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Executive Summary

The Pharmaceutical Manufacturers Association appears willing to concede on price indexing for Medicaid prescription plans and to increase its across-the-board percentage rebate offer in the hopes of fending off a "best price" discount plan. The association sent a letter to Capitol Hill on Oct. 4 indicating its acceptance of indexing in an eleventh-hour effort to persuade Congress to include in Medicaid drug price rebate legislation provisions for flat, industry-wide percentage rebates rather than "best price" requirements. At an Oct. 4 board meeting, PMA accepted a position to "guarantee" savings to Medicaid over five years. Although the guarantee is not an explicit agreement to an indexing mechanism, PMA is reportedly ready to do "whatever it takes" to make the savings "scorable" -- i.e. predictable to government over a period of years. The Congressional budget analysts have declared that a drug savings plan cannot be considered "scorable" if it does not have some formula to control price increases in the future. PMA would presumably prefer an index to the medical component of the Consumer Price Index rather than to general inflation. However, the association's Oct. 4 letter does not argue for either type of index. Similarly, the association has not played its cards on the issue of a product-by-product indexing scheme or an aggregate price indexing scheme. A version of an aggregate index, which would allow each company more flexibility for determining the price changes on individual products, was favored by Merck in previous discussions of the indexing ("The Pink Sheet" Sept. 17, p. 13). Indexing of prescription drug prices was included in proposals by Sen. Pryor (D-Ark.) and Reps. Wyden (D-Ore.) and Cooper (D-Tenn.) but not in a proposal floated by PMA on Sept. 26 ("The Pink Sheet" Oct. 1, p. 3). PMA's earlier plan stipulated that protections against future price increases would be voluntary. PMA also identified therapeutic substitution and formularies as the continuing bete noires of the impending legislation. The association called for "open access" as its "principal goal" in the final stages of legislative negotiations. The Oct. 4 letter states that PMA's board "affirmed that its principal goal in the Medicaid rebate legislation that is being drafted as part of the budget summit agreement is to achieve open access for Medicaid patients to Rx drugs." That position represents a choice to protect the industry's ability to bring new products to market rapidly in lieu of pricing flexibility on existing products. At its core, it is a forward-looking choice that continues to put faith in the industry's ability to develop new products in the future and prevent the the limbo situations in which a company has a new product approved by FDA but can't sell it because of slow formulary decisions or non-payment decisions by state Medicaid departments. The choice between access and pricing flexibility for existing products is, of course, the type of decision that the industry never wanted to have to make. To assure open access of Medicaid patients and prescribers to all FDA-approved prescription drugs, the association indicated a willingness to back off other elements of its Sept. 26 plan for the Medicaid rebate program. For example, PMA agreed to provide Medicaid with price discounts sufficient for the program to meet savings targets set by the budget summit. The association had proposed that Congress require industry-wide price rebates of 10%. However, the Oct. 4 letter notes that the board "agreed to support rebates in the Medicaid program based on a fixed percentage of prices as of Sept. 1, 1990, designed in a way to guarantee scorable federal savings in the amount of $1.6 bil. in the period fiscal years 1991 through 1995." Furthermore, the letter states that manufacturers will agree to provide discounts deeper than necessary to meet federal savings targets in order to preserve open access in the legislation. PMA said it is willing to pay a premium for open access. "The board also agreed," PMA informed the Hill, "that the industry is willing to pay an increased rebate percentage, over and above that needed to achieve budget summit 'federal savings,' in order to cover the added amount reasonably needed for open access." In presenting its earlier proposal, PMA estimated that open access would cost $125 mil. each year. In an earlier Oct. 1 letter to Congress, the association submitted a study indicating that the lost savings due to open formularies would be only $77 mil. in 1991. At $125 mil., the association would have to agree to a percentage discount to achieve $345 mil. in federal savings for 1991 to meet budget targets. The Oct. 1 letter states that the association's proposal would provide "that in return for rebates, states could not restrict the physician's ability to prescribe or the patient's ability to receive the drug the physician chooses to treat the patient." The letter followed the Sept. 30 budget summit agreement, which was subsequently voted down by the House on Oct. 4. Summit negotiations between congressional leadership and the Bush Administration resumed Oct. 5 (see preceding story.) Pointing out that Sept. 30 "the budget summit agreement is silent" on the matter of open access, the association said it hopes to "work closely with [Congress] to merge the interest of the PMA and its key allies in providing open access to all drugs to Medical recipients with the savings resulting from the manufacturers' rebates to Medicaid." Legislators who received the letters include Finance/Health for Families and the Uninsured Subcommittee Chairman Riegle (D-Mich.), House Energy & Commerce/Health Subcommittee Chairman Waxman (D-Calif.) and Rep. Wyden (D-Ore.). The Oregon Democrat was an original sponsor of HR 5589, the House legislation to obtain manufacturer rebates for Medicaid prescription drugs. PMA enclosed a study that concluded the cost of permitting unrestricted access under a Medicaid drug price rebate plan would cut savings by $77 mil. in fiscal 1991. Conducted for the association by SysteMetrics/McGraw Hill of Santa Barbara, Calif., the study set an "upper bound estimate" of the added costs involved "by assuming that all restricted medications are added to each state program where they were previously restricted." It then determined a "best estimate" by "accounting for some replacement of formulary medications." The study assumes that "previously restricted medications will displace some portion of medications already used to treat" indicated diseases. Calculating the rate of replacement "requires detailed medication utilization data from each Medicaid program," the study report states; however, due to time restrictions, the study relied upon Medi-Cal drug use data from 1989. Restricted medications would have added $128 mil. to the Medi-Cal drug program if the restricted products were dispensed in addition to similar unrestricted products already dispensed. The$128 mil. figure is based on the "national percent share" of the restricted products within their therapeutic classes. However, the amount was reduced by 36% to account for costs not expended on unrestricted products whose use would be displaced by the previously restricted products. The remainder was multiplied by 56%, the portion of Medicaid expenditures paid by the federal government. The study concludes that "federal expenditures for the national Medicaid drug benefit will increase approximately $77 mil. (in 1989 dollars) by adopting a national" open formulary policy for Medicaid.

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