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Executive Summary

HCFA is willing to allow drug manufacturers flexibility on individual drug product pricing but would like to see an aggregate price indexing mechanism to make sure that a manufacturer's product line, as a whole, does not increase at a rate above general inflation. At a Sept. 17 Senate hearing on Medicaid drug proposals, Health Care Financing Administration chief Wilensky indicated that HCFA is leaning toward comparing an overall index of each manufacturer's sole source product line to the Consumer Price Index to ensure that savings from discounts would not evaporate in future years. The HCFA testimony was presented to the Senate Finance/Health For Families and the Uninsured Subcommittee. The HCFA approach to indexing drug prices is more generalized than that being pushed by House and Senate legislation. However, it still may be interpreted by industry as a form of price controls. Under Sen. Pryor's (D-Ark.) second Medicaid drug bill (S 3029) and House legislation (HR 5589) sponsored by Reps. Cooper (D-Tenn.) and Wyden (D-Ore.), states would pay the lowest price in the market as of Sept. 1, 1990, indexed by the Consumer Price Index, or the lowest price currently offered. Wilensky told the subcommittee: "We can support a type of indexing," but said that tying individual drug prices to the CPI "sounds like a price control to me because it pegs a price at a given point in time and it increases it at a fixed amount over time." An example of an indexing approach that would maintain savings for Medicaid, but avoid the "price control" drawback, would be to construct an index of a manufacturer's sole source products "weighted according to the sales...and to index the price over time. And if the index of the manufacturer's sole source line goes above CPI or MCPI [CPI medical component] increases, you could force an additional rebate." Wilensky observed that with this sort of method, "It doesn't matter so much if a single drug gets out of line as long as the weighted index of what that manufacturer does" stays within the alloted range. HCFA envisions any federally-mandated program as providing a "series of rules" for state Medicaid agencies to work within. Wilensky explicitly rejected a role for HCFA as a central broker for pharmaceutical company bids. Absent any restructuring, HCFA estimates that Medicaid expenditures for outpatient prescription drugs will increase from $4.4 bil. in fiscal 1990 to $8.2 bil. by fiscal 1995. Overall, Wilensky agreed that "there is some useful federal legislation that could be put together. I am encouraged by some of the modifications [to the legislative proposals] that have been made over time, although I hope that we can try to make a few more modifications." She said HCFA does not yet have a formal legislative package but instead presented the types of options the agency is favoring. HCFA had been expected to unveil a plan at the Sept. 17 hearing. Meeting with reporters the day after the Finance hearing, Wyden maintained that "Pryor II" and the Wyden/Cooper bills are gaining support within the Bush Administration and "even within some in the drug industry." He predicted that "we're going to get this in [budget] reconciliation." HCFA's eventual proposal is likely to center on the concept of pharmaceutical firms providing Medicaid with the "best prices" offered to other buyers, but with an upper and lower boundary on rebate amounts. The floor-and-ceiling approach to rebate levels appears to have some kinship with the intent of the Pryor and House "best price" plans ("The Pink Sheet" Sept. 17, p. 11). Wilensky explained that "best price" is "a generally appropriate concept," but she qualified that statement with a concern that some existing price arrangements between manufacturers and outside groups could set unreasonable precedents for Medicaid pricings. "We are concerned," Wilensky said, "because we know there are some areas that have historically had exceedingly low prices because, [for example], of a special relationship with the Veterans Administration that might have started after World War II or a special relationship with Planned Parenthood that has a very low price for birth control pills." She added: "What we would like to do is to see a concept of having a minimum-type discount and maybe a maximum-type discount also on a best price, so that you try not to put the industry in a position that might be regarded as too extreme." Both the Pryor II and Wyden/Cooper bills would require that a manufacturer's arrangement with a state must provide overall savings of 10% from what spending would otherwise be based on the manufacturer's average prices. Pryor II would cap the total discount at 25%. Wyden/Cooper would provide a four-year transition with a ceiling on total savings, but then require full "best prices." Exceptions would be made for special situations where a manufacturer has provided "nominal prices" to certain purchasers. Wyden has cited Planned Parenthood as such a situation. The Pharmaceutical Manufacturers Association in its testimony to the committee cited the example of long-running "deep discounts" to the V-A to illustrate its argument that the Pryor II and Wyden/Cooper bills are "inherently unfair." Companies providing these special discounts would be "hardest hit" if required to provide these prices also to Medicaid, PMA contended. In a Sept. 21 critique of issues raised at the hearing and circulated to Finance Committee members, Pryor rebutted some of the arguments against requiring both best prices and indexing. Several manufacturers contend requiring best prices is "unfair since different manufacturers offer different levels of rebates," and the "federal government represents a very small level of their business (1-2%)," Pryor said. "In many cases however, this 1-2% of the business may the be the single largest contract that a manufacturer has with a single client. Manufacturers say that the 'best price' should be the price they offer larger customers, such as HMOs, since this class of purchaser represents 20-30% of their business. This class of trade, however, may in reality represent the sum total of many, many smaller single contracts." The letter maintains that the proposed index does not equal price controls, which "are usually defined as arbitrary price setting." Under Pryor II, the index is tied not to any preferred price, but "to a price that has been competitively determined in the marketplace through negotiations between the drug manufacturers and purchasers." Pryor further suggested that the index should more appropriately be perceived as a "'cap' on what Medicaid will pay...with appropriate allowances for inflation," adding that Medicaid has used various reimbursement caps "for many years." HCFA also is "considering the notion of requiring states to do competitive bidding for a limited number of their high volume, high cost drugs," Wilensky said. Avoiding a bid process has been one of the main impetuses behind the voluntary discount programs undertaken by drug companies this year. Other approaches on the table at HCFA include "better enforcement of existing requirements for generic dispensing," the HCFA administrator said. "Additionally, HCFA could conduct research on the cost-effectiveness of certain high-volume, high-cost drugs, and test and evaluate alternative strategies such as mail order prescriptions, and best practices in state drug use review." However, Wilensky said that rather than mandating drug utilization review at this time, she would prefer to undertake an analysis of the variety and effects of the DUR programs states now are operating and then decide on the next policy step. As it has all along, HCFA opposes any mandatory provision for substitution of different drugs judged to be therapeutically equivalent, terming this an "unacceptable interference in the patient-physician relationship." Wilensky also opposed inclusion of any provisions to raise pharmacy payments levels, defining them as Medicaid program expansions. Noting that state governors last year asked Congress for a two-year moratorium on new Medicaid mandates, she suggested that pharmacy increases would break with that request. She also pointed to a study recently completed for HCFA by Purdue University professor Steven Schondelmeyer as evidence against the need for increasing pharmacy payments ("The Pink Sheet" Sept. 17, p. 16). "The report makes clear that although pharmacy margins have declined as a percentage of retail prescription price (35.3% to 26.4%), even after taking inflation into account pharmacist dollar margins have increased $0.33 on an average prescription." The study looked at changes between 1981 and 1988. Pryor II would provide that a portion of rebates be reallocated to increase pharmacy payments. Wyden/Cooper is silent on the issue. Aides to Wyden said the two representatives wanted to have a more "streamlined" bill focusing only on manufacturer issues. Wyden and Cooper appeared at the Senate hearing, and neither they nor Sen. Pryor took a conciliatory tone in describing pharmaceutical industry pricing to Medicaid or the industry's efforts to oppose the savings legislation. Pryor also pressed Wilensky about HCFA's previous efforts to aid state bidding programs. "HCFA is sitting there watching drug prices for the Medicaid program explode, profits at an all-time high for the drug manufacturers, no discounts for the Medicaid program," Pryor asserted. "Why has HCFA done nothing in this area?" The HCFA administrator replied: "Let me indicate some of the complications, but I don't know whether I can give you the rationale for why particular policies were not undertaken in the last 'x number' of years." For example, she noted that drug coverage is an optional Medicaid benefit and states have latitude in structuring their programs, and that Medicaid is an "open" system in contrast to direct delivery programs such as the V-A. In addition, Wilensky said she has warned the pharmaceutical industry that she would refer to the Justice Department any evidence that industry firms acted in concert to thwart state bidding programs. She described HCFA as providing "technical assistance" to states when requested. Rep. Cooper described Medicaid payment levels for pharmaceuticals as "secret subsidies" to drug companies. One of the industry's "tactics," the representative said, "has been not to work with Congress to improve the legislation and discourage any company that's interested in talking to us." He added: "Now, I'm thankful that they're willing to talk...[but] drug companies had to be dragged kicking and screaming into these talks in the first place." He said the industry should not be able to "treat Uncle Sam like Uncle Sucker." Purdue's Schondelmeyer also testified before the Senate committee to urge the establishment of a federal program with standardized discount approaches and reporting methods. He highlighted three reasons why relying on manufacturers to voluntarily negotiate with states is a "poor public policy." For example, he said, every manufacturer has its own plan with special unique reporting and accounting requirements. A state could end up with several different plans resulting in higher administrative costs. Also, the voluntary approach is premised on continued cooperation by manufacturers, Schondelmeyer noted, and holds the potential for manufacturers to target only the larger states for discounts.

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