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MEDICAID INDEXING PROVISIONS COULD ENCOURAGE NARROWING OF DRUG PRICE RANGES: SILVER LINING IN THE BLACK REBATE CLOUD? AMP WILL NEED DEFINITION

Executive Summary

The brandname drug firms may be induced to move away from the discounting and different price deals that they developed during the 1980s due to one of the last-minute changes in the Prudent Pharmaceutical Purchasing Act passed Oct. 27. The significant change affects the indexing system devised to assure that the Medicaid savings do not get washed out in future years by aggressive manufacturer price increases. The indexing provision was one of the key points of controversy during August and September as the Medicaid rebate proposals were developing as part of the budget debate. The Pharmaceutical Manufacturers Association and several brandname companies worked hard against indexing on the premise that it would turn out to be simply another name for price controls. Eventually, the lobbyists appeared to turn away from that provision to focus their efforts on maintaining whatever form of open access for all drug products that could be maintained. A final shift in the indexing formula, however, may make it the silver lining for brandname firms in the rebate plan. Earlier drafts of the legislation provided that the lowest existing discounts (the so-called "best prices") be indexed to general inflation so that deep discount prices offered to favored customers could not be raised faster than inflation in response to the Medicaid adoption of those prices. The House/Senate conference committee, however, in the last days before enactment changed the indexing provision to index the average manufacturer price (AMP) for a product to inflation and not the best price. The conference committee reportedly agreed to index AMPs rather than best prices on the grounds that indexing AMPs would be less burdensome to the industry. The new law appears to add an incentive to manufacturers to raise non-government prices to limit the size of rebates paid to Medicaid. The changes in prices would not be permitted to increase the AMP for a product by more than inflation, but they could apparently be used slowly to get rid of steep discounts to the non-government market. If the Prudent Pharmaceutical Purchasing Act does turn out to lead to a gradual erosion of the non-government discounting, then it could reverse the trend toward competitive price bidding between brands. When Sen. Pryor (D-Ark.) first held hearings on pharmaceutical pricing issues in the summer of 1989, he attacked the multi-tier pricing policies of the industry, in which different classes of trade obtain the same products at vastly disparate prices. Pryor made that issue a rallying point to get pharmacy support for his legislative program. He may achieve that goal through the indexing provision. A Senate Aging Committee summary of the bill describes the indexing provision as an extra rebate to recover any increases in the AMP above general inflation. "The Secretary [of HHS] is also required," the Senate explains, "to develop methodology that would recover for the state Medicaid plans, on a weighted average basis, additional rebates that would account for increases in average manufacturer prices that exceed the increases in the consumer price index (CPI-U)." Selecting the CPI-U index instead of the medical products index was a congressional choice to keep price increases lower. Medical costs have generally been growing several points faster than the broader indices over the past decade. Under the plan offered by the House-Senate conference committee and passed by Congress, brand-name pharmaceutical manufacturers in 1991-1992 will offer Medicaid price rebates equal to the greater of at least 12.5% off the average manufacturer price (AMP) or rebates sufficient to reduce the cost of their products to the level of their best prices offered to favored customers, including nonprofit hospitals. However, the act sets maximum rebates of 25% off AMP in 1991 and 50% in 1992. The legislation stipulates that "the best price excludes depot prices of certain federal agencies," such as the Veterans Affairs Department, or prices to charitable institutions. That definition comes close to meeting some of the refinements in the "best price" concept suggested by several manufacturers that objected to discounts that mirror the price of big accounts taking delivery of the product. Glaxo was a major proponent of the distinction of best price defined as the price to customers that do not actually take possession of the products ("The Pink Sheet" Aug. 20, p. 9). Another key definition of the bill is average manufacturer price. The first calculation will be based on prices as of Oct. 1, 1990. The summary of the bill defines AMP simply as the average manufacturer price the manufacturer charges wholesalers or direct retail customers for a product. As many of the discount prices are actually chargeback agreements, the AMP as roughly defined may not pick up some deep discounts. The price to the wholesaler will appear to be similar to the general market. The effective price after chargebacks will create the discount. The legislative drafters of the program, however, say that determining existing low prices and calculating them into the AMP formula will not be a problem, primarily because of the data required from manufacturers to do business with the Veterans Affairs Department. The difficulties posed by surveying and assuring average prices created one of the issues that individual manufacturers addressed in their separate deals with the states. Merck, for example, promoted its plan to the states as a discount offer that entailed no new paperwork, no added data collection and no new administrative costs for the states. The legislation may also encourage some companies to consider not participating in Medicaid market. Within days after enactment of the bill, one pharmaceutical manufacturer was rumored to be leaning against participation in Medicaid as of Jan. 1, 1991, the effective date of the legislation. Companies with products rated as significant breakthroughs by FDA and which may be crucial to a state's Medicaid coverage may be able to opt out of the discount program. The Senate summary notes in legislative negativese: "Drugs not providing an acceptable rebate WILL NOT be eligible for Federal matching funds UNLESS the drug is listed as a '1A' drug and the Secretary has approved the state's determination that the drug is 'medically necessary'." The industry is also braced for a spillover of the legislation into Medicare and into the private sector. Pryor aide David Schulke has said that Congress is likely to revisit the idea of creating a drug benefit for Medicare. If it does, it is certain to attempt to establish a structure similar to Medicaid's for obtaining price discounts. EDITORS' NOTE: A summary of the legislation by the Senate Special Committee on Aging appears on pages 17-19 of this issue.
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