting a discount program without tackling the challenges of the volume purchase and brokerage plans that were previously being considered. "The contract with Merck," the state said, "offers the Medi-Cal program the best price available to any other purchaser of drug products, and it does so without requiring [the state department] to purchase and distribute (i.e. 'take possession of') the drug products." Merck originally began pursuing the discount program through a legislative proposal in the California state legislature. The company says that it continues to pursue the legislation as well as the contractual agreement as a way to open up the state program to all new drug innovations. In the California state legislature, a bill (SB 2451) that would establish a Medi-Cal state chargeback plan for drug discounts is being amended to provide for the Merck contracts and any other manufacturer agreements executed before the bill's Jan. 1, 1991 effective date. The amendments will be introduced by the bill's sponsor, Sen. Maddy (R). To encourage further deals with the state, the amendment would establish a "grandfather clause" that would exempt from initial therapeutic category review by the state advisory committee any drug in the process of being added to the formulary under a contract executed prior to Jan. 1, 1991. Drugs under contract for retention in the contract drug list would also be "grandfathered." Another amendment to the bill will state that during the contract negotiation process, the Department of Health Services would not ask drug companies for prices that are lower than a manufacturer's "best price" to other classes of trade, organizations or entities. A third amendment sponsored by Maddy would expand the public hearing process prior to deleting drugs from formularies. Another amendment would add language assuring the timely processing of prior authorization requests for non-formulary drugs. Such requests are made by physicians or pharmacists for drugs not on the state formulary. Maddy announced he would sponsor the amendments at a June 20 hearing on the bill before the Senate Health and Human Services Committee. The amendments are being developed with the support of the California Department of Health Services. At the hearing, Maddy also noted that an amendment had been added to the bill establishing the legislature's intent "that the list of contract drugs contain a comprehensive mix of single-source and multiple-source drugs, sufficient to assure beneficiary access to appropriate drug therapies." Another provision added to the bill would require the department to report to the legislature after the first three major therapeutic categories have been reviewed and contracts executed. "The report shall include the estimated savings, number of manufacturers entering negotiation, number of drugs added and deleted, and impact on Medi-Cal beneficiaries," the amendment states. The Maddy bill would authorize the department to contract with manufacturers of drugs on a bid or non-bid basis for each therapeutic category ("The Pink Sheet" May 28, p. 8). The committee is scheduled to hold another hearing on the bill June 27.

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