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MERCK ALTERNATIVE TO MEDICAID "BEST PRICE" INDEXING IS TO INCREASE AVERAGE DISCOUNTS BASED ON AMOUNT PRICES EXCEED CPI, ZABRISKIE TELLS WAXMAN HEARING

Executive Summary

Merck's alternative to the "best price" indexing provisions contained in Medicaid drug price legislation sponsored by Sen. Pryor (D-Ark.) and Reps. Wyden (D-Ore.) and Cooper (D-Tenn.) is to increase the average manufacturers' price discount to Medicaid based on the amount that drug prices exceed the Consumer Price Index. Merck Sharp & Dohme President John Zabriskie expressed the company's opposition to the indexing provision in the latest Medicaid drug legislation (see p. 11) and offered the company's alternative at the House Energy & Commerce/Health subcommittee's Sept. 14 hearing on Medicaid. Zabriskie's comments at the hearing represented the firm's first public discussion of its approach to assuring Medicaid discounts in the face of price increases. In response to a question from subcommittee Chairman Waxman (D-Calif.) on whether Merck had an alternative to the indexing provision in the bills, Zabriskie said: "Merck believes that the way to handle that situation would be to increase the discounts by the manufacturers when prices increase faster than the Consumer Price Index by the amount of the excess over the Consumer Price Index." Under the Pryor (S 3029) and Wyden/Cooper (HR 5589) bills, Medicaid would pay no more than the lowest price in the market as of Sept. 1, 1990, indexed to the CPI. In other words, the bills propose indexing the manufacturers' "best price" to the CPI. The indexing provision is an attempt to guarantee that company discounts to Medicaid are not eroded over time by price increases. Merck's legislative plan is characterized as guaranteeing a minimum savings to Medicaid of 10% on drug ingredient costs. The company is now proposing that that the amount that average drug price increases exceed the CPI could be added to the rebate already provided by the 10% discount. For example, if the average manufacturer's price was $100, the minimum rebate under the current Merck plan would be $10. Applying the inflation adjustment formula, if the CPI increased only 5% and the manufacturer raised the price 10% to $110, Medicaid would get back $11 plus the difference between $105 (the correlative to the CPI) and $110 or $5, making the total rebate to Medicaid $16. In his testimony for the hearing, Zabriskie expressed strong opposition to indexing "best prices." Commenting on the Pryor and Wyden/Cooper bills, he said: "Of great concern to us -- and a feature we will strenuously oppose -- is indexing each product's current best price to the Consumer Price Index." "This would amount to price controls," Zabriskie contended, "and would be unfair to those several manufacturers that currently provide large discounts to certain limited markets." Merck is suggesting a system that could give Medicaid larger rebates in inflationary situations in order to keep the government out of the company's overall pricing policy. In separate testimony, Glaxo opposed the "best price" Medicaid reference price used in the two bills. According to prepared testimony delivered by Glaxo Exec VP Robert Ingram, "although the 'best price' may be reasonable for a few companies, we believe for the industry as a whole, it is not a fair standard." Noting that for most firms, the "best price" is the price paid to the Veterans Affairs Department, the firm continued: "for many manufacturers including Glaxo, the federal prices are dramatically lower than prices we quote to any commercial customer." Glaxo proposed that Congress allow individual manufacturer contracts with Medicaid agencies to continue without imposing a specific plan for discounts. "We suggest that Congress issue a broad legislative directive to the states to achieve savings in the state drug budget during the coming year," he said. "Such a directive would allow each state Medicaid agency to achieve savings in ways most appropriate to the individual state. Each state could be directed by federal legislation to demonstrate the amount of its savings to the federal government."
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