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Executive Summary

Sen. Hatch is urging pharmaceutical companies to cut their prices voluntarily to Public Health Service clinics to take some of the steam out of the current drive to extend forced rebates and discounts from Medicaid to other government programs. "I would hope that each of the companies providing products to these clinics will voluntarily reduce the prices," Hatch declared in a Dec. 10 speech to the Food & Drug Law Institute annual meeting. "We are talking about assisting some of the poorest people in this nation. I urge you to take positive action to demonstrate to your critics in Congress that you can and will act responsibly. This type of action will assist those of us who hope to stem the tide of further regulatory, and in fact mandatory pricing, legislation." Noting that he was unable to work out a compromise proposal for the Public Health Service clinics at the end of the last legislative session, Hatch pointed out that Sen. Kennedy will be able to use the "lever of time" in the new session to seek support for his plan to extend current "best price" rebates to the PHS clinics. Hatch said he "personally opposes" that approach, which he characterized as a "hidden tax on the industry." However, he warned that if the industry does not respond to the call for reductions to the PHS, then the Kennedy approach may have an open field. Hatch's request is the second call in recent months from an unlikely source for voluntary price cuts to a special class of government purchaser. In mid-October, Pharmaceutical Manufacturers Association President Mossinghoff and Chairman Jack Stafford (American Home Products) wrote to members urging them to consider offering discounts to the Veterans Affairs Department hospitals ("The Pink Sheet" Oct. 14, T&G-6). The Utah Republican strongly warned the drug industry that its image of aggressive price raising is a major political liability. Hatch focused particularly on price increases by off-patent brandname products. "Frankly, I would like to see the response from PMA [Pharmaceutical Manufacturers Association] companies on what justifications exist for such [post-expiry] pricing policies, and I have asked my staff to conduct further research." Hatch commented that when he coauthored the 1984 Patent Term Restoration and Drug Pricing Competition Act, "it was our intent to create a very competitive market place for non-patent protected drugs. It apparently has only worked in the generic drug arena, where prices are set by a fiercely competitive market place. But the PMA member company prices appear to be insulated by brandname loyalty created by effective marketing practices engaged in during the market exclusivity period provided by patent protection." Hatch's view of the competition between generic manufacturers led him to consider an exemption for generic marketers from any PHS rebates during recent negotiations on Kennedy's bill. Reminding the drug companies that he is traditionally one of their strongest supporters on Capitol Hill, Hatch asserted: "I have always spoken out strongly in the defense of research companies on the premise that we must maintain these incentives for new drug research, and to provide an attractive investment opportunity for capital investment to fund that research." Post- patent price increases, however, do not appear "justified," Hatch told FDLI. "In fact, such price increases appear not only to violate the fundamental principles of a free market economy, they potentially represent the most callous and insensitive abuse of customers." Alluding to Sen. Pryor's (D-Ark.) bill (S 2000) to reduce Sec. 936 tax credits to companies whose drug product prices increase faster than inflation, Hatch noted. He has expressed concern in other contexts that pharmaceuticals are one of the few U.S. industries "still going full blazes," and "now we want to come in and ruin it, too. And frankly," he warned, "that's what will happen if we move to a system of . . . price and rate regulation." Hatch's attention was drawn by some advocates of the elderly to some instances of pharmaceutical companies increasing their prices at the time of patent expiration. He told FDLI that data from sources such as the "Red Book" appear "to validate the criticism that PMA companies are not pricing their products appropriately after patent expiration in what should then be a competitive market place." Hatch's acceptance of the price increase picture indicates the wide currency of that view in policy circles. Recent academic attempts to balance the pricing figures by looking directly at company figures may show more accurate pictures of smaller price increases, but it will be hard for those figures to dislodge the well-entrenched picture of the drug industry's price increases. A recent study at MIT puts that annual price increases in the brandname sector at less than 7% compared to the 9-10% range cited by government statistics ("The Pink Sheet" Nov. 25, T&G-10). The study of Red Book prices also fails to take into consideration real market prices for those products and the effects of bundling off-patent products together for discounts.

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