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Executive Summary

"Best price" Medicaid drug proposals offered by Merck and Pfizer could provide workable points-of-departure for federal legislation, Sen. Pryor suggested in an Aug. 30 letter to Senate Finance Committee Chairman Bentsen (D-Texas) and other members of Congress. Pryor's letter is less than a full endorsement for the Merck and Pfizer plans, but it does highlight them as Pryor's favorites among the various plans being offered to the state Medicaid programs by individual drug companies. While expressing reservations about the Merck and Pfizer plans, the Senate Aging Committee chairman said: "The only drug manufacturer plans that should be seriously considered by Congress are those that offer the Medicaid program the 'best price' or the 'lowest price' that the manufacturer makes available to any other purchaser of its drug products." The Glaxo and Upjohn plans recently offered to several states were rejected as legislative models by Pryor. Those plans "simply do not" offer the states the best prices available from those companies, Pryor contended. They are "non-starters" as legislation, he declared. Pryor's Aug. 30 letter was accompanied by an analysis of proposals that have been offered by Merck, Pfizer, Glaxo and Upjohn as alternatives to S 2605, Pryor's Medicaid drug pricing bill. [EDITORS' NOTE: See box p. 12 for a summary of Pryor's analysis of how each of the existing private plans measure up against his objectives for Medicaid drug legislation.] (NEW LINE) (NEW LINE)SEN. PRYOR CRITICIZES MEDICAID DISCOUNT PLANS OFFERED BY FOUR FIRMS This chart is reproduced by "The Pink Sheet" from material distributed by Sen. Pryor's Special committee on Aging on Aug. 30. The letter and enclosure were sent to all members of the Finance Committee, the leaders of the budget committees and House Energy & Commerce/Health Subcommittee Chairman Waxman (D-Calif.) and Ranking Republican Madigan (Ill.) Cryor's attention to the private Medicaid discount plans over the last several weeks indicate that they have worked as political moves to take the initiative away from the Aging Committee chairman. The existence of the plans (and the fact that some are already in place with a number of states) means that Pryor cannot dominate the debate on Capitol Hill but must deal with the company alternatives. Another complicating factor in the upcoming discussions of Medicaid drug savings is the role of HHS. The Health Care Financing Administration (HCFA) is close to introducing a revision of the Office of Management & Budget Medicaid drug savings plan (see related story, p. 10). The HHS and OMB plans also make Pryor's leadership position in the debate more murky. In his recent analyses of the private discount/rebate plans, Pryor said that "the very serious and obvious problem" with the Merck and Pfizer proposals "is that the manufacturers have control over the 'best price' on which the discounts would be based, and could easily eliminate the 'best price' over time." To illustrate his concern about maintaining discounts, Pryor pointed to a recent problem reviewed by the Senate Judiciary/Subcommittee on Antitrust, Monopolies and Business Rights on rebates for infant formulas. "After a few years of drug manufacturers' offering a program of substantial rebates to states for infant formulas -- up to 80% off the retail price -- drug companies tried to push prices higher in 1989 for these formulas and negate the value of the rebates," he said ("The Pink Sheet" Aug. 27, T&G-17). The Merck and Pfizer plans include phase-in periods during which firms may have the opportunity to raise their low prices before the discount program begins. Pryor has previously stated that Medicaid legislation will need some mechanism for guaranteeing that manufacturers do not eliminate their best prices from the marketplace and thereby effectively get rid of their discount offers to the states at the same time. Pryor also suggested that a national plan should include a component forcing competition between firms -- S 2605 is based on competitive bidding. The avoidance of a bidding situation appears to be one of the foundations of the Merck "best price" proposal from which all the other plans have developed. "It seems clear to me," Pryor said, "that any estimator, particularly [the Congressional Budget Office] and [the Office of Management and Budget], will have a difficult to impossible time projecting significant savings from non-competitive proposals. That is because free rein is given to drug companies to reduce or eliminate the discounts they are suggesting they will continue to voluntarily give (as is the case in every single one of the four companies' alternatives)." CBO is preparing final estimates on S 2605. The budget analysts have further been asked to calculate the potential savings from alternatives to his bill, including the relative savings provided by each company proposal. In a preliminary report on S 2605, CBO estimated the bill could save $1.6 bil. over five years. Pryor is planning to develop an alternative bill to S 2605 for introduction just before Rep. Waxman's Sept. 14 hearing on Medicaid. That bill also is likely to be discussed at the Sept. 17 hearing before the Senate Finance/Subcommittee on Health for Families and the Uninsured. In a response to Pryor's analysis, Pfizer maintained that its proposal "will produce significant Medicaid savings." Pfizer asserted that "there is no basis for assuming that the Veteran's Administration and others will not continue to receive substantial discounts. The market forces that have produced these discounts will continue to operate." The firm maintained that "under this 'market-based' approach, Medicaid savings will be achieved with a minimum of new administrative procedures and costs." Pryor raised a question about the all-or-nothing requirement in each of the private discount plans. Those parts of the deals link Medicaid discounts to open formularies for all of a company's single-source products. Pryor maintained that one company -- Merck -- has not been enforcing that part of its plan. "We have evidence from states that have already signed an agreement with Merck that the company is not forcing all states to put all their single source drug products on the state Medicaid formulary as a condition of providing the 'best prices'," the Pryor analysis said. "This fact is very important because all the manufacturers' proposals contain this requirement." Merck and California have been tight-lipped about the actual start-up date for calculating discounts -- whether it was triggered by California's coverage of Mevacor or whether Merck would wait until all four excluded Merck single-source products were added to state coverage. In his analysis of the Glaxo plan, Pryor maintains that the company's proposal to offer Medicaid the prices paid by Independent Practice Association model HMOs is unworkable on a national scale because many manufacturers are not set up for such a pricing system. The Glaxo proposal would provide rebates to reduce Medicaid prices to levels paid by HMOs that contract for pharmacy services -- but not to the company's lowest pricing levels, such as the prices paid by large nonprofit hospitals that receive and warehouse shipments from the company. Pryor contended that Glaxo's "rationale" for the plan is to avoid giving Medicaid the "deep discounts" it provides to the Veterans Affairs Department. "The company gives deep discounts (about 67% off retail) to the DVA on its number one selling drug, Zantac. It apparently does not want to extend these same 'best prices' to the Medicaid program on this or any other drug that it deep discounts," Pryor observed. He added that under the Glaxo approach, "manufacturers would be able to raise or eliminate their 'best prices' over time like the Merck and Pfizer plans." Commenting on the Pryor statements, Glaxo said that its proposal provides Medicaid the "best price" offered to "similar customers -- those that don't take delivery of our products." The firm emphasized that such customers do get "significant discounts." Glaxo's offer to the states is probably the largest of the four plans in terms of percentage discount. Upjohn's flat rate earned discount drew the sharpest criticism from Pryor. The senator suggested that the Upjohn proposal would be the least workable on a national level. Upjohn is offering rebates of $1.36 per Medicaid prescription filled with any Upjohn product except Rogaine. "By any measure," Pryor stated, "Upjohn's plan is a poorly thought out and totally unacceptable plan." Pryor said that Upjohn's plan would not work across the board for a wide range of manufacturers. Taking the Upjohn approach to "its logical conclusion," Pryor contended, "it is absolutely unfair to ask a manufacturer of a much less expensive and competitively priced generic drug to rebate the same amount" that a manufacturer of a "much higher priced" drug would pay. Pryor urged the establishment of penalties for manufacturers that attempt to "game" the new system. For example, he said, "a small manufacturer with one or two drug products might give states their 'best prices' for a year or two in order to get their products on state formularies, knowing they would not renew the agreement after expiration." The manufacturer contracts signed to date have generally been for a one-year period. "Restitution" for pharmacists' reimbursement cuts should be included in any federal Medicaid plan, Pryor maintained. "The current system of reimbursement produces an average loss of 8% on retail pharmacy's Medicaid business," the analysis states. "Pharmacists should receive restitution for the draconian cuts inflicted on their reimbursement over the last 10 years in any final plan enacted," Pryor said. Like Glaxo, Pryor said, "Upjohn is also a deep discounter, and does not want to provide these similar discounts to Medicaid. On its popular drug Motrin, the difference between the Medicaid price and the [VA] price is about 62%." Pryor also wants to extend the best price discounts to brand products in multi-source categories. Pryor says that the "focus of drug cost containment in the Medicaid program should be on 'single source drugs' and 'innovator multi-source drugs'." The two categories "are the highest-priced products in the market and have been the primary cause of unchecked drug price inflation over the past decade," Pryor said. Noting that the four private plans exclude innovator multiple source products, Pryor argued: "It is essential to include these products in any rebate plans developed because almost all manufacturers of single-source products also have a substantial number of high-priced [brand products in multi-source categories] in their product mix for which Medicaid incurs significant expenditures." "Restrictive prescriptions," or those that indicate "brand medically necessary," contribute to the substantial Medicaid expenditures on innovator multiple source drugs, Pryor noted. Such prescriptions essentially create a "single source of supply," he maintained. Pryor also urged establishing a "minimum rebate" on single-source products and new drugs "because manufacturers' discounts or rebates on these products are relatively small for the first few years after introduction to the market, especially if there is no therapeutic substitution." Chart omitted.

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