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Executive Summary

Medicaid drug price rebates to states under the 1990 "best price" plan are on schedule to generate savings of $ 570 mil., Merck Sharp & Dohme Government Affairs Director Charles Grezlak told a Dec. 12 session of the National Conference of State Legislatures. Merck's estimates, Grezlak said, "based on discussions with officials in 12 states accounting for 25% of the Medicaid population, indicate that rebate payments this calendar year . . . will be at least $ 570 mil." The rebate levels show, Grezlak maintained, that the Medicaid drug price rebate law's "best price" program "is working" and does not need a legislative fix. He noted that Merck is urging "a wait-and-see approach." The Merck presentation to the state legislators reflects the position the company has been taking in Washington. Merck has been the most prominent of a small, but effective, group of drug firms lobbying to maintain the "best price" formula for determining discounts to state Medicaid programs. Bristol-Myers Squibb and Pfizer are the other major proponents of the current approach. On the other side of the issue, Glaxo is the leading proponent of changing the rebate approach to a fixed discount and removing the concept of tying discounts to best prices. A larger number of companies are said to favor fixed discounts, but many of those companies may be reluctant to take the risks inherent in raising the Medicaid issue again on Capitol Hill. Glaxo has been seeking a legislative sponsor for its attempt to change the "best price" formula and may have found one in Rep. Synar. The Oklahoma Democrat has expressed interest in a legislative proposal to base the Medicaid rebate on a flat percentage rate. However, Synar has not yet introduced his proposal, though he floated an early version in late October based on fixed discounts in the 15%-20% range ("The Pink Sheet" Nov. 4, p. 11). On Dec. 12, a group of large drug purchasers in the private sector wrote to Synar to support the concept of his proposal. The private purchasers told Synar that "the repeal of 'best price' and insertion of a guaranteed percentage rebate to the states are concepts that are consistent with the principles for Medicaid reform that we agree to." The private purchasers argued that the rebate formula "should not penalize other government and private purchasers who obtain market-based discounts." Groups signing the Oct. 12 letter included the American Hospital Association, the American Society of Hospital Pharmacists, the American Society of Consultant Pharmacists, the Federation of American Health Care Systems, Kaiser Permanente, the Premier Hospital Alliance and the Voluntary Hospitals of America. Merck's Grezlak characterized the Synar proposal as "nothing more than an arbitrary tax with no relationship to the market." He argued that a flat percentage-based rebate "will penalize some firms who price their products fairly to the retail sector, where your average citizen pays, and reward others who are willing to give large discounts to certain segments of the marketplace but not to Medicaid." The "best price" rebate plan appears to be very important strategically to Merck. The company has recently indicated that it is ready to begin bidding to the private sector ("The Pink Sheet," Nov. 11, p. 3). That bidding is presumably predicated on the assumption that few companies will be able to offer large discounts to specific accounts for the fear of setting a "best price" precedent that will affect larger segments of its business. In a narrow price range environment, Merck apparently feels comfortable talking about discounts. John Coster, an aide to the Senate Special Committee on Aging, maintained that a change to flat percentage-based drug price rebates would mean less savings for states. The proposal "would just knock out 'best price' and shortchange the state by just giving it a flat rebate, 15%," Coster said. Under such a plan, Coster argued, "if an HMO, hospital or anybody else got a deeper discount than [the flat rebate], states could never get access to those deeper discounts." The state programs, he added, "would never get to take advantage of the market forces in place without a best price provision in the bill." Therefore, he argued, the states have to decide whether they want "to be able to take advantage of the market forces in place and be able to get access to greater discounts to help pay for all the expanded access that you have in drugs now. Or do you want to settle for a flat 15%, 20% rebate, which doesn't reflect the dynamics of the pharmaceutical marketplace." Coster said committee Chairman Pryor (D-Ark.) agrees with Merck that the best price program needs more time. Since "the industry claims it is so competitive," HMOs and hospitals should be given an opportunity to try to "force manufacturers to bargain with them for lower prices," Coster said. The congressional staffer reported that Sen. Pryor has a plan that he hopes will restore the deep discounts lost by HMOs and the Veterans Affairs Department due to manufacturer cost-shifting in response to the 1990 law. Instead of eliminating "best price," Coster said Pryor will propose using a frozen, rather than a floating, best price indexed to September 1990 prices in order to account for inflation. Pryor espoused the same idea during the House-Senate conference committee on the 1990 Medicaid law. Pryor believes "a comprehensive approach is needed" to obtain drugs at best prices without causing cost shifting in the marketplace, Coster said. Pharmaceutical cost containment is needed "across the board for everything, for HMOs, hospitals" and the government "because the next generation of pharmaceuticals are going to be high-tech, very expensive biotechnology products with price tags of thousands of dollars." House Veterans Affairs Committee General Counsel Ralph Ibson said the V-A committee passed Chairman Montgomery's (D-Miss.) bill to lower drug prices to V-A and exempt them from Medicaid rebate calculations (HR 2890) because it "had to" respond to what the department perceived as a crisis. Noting that V-A spends $ 700 mil. on drugs each year through the depot and FSS (federal supply schedule) contract, Ibson said the industry's cost-shifting in response to the 1990 Medicaid law was "particularly harsh" to V-A. He explained that the long-term FSS contract, through which V-A obtained "about half" its pharmaceuticals, "expired at the very time that [the Medicaid rebate law] became effective." Consequently, he said, "V-A was utterly vulnerable to the market response that was triggered" by the act, and new FSS prices "were increased very dramatically" -- 60% to 80%, "even 200%, 300% and in a few cases over 1,000%." Pharmaceutical Manufacturers Association Deputy VP for State Government Affairs Kathleen Sheehan agreed that it will take time to see how the market will adjust to the 1990 law. For example, she noted, six states have yet to invoice manufacturers for rebates due. Noting that the industry is criticized for having very high profitability, Sheehan pointed out that a recent OTA report suggests that estimates of the industry's profitability have been exaggerated ("The Pink Sheet" Nov. 25, p. 3). In addition, she said, "according to the 1991 Businessweek 1,000 survey, 12 of the top 30 pharmaceutical firms lost money or returned less than shareholders could have earned on passbook bank accounts." The 12 companies cited by Sheehan include 10 biotech firms, Ivax and Rhone-Poulenc Rorer, which was in the process of merging during 1990.

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