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MEDICAID REBATE LAW CHANGES SHOULD WAIT FOR MARKETS TO SETTLE DOWN -- KOGAN; AHP'S STAFFORD DEFENDS "INCREMENTAL" R&D GAINS

Executive Summary

The Pharmaceutical Manufacturers Association appears to be moving away from a legislative effort to revise and refine the Medicaid rebate provisions in the 1990 budget reconciliation act. The association describes the issue of supporting technical amendments as an open one that is still being reviewed. At a session prior to its April 28-April 30 annual meeting in Phoenix, the association's board reportedly agreed to reconsider whether to push for amendments to the act. Immediately after passage of the act last fall, there was a groundswell of interest in seeking changes and refinements in the language of the law. The current mood at PMA was captured by outgoing chairman Richard Kogan (Schering-Plough) in an April 29 speech. Urging patience and a cooling period, Kogan said: "Time is now needed in [pharmaceutical] markets to settle down." The drug price discounts and the provision of the law tying future price increases to the consumer price index, Kogan said, have "disrupted all marketplaces." As a result, he suggested, "time would be better used on key factors that effect our research costs, such as FDA's new drug approval process." Kogan's comments appear to underline two aspects of the market reaction to the Medicaid "best price" provisions: (1) that it is taking more time than expected for the market to adopt the new rules; and (2) not all the changes are unpleasant to the pharmaceutical manufacturers. One indication of the extent of the changes wrought by the new law on the marketplace appears in complaints from wholesalers about unusual order patterns and out-of-stock situations arising from low-price contract purchasers trying to buy ahead of the expiration of a contract. Those low-cost buyers have anticipated that contracts would not be renewed as part of the response to the best price provisions by manufacturers. Kogan's suggestion of a cooling period would let some of those one-time blips in ordering patterns work themselves out. While PMA may not actively pursue amendments to the Medicaid bill this year, the association will apparently have an attractive alternative ready to support if the issue is raised. Sen. Chaffee (R-R.I.) is reportedly preparing a bill which would fix Medicaid rebates as a percentage off aggregate product prices, similar to a proposal by PMA late in the legislative effort last year ("The Pink Sheet" Oct. 1, p. 3). A Finance Committee member, Chafee participated in the House- Senate conference committee that produced the Medicaid rebate provisions of the Omnibus Budget Reconciliation Act last year. The Rhode Island Republican reportedly argued for fixed-percentage rebates during the conference and was a key proponent for the committee's shift of the draft bill's provision for an inflation index on best prices to an index on AMPs (average manufacturers prices). Senate Special Committee on Aging staffer John Coster, PhD, contended at a May 1 session of the American Managed Care and Review Association's health policy conference in Washington that any amendments to the Medicaid law to eliminate best price requirements for drugs would be "premature." Asked whether potential amendments are likely to change the basis for manufacturer rebates from the best price requirement to a flat percentage discount, Coster replied: "I don't know where best price is going to end up in the legislation, but at this point I think it's a little premature to talk about [substantive] modifications to the legislation, four months" into implementation. "I think what's likelier to happen is that best price will remain in the legislation and that discounts will come back over time because that's what manufacturers have to do to complete in the [institutional] market," the Senate aide continued. The Senate committee aide believes the pharmaceutical industry may try to use any technical amendment legislation as an opening to propose a switch in the rebate requirement so that "very deep discounters" will not have to offer Medicaid the same discounts of "up to 70% to 80%" that historically have been available to institutional customers such as nonprofit hospitals and HMOs. Because many companies have raised or eliminated their deep discounts in response to the Medicaid legislation, hospitals, HMOs and managed care administrators now also question the wisdom of the act's best price requirement. The industry will adjust to the legislation, and deep discounts will reappear, Coster maintained. Pharmaceutical manufacturers that market multiple-source products with many competitors in the same therapeutic class "have to" offer deep institutional discounts "to get on your formularies, to [assure their products are used] in your institutions," he said. Hospitals, HMOs and managed care providers will "have to become more aggressive bargainers with drug companies, and I think that's fine." The primary challenges facing the industry at present in PMA's view are the prior authorization provision in the Medicaid rebate law and Sen. Pryor's (D-Ark.) view that "me-too" drugs are interchangeable. Calling 1990 "the year of Medicaid," PMA President Gerald Mossinghoff declared that 1991 will be "the year of prior authorization." Mossinghoff also commented indirectly on Pryor's perception that most drug R&D is marketplace driven rather than innovation inspired. In a "hall-of-fame" list of "visionary" bad predictions, Mossinghoff included a statement by Pryor: "The majority of new drugs add little or nothing to existing therapy." Mossinghoff put Pryor's assessment on par with a 1921 statement by Cleveland Indian great Tris Speaker: "Ruth made a big mistake when he gave up pitching." In his address as the new PMA chairman, American Home Products Chairman John Stafford compared the attack on what he called incremental R&D advances to public policy mistakes that led to the demise of the U.S. electronics industry. "In my view," Stafford said, "the notion voiced by Congress that incremental advances is an abnormal and unproductive method of R&D could further undermine our competitiveness. The fact is that incremental advancement has been a foundation of successful R&D in virtually every field of high technology, including health care." The domestic drug industry's incremental R&D approach, Stafford claimed, "is the reason that the U.S. pharmaceutical industry is one of the few in the U.S. that still enjoys a trade surplus with Japan, and it is the very technique the Japanese industry uses to compete so effectively with the world." Mossinghoff indicated that PMA feels cheated by the appearance of prior authorization programs after the association's apparent victory in getting formularies and therapeutic substitution out of the bill. "We thought we had a deal for access on the one side and the industry to pay rebates," Mossinghoff noted. "The legislation we worked on prohibited formularies . . . but the law allows prior authorization." The association agreed to allow prior authorization as "an accommodation to the national Governor's Conference [which] wanted some authority for very, very unusual or expensive drugs to require prior authorization," Mossinghoff explained. Citing quotes from Reps. Wyden (D-Ore.) and Cooper (D-Tenn.), HHS Secretary Sullivan and Pryor, Mossinghoff maintained that the Medicaid drug price rebate law was not intended to encourage the use of prior approval plans. However, Mossinghoff observed, "our worst fears are now being realized." He noted that Maryland "intends to implement a therapeutic formula tied to prior authorization" and that other states are planning similar actions ("The Pink Sheet" Jan. 21, p. 6). PMA, Mossinghoff reported, has resurrected the coalition of medical societies, patient associations, and minority groups assembled by the industry last year to fight therapeutic substitution. "Already the coalition we worked so closely with is at work trying to blunt this effort," Mossinghoff said. He noted that American Legislative Exchange Council Exec VP Samuel Brunelli has sent letters to each governor denouncing the use of prior authorization plans and that the National Black Caucus of State Legislators recently passed a resolution calling on governors and state Medicaid officials to eliminate prior authorization programs. PMA companies project paying $ 3.4 bil. from 1991-1995 to Medicaid as a result of the new drug price rebate law, Mossinghoff said. "We think that's a conservative estimate, Mossinghoff added. "We think it's going to be higher than that and we are moving to obtain data as we move into the Medicaid arena." Mossinghoff noted that the Medicaid drug price rebate law is the second big hit after the Waxman/Hatch Act the brandname drug industry has taken from Congress in the past seven years. Looking no further than 1990, Mossinghoff said Waxman/Hatch has had a "dramatic effect" to the "detriment" of the research-based drug industry. "As of the end of 1990, there are about 2,000 ANDAs approved, most of them legally," Mossinghoff said. He compared that figure to 65 patent extensions granted. "But only eight patents out of the entire patent portfolio are affected" by those extensions, he added. Generic drug industry sales in the U.S. in 1990 were $ 3.3 bil. Mossinghoff pointed out. Sales from the eight products with patent extensions were $ 644 mil. last year -- "less than one- fifth of the economic benefit to our industry compared with the generic industry," Mossinghoff declared. The impact of Waxman- Hatch, however, may be ameliorating: in addition to the delays to generic competition brought about by the generic investigations, some companies (Glaxo and Lilly) apparently have come up with new approaches to evergreening patents. While acknowledging the strong shape of the U.S. pharmaceutical industry relative to foreign competitors and other domestic industries, Stafford listed five negatives facing the industry: "Recent initiatives to create some type of price control on health care goods and services continue to threaten the free market; "There is no adequate solution in sight for the product liability dilemma . . . ; "We see the consolidation of payors into mega-purchasers whose interests may not be in line with those of our industry and the patients who require better treatments that can only come from extensive R&D commitments and full access; "Some of our private sector colleagues continue to push for some kind of national health insurance without adequately addressing how these costs will be financed; "Despite the FDA's herculean efforts with insufficient resources, the regulatory environment does not promise to improve in the near term." Stafford commended FDA Commissioner Kessler for his intention to restore FDA credibility. However, he added: "Unfortunately, it appears that the emphasis of FDA activity in the foreseeable future will be heavily skewed toward enforcement of FDA regulations, even as NDAs pile up at the agency." Kogan also complained about FDA's focus on enforcement in his address to the association. While the concern may be industry wide, both Stafford and Kogan head companies that have had recent spats with FDA over drug advertising abuses. FDA's recent high profile seizure action against Procter & Gamble for a mislabeled orange juice indicates the type of major company object lesson that FDA might have in mind in the drug area. Industry's fear of a slowdown may be premature. Already in 1991 the agency is well ahead of its pace of approvals in recent years.
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