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Executive Summary

Merck's Mevacor will pick up over $20 mil. in Medicaid business from the state of California during the the term of the company's "best price" rebate contract with the state, according to testimony by the state to Rep. Waxman's Sept. 15 House health subcommittee hearing on Medicaid. The addition of the Merck lipid-lowering agent appears to far outweigh the state savings from other Merck products over the period of the contract. The state and company have previously estimated first-year equalization payments from Merck of about$2.8 mil. The lowest projected average annual Medi-Cal volume for Mevacor is about $4 mil., based on a five-year deal. Merck and California have not disclosed the length of the contract. However, Medi-Cal says all of its current contracts are for three to five years. The financial risk that California is taking with the Mevacor coverage is highlighted in the state's testimony to Waxman. The state indicated that the first four contracts with drug manufacturers have created a balance between program savings ($26.7 mil. over the terms of the contracts) and added costs from newly covered products ($25.3 mil.). Medi-Cal Drug Discount Program Director Jim Parks noted, however, that the virtual trade-off between savings and the costs of newly-added products does not include the big added expenditures for Mevacor. California's testimony appears to confirm a cynical view within the trade that Merck's initial "best price" offer was a short-term profit plan in the guise of a political maneuver to protect open markets for the drug industry. The company maintained when it made the offer that it would suffer losses in the short-term from the discounts. For the discount programs to represent a long-term savings, California will have to extract net savings from deals with other manufacturers. The state is apparently well on the way to achieving that goal. The Medi-Cal program has confirmed two more deals: signing contracts with Searle Sept. 11 and Syntex Sept. 12. In addition to Merck, the state has an existing agreement with Glaxo. In return for the Searle price discounts, Medi-Cal has agreed to cover four products: the calcium channel blocker Calan SR 180 mg, which had earlier been covered only in the 240 mg form; the anti-ulcer drug Cytotec; the beta blocker Kerlone; and the oral contraceptive Demulen 1/35 (ethylnodiol diacetate/ethinyl estradiol), previously covered only in the 1/50 formulation. Details of the Syntex agreement have not been disclosed, but the discounts to the state could be substantial. In a chart attached to his testimony, Parks noted that the differences between the current Naprosyn prices to the state and the Veteran's Administration range from 91% to 115%. Medi-Cal clearly was aware of these large savings potential in talks with Syntex. * Parks told Waxman that Medi-Cal has reached a "conceptual agreement" with three additional firms, and has scheduled "formal negotiations" with another four. Also, four "preliminary meetings" are scheduled with other firms. Outlining general characteristics of the four contracts inked thus far, Parks said further that discounts "vary from being very low to offers of 'best price' on individual drugs;...and all contracts have resulted in the addition of at least some drugs to the list of contract drugs." Other features are that all of the contracts "have provisions which assure that discounts do not shrink through the normal process of price increases; and...all discounts are achieved through a rebate mechanism that does not require any kind of direct drug purchase and/or redistribution mechanism." * On the federal level, Parks opposed any provision that a Medicaid agency must agree to make all of a company's products available in order to be eligible for proposed discounts. "That is not to say we may not, in the negotiation process, agree to add all of a company's existing single source products, or to favorably or expeditiously review new FDA product approvals; just that as a manufacturer's condition of being eligible for a rebate, it is not an appropriate requirement for states with formularies," Parks written testimony asserts. "I would point out that our contracts do not adopt these policies." Parks continued to support federal legislation for Medicaid drug discounts as "appropriate, and probably even necessary." He outlined the three guidelines that "may be sufficient" if incorporated in federal legislation. The first is that "all state Medicaid agencies should achieve some minimum aggregate level of discounts from pharmaceutical manufacturers." Second, as suggested before, states "should have the flexibility to have a formulary or not, so long as drugs not readily available remain obtainable through some type of exception (prior approval) process." Finally, states "with an existing mechanism for obtaining discounts from pharmaceutical manufacturers should be allowed to retain their program as long as they meet the conditions specified above," he advised the subcommittee.



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