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Executive Summary

Sen. Pryor's (D-Ark.) latest bill to obtain manufacturer rebates for prescription drugs under Medicaid caps discounts available to states at 25%. The legislation, dubbed "Pryor II," was introduced on Sept. 12. Like the House version (HR 5589), introduced the same day by Reps. Wyden (D-Ore.) and Cooper (D-Tenn.), Pryor II (S 3029) requires that the total aggregate value of the discount arrangement for each manufacturer cannot be less than 10% of total state expenditures attributable to the average price for all of a given manufacturer's drugs. However, the Wyden-Cooper bill, according to a summary of the legislation, takes a different approach to capping manufacturer discounts than the Pryor bill. While Pryor II sets a permanent 25% cap on the total amount that the manufacturer will be required to rebate, the Wyden/Cooper bill provides a transition to best prices, a summary of the bill states. The House bill sets a "discount ceiling for each manufacturer of 25% [that] would be established for the first two years, increasing to 50% for years three and four, and achieving full 'best prices' for the Medicaid program by year five," the summary explains. The divergent discount caps represent one of only a few differences between the House and Senate bills. Another difference is that while Pryor II, as anticipated, contains provisions for enhancing pharmacy reimbursement under Medicaid, the House bill does not. Pryor II provides for a restoration of pharmacy reimbursement cuts and reforms the Medicaid pharmacy reimbursement system. The bill restores some of the cuts that have been made in pharmacy reimbursement over the past decade by setting aside 10% of the rebates received each year by the state. According to the summary, "pharmacies will receive a fixed rebate for each prescription that they dispense to Medicaid beneficiaries in an annual lump sum payment." Pryor' first Medicaid drug bill (S 2605) would reimburse pharmacy at actual charges capped at the 90th percentile. Pryor II also would require states to perform an annual cost-of-dispensing study to update pharmacy dispensing fees. In addition, the measure would place a two-year moratorium on further reductions in drug product cost reimbursement for brandname drugs and change the federal upper limit on non-innovator multiple source drugs from 150% of the lowest average wholesale price (AWP) to the average AWP. The bill additionally would instruct HHS to develop a "look-behind" program to provide better enforcement of the Health Care Financing Administration's "brand medically necessary" requirement, which is designed to promote generic substitution. Both bills "allow the Medicaid programs to pay no more than the lowest price in the market as of Sept. 1, 1990, indexed by the Consumer Price Index," according to a joint press release issued by Wyden and Pryor. "The fact is that drug companies are taking Medicaid to the cleaners," Wyden said in introducing the bill. "Drug companies are gobbling up scarce government dollars for the poor by charging prices far in excess of what private purchasers pay." At a Sept. 14 hearing held on the bills by the House Energy & Commerce/Health Subcommittee, Chairman Waxman (D-Calif.) praised Pryor for raising and pursuing an issue that has already seen results in the form of voluntary price rebate programs by the industry. "You've already brought about change from an industry that is not known for its flexibility," said Waxman, whose Health Subcommittee held pharmaceutical pricing hearings without similar effect in the 100th Congress. Rep. Wyden told Pryor, who testified at the hearing, that S 3029 "is an indication that you are willing to walk the extra mile to be reasonable." Wyden and Cooper pointed out at the hearing that the senator responded to concerns about S 2605 by deleting from Pryor II any provisions for therapeutic substitution, therapeutic equivalence or a national pharmacy and therapeutics committee. In response to a question from subcommittee Member Rowland (D-Ga.), a physician, Wyden and Cooper noted that the House and Senate bills would not restrict Medicaid recipients' access to pharmaceuticals but expand access by eliminating existing state formularies. Pryor's efforts have also spurred the Bush Administration. HHS reportedly has proposed a Medicaid drug price rebate bill. The department is said to have floated a "Merck-like" legislative proposal at the budget summit among Bush Administration and congressional negotiators at Andrews Air Force Base. Under such a proposal, manufacturers would be required to offer price rebates for their drugs to be covered by Medicaid. The rebates would have to be sufficiently large to reduce the price to state Medicaid agencies to the level of prices paid by firms' most favored customers, e.g., large nonprofit hospitals. The Office of Management & Budget previously proposed legislation, but it withdrew the proposal after HHS Secretary Sullivan objected to its therapeutic substitution provisions. * Introducing his bill on the Senate floor Sept. 12, Pryor emphasized that it is not a substitute for his original Medicaid drug pricing bill (S 2605), which requires manufacturers to bargain with Medicaid over drug prices. "There is no need for a substitute for state-of-art medical care and $1.6 bil. in savings over five years," Pryor said. CBO has estimated that S 2605 would save $1.6 bil. over five years. The new bill "is simply another option that can be considered by this Congress as a true way to save money" for Medicaid. Pryor II defines a manufacturer's "best price" as the "lower of the 'best price' in the marketplace during the calendar quarter in which the drug is dispensed or the 'best price' in place in the market as of Sept. 1, 1990, indexed to the Consumer Price Index," according to a summary of the bill. S 3029 differs from S 2605, Pryor's original bill, in that it does not specifically define the discount to be offered to Medicaid or include assurances that the discount would be continued at a certain level over time. Under Pryor II, a manufacturer is required to provide Medicaid its "best price," or "the same substantial discounts it is now giving to other purchasers of its medications" in order to be placed on the state's covered drug list. The bill summary notes that "many manufacturers are providing in excess of 40 to 60% discounts to hospitals, HMOs, the Department of Defense and the Department of Veterans Affairs for the very same drugs purchased by Medicaid." The indexing mechanism, the summary explains, "is absolutely necessary because cost estimators, such as CBO and OMB, are highly unlikely to project significant savings for any proposal that would allow manufacturers to eliminate or significantly reduce current discounts." Some manufacturers that currently offer discounts as high as 60% are concerned that freezing such discounts would be prohibitive. To address that concern, the summary notes that under the bill "the total amount that the manufacturer will be required to rebate will be capped at 25% of the total state expenditures attributable to their drugs." The provision applies to single-source and innovator multiple-source drug products. For generic drugs, the summary explains, "the manufacturer is required to rebate a flat 10% of the total aggregate expenditures for all that manufacturers' drug products as a condition of Medicaid coverage." In addition, S 3029 would penalize companies that offer a discount to one state, but not all states by virtually banning such manufacturers from participating in any state programs. "If a manufacturer fails to give such discounts to any one state, no federal matching dollars will be provided for that drug manufacturer's medication in all states," the summary states. In a provision that appears directed at products such as Sandoz antischizophrenic drug Clozaril, the new bill would not require Medicaid plans to cover drugs that are sold with a package of associated tests or services "as a condition of sale" by the manufacturer.

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