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Executive Summary

Pharmaceutical manufacturers would offer their best prices to state Medicaid agencies in exchange for open formularies under federal Medicaid proposals being floated by Pfizer and Merck. Glaxo is proposing federal legislation requiring companies to give Medicaid price discounts that match those offered to "analogous" health care providers, like HMOs, that contract for pharmacy services but do not take delivery and distribute prescription drugs. Upjohn has forwarded to the Pharmaceutical Manufacturers Association for discussion purposes a formula to provide per-prescription rebates to Medicaid. The proposals, some of which have been floated to the Office of Management & Budget and in Congress, have been developed by companies looking for a more palatable alternative to legislation offered by Sen. Pryor (D-Ark.) and the Office of Management & Budget. The appearance of company-proposed federal legislation indicates the increasing likelihood that a congressional budget reconciliation measure will include some form of manufacturer rebates for Medicaid prescription drugs. The idea was first proposed during the spring in Pryor's "Prudent Purchasing Act" (S 2605). However, the chances that the federal government would mandate Medicaid drug discounts improved dramatically when OMB adopted a form of the bill in an Administration budget proposal ("The Pink Sheet" June 25, p. 3). The emerging likelihood of industry discounts for government purchases is the type of news that will be greeted unfavorably by Wall Street, where price reductions quickly will be translated into short-term profit reductions. However, if the industry can play an active role in determining the gradual phase-in of pharmaceutical cost-control mechanisms, the "Street" may interpret the resulting legislation as a policy victory for the industry in the longer term. PMA's official position on Medicaid rebates is still staunch opposition. The board's Medicaid committee met in New York July 20 and discussed the Pryor and OMB proposals again by teleconference July 24. The committee has referred the issue to the full board, which will meet Aug. 1. A Pfizer draft proposal now circulating in Washington would require best prices. A July 19 document describing the "key concepts" of Pfizer's Medicaid proposal says that "states would be required to have an 'open Medicaid drug formulary,' and companies would be required to charge state Medicaid programs best price given any U.S. purchaser." The details of the proposal are subject to change in further negotiations. Under Pfizer's proposal, the "best price" provision would become effective in 1992 after a transition year to provide the opportunity for states with closed formularies to enact legislation to open them. In 1991, companies would provide discounts of up to 15% only to states with open formularies, under Pfizer's proposal. "Effective upon enactment," the draft stipulates, "in states with an 'open Medicaid drug formulary' companies would be required to charge best price given any U.S. purchaser, with a maximum discount limited to no more than 15%." The initiative taken by a few firms to steer developing legislation in a less objectionable direction, rather than stonewall it, is reminiscent of strategy taken in 1984. Anticipating legislation to facilitate approvals of generic versions of post-1962 drugs, Pfizer was one of the firms that participated very early in the legislative process to influence what became the Drug Price Competition/Patent Term Restoration Act. Although the legislation underwent many transformations on route to enactment, it retained a transition period offering 10 years' exclusivity for drugs first approved from Jan. 1, 1982 to Sept. 24, 1984. The provision was commonly referred to as the "Pfizer amendment"; Pfizer's calcium channel blocker Procardia (nifedipine) was first approved in 1982. The company originally had lobbied to have the transition period include 1981 so that it would also protect its nonsteroidal anti-inflammatory drug Feldene (piroxicam). Merck, which has made an offer to state Medicaid agencies for discounts off its product prices, has sent to Capital Hill and to OMB proposed legislation for a national, industry-wide Medicaid price discount program. The Merck proposal differs from the Pfizer concept in that it is voluntary. However, companies that do not offer price discounts could be excluded from the Medicaid program under the Merck plan. States that do not receive rebates from a company are ineligible to receive matching funds for Medicaid from the federal government if they reimburse for that company's products. However, the Merck proposal offers an exception: a state could continue receiving matching funds even though it reimburses for a product at a nondiscounted price if the state considers the product "medically necessary." Although a company's offer of rebates would be voluntary under the proposal, the specter of losing national Medicaid business would provide a powerful disincentive to a decision not to offer price discounts. Medicaid accounts for 10%-15% of prescription drug sales across the industry. Merck's plan includes a multiple-year transition period. Companies would have to offer price discounts of 10%-15% in the first two years after enactment, 20% in years three and four and 25% in year five. In subsequent years, companies would be required to offer their best price to participate in the Medicaid program. Because Merck offers modest price discounts under its single-tier pricing policy, the firm has little to lose in offering Medicaid best prices nationwide. Nonetheless, the length of Merck's proposed phase-in would give other companies time to moderate their best prices, that is, to lessen the deep discounts given to large nonprofit hospitals. Industry observers have speculated that the abolition of multi-tier pricing -- pushed by pharmacy and legislators like Pryor and Rep. Brooks (D-Texas) -- would result in hospitals paying more and charging patients more for prescription drugs. Merck is already offering price discounts to states individually. As of July 26, 21 states have formally accepted Merck's Medicaid offer and another 12 states appear ready to do so. Sen. Pryor is said to have questions about the company proposals. He reportedly believes S 2605 is preferable because it allows each manufacturer to cut its own deal with each state and does not force the industry into a one-size-fits-all rebate formula. Furthermore, although the Pfizer and Glaxo drafts require company rebates and firms would sacrifice all Medicaid business under Merck's plan if they do not, Pryor apparently prefers his system of incentives for state negotiations. Pryor reportedly is concerned that the elimination of all of a company's products due to an unwillingness to participate in the rebate program would penalize Medicaid patients. The Pryor bill was discussed at a July 25-26 meeting of state Medicaid pharmacy administrators in Chicago. Attendees reportedly indicated general support for the legislation but specified two problem areas: they consider the 90th-percentile pharmacy reimbursement scheme too generous, and they oppose mandatory coverage of all FDA-approved drugs and indications. Upjohn has forwarded to the Pharmaceutical Manufacturers Association for discussion a skeletal plan regarding federal Medicaid drug price legislation. Upjohn's idea is that companies would provide each state with quarterly rebates based on the volume of Medicaid prescriptions. For each prescription dispensed by a state in the quarter, the state would receive .72 plus 10% of the state's dispensing fee. The .72 component of the payment represents the average per-prescription administrative cost for state Medicaid agencies. Upjohn estimates that the formula would provide states a rebate of .98 to $1.15 per prescription. Medicaid covered 221 mil. prescriptions dispensed in 1989. With an average rebate of $1.10 per prescription, the Upjohn plan would have saved Medicaid $243 mil. nationally in 1989. The four company proposals have two elements in common: they have open formularies and avoid therapeutic substitution. The industry fears that the Pryor bill, like the OMB proposal ultimately would provide Medicaid reimbursements for only one bid-winning, "preferred" product within each therapeutic category of drug. The Pryor legislation currently provides for "at least one" therapeutic alternate within each category. Several drug manufacturers have offered Merck-like price discounts individually to states. Glaxo, which announced July 24 that it signed agreements with Texas and North Carolina, and Ciba-Geigy are two examples (see story, p. 6). Ciba-Geigy has curtailed discussions with the state Medicaid programs while it assesses the various federal proposals being floated. The shift of focus to the federal level indicates the industry's belief that the time has come for cutting losses and accepting price rebates with damage control provisions.

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