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MEDICARE OUTPATIENT DRUG COVERAGE EXPERIMENTS FUNDED BY SEC. 936 LIMITS WILL BE PROPOSED BY SEN. PRYOR; BILL WILL BE INTRODUCED "IN VERY NEAR FUTURE"

Executive Summary

Savings from limits on Sec. 936 tax credits would be used to fund Medicare outpatient drug coverage pilot projects under Sen. Pryor's Prescription Drug Cost Containment Act of 1991. The Arkansas Democrat said he plans to introduce the legislation in the "very near future." The provision to impose limits on Sec. 936 tax credits for companies with manufacturing plants in Puerto Rico reflects one of the concepts Pryor highlighted during his Sept. 24 press conference on drug prices. Pryor said at that press conference that he was interested in reducing Sec. 936 benefits to companies that increase drug prices faster than the general rate of inflation ("The Pink Sheet" Sept. 30, p. 3). Pryor outlined the proposal in a written statement submitted to Sen. Kennedy's (D-Mass.) Labor & Human Resources Committee for the panel's Oct. 16 hearing on legislation to obtain drug price rebates for Public Health Service-funded clinics (see related story p. 5). Pryor explained that the "revenue saved would be funneled into a new prescription drug trust fund to finance Medicare outpatient prescription drug demonstration projects and to reduce the deficit." Pryor's upcoming bill also would direct HHS to study the feasibility of establishing a Pharmaceutical Products Price Review Board "similar to the one that has been established and has been successful in Canada." Overall, the planned legislation is characterized in Pryor's testimony as addressing the "prescription drug inflation problem by utilizing a business-like, carrot and stick tax incentive approach." During the hearing, Pryor cited figures he has quoted in the past to support revisions in Sec. 936 of the tax code. Pryor noted that during 1987, pharmaceutical firms paid an average annual salary of $ 26,000 per employee in Puerto Rico, but received the equivalent of $ 70,000 per employee in Sec. 936 tax credits -- a return he described as "madness." Pryor said he would soon be releasing 1988 figures on Sec. 936. Another idea that Pryor highlighted during the September press conference is reducing R&D tax credits for companies that do not successfully develop products rated by FDA as representing a therapeutic advance. However, Pryor staffer Christopher Jennings told the American Managed Care Pharmacy Association Oct. 15 that the senator also would support an increase in R&D tax credits for companies that develop "breakthrough" products. Jennings said Pryor "frankly would be more than happy to provide more R&D tax credits for those representatives of the industry that are actually producing breakthrough drugs." According to Jennings, Pryor "is not going after the R&D tax credits the drug industry is receiving" and "is not talking in any way about reducing tax credits for research and development." Instead, Jennings said, Pryor is "looking at ways to create new incentives for our tax credits for R&D to make them do a little bit better and be a little more successful on the breakthrough side of prescription drug R&D." The Pryor aide said that "there is no question whatsoever in [the senator's] mind that drugs can be the most cost-effective intervention in our whole medical array. No argument here." However, he cautioned, "we want to make sure that what we are paying for is paying off some dividends." The Arkansas senator, Jennings said, "feels that when the drug industry is making profits three times the average profit margin of the Fortune 500, after their investment in R&D, then it's time to start asking questions about the prescription drug industry's responsiveness to our concerns." He added: "If Merck ... is investing the most in terms of R&D [yet] can keep its prices at or below the general inflation rate, [Pryor] asks why the rest of the industry cannot. When Canada can contain prescription drug costs and still solicit and achieve a commitment by the drug industry to increase R&D investment by 10% over the next five years, he wonders why the U.S. cannot."
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