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Executive Summary

Price increases to large drug purchasers in the private sector have been increasing "at twice the rate that would have been expected based on price inflation in prior years," according to a coalition of hospitals, health maintenance organizations and buying groups. Contracts signed with drug manufacturers in 1991, after the passage of the Medicaid rebate law, have shown the doubled increases, the coalition states in a recent background paper on drug prices and large buying groups. The coalition also maintains that "during 1991, manufacturers refused to submit bids for contracts with large purchasers four times as often as in prior years." In addition, the background paper states, "the length of contracts signed in 1991 declined from an average of three years to an average of nine months" as drug manufacturers attempted to adjust to make sure they would have price flexibility in the future. The Feb. 19 background paper on prices is part of the effort by the large purchasers to get involved in the debate about changing and/or extending the "best price" Medicaid rebate formula. The group calls itself the Coalition of Health Care Providers Concerned about Rising Drug Costs and includes as members the American Hospital Association, the American Society of Consultant Pharmacists, the American Society of Hospital Pharmacists, the Federation of American Health Systems, the Group Health Association of America, the Health Industry Group Purchasing Association, Kaiser Permanente, Voluntary Hospitals of America and other associations of health care providers. The coalition's lobbying effort is complicated by the fact that hospitals cannot document the extent to which the Medicaid law has raised their drug product acquisition costs because manufacturers generally provide discounted prices under confidential contracts. "These contracts typically prohibit purchasers from disclosing the terms and conditions of the contract," the paper states, and disclosure "could result in an immediate breach of the contract and loss of any discounts or rebates." The coalition says that Congress should "repeal the so-called 'best price' provisions and substitute a guaranteed percentage rebate to Medicaid." Such a change would benefit not only hospitals by facilitating offers of price discounts from manufacturers, the coalition said, but it will also benefit states because "guaranteed" fixed-percentage rebates will not erode over time. In contrast, best prices are being gradually eliminated by manufacturers because the current law requires them to offer the same discounted prices to Medicaid. Sen. Chafee (R-R.I.) and Rep. Synar (D-Okla.) have drafted but not yet introduced bills to repeal the 1990 Medicaid rebate law's best price provision and replace it with fixed-rate rebates. The coalition estimates that an 18% flat rebate would generate sufficient Medicaid savings to meet budget targets. The group also is talking with other members of Congress, including Rep. Slattery (D-Kan.). A member of both the House Energy & Commerce and the Veterans Affairs Committees, Slattery is sensitive to the concerns of the V-A Department, which, like hospitals and HMOs, wants a pharmaceutical industry rollback of deep discount prices. Legislation (HR 2890) authored by House V-A Committee Chairman Montgomery (D-Miss.) would require pharmaceutical manufacturers to roll back their prices to V-A health care facilities to levels of September 1990, before the Medicaid rebate law was enacted. The bill also would extend permanently a recently passed exemption of best prices offered to V-A from Medicaid best price calculations. HR 2890 was passed by the V-A Committee and is pending in the Energy & Commerce Committee ("The Pink Sheet" Nov. 18, T&G-5). "The coalition was formed because each of our members experienced severe disruption in its pharmaceutical purchasing operations soon after enactment" of the 1990 Medicaid rebate law, the position paper explains. Through 1992-1993, as caps on the law's best price requirements are lifted, the coalition said, "the costs of our pharmaceutical procurements will escalate substantially." Such increases will result in "higher costs to the state Medicaid programs, reduction in services to the medically underserved and patients served by long-term care pharmacies, and higher premiums charged to members of HMOs," the coalition maintained. The coalition document contends that a guaranteed fixed- percentage rebate will yield greater savings for Medicaid than rebates based on best prices. As best prices are abandoned by manufacturers, "the spread between 'best prices' and average manufacturer prices" are disappearing, the group said. "In 1993 and later years, the states would be much better off with a guaranteed percentage rebate." The position paper also criticizes proposed bills being contemplated by Sen. Pryor (D-Ark.) and Rep. Wyden (D-Ore.) to roll back best prices to 1990 levels. Proposals to "roll prices back for all government programs to the V-A's Federal Supply Schedule prices" that were available in 1990 "fail to address the core problem...which is that the use of 'best price' in the rebate formula encourages manufacturers to abandon or reduce discounts to large purchasers of prescription drugs," the document maintains. Drug manufacturers are divided on legislation to move from best price rebates to fixed-percentage rebates. Manufacturers that have not offered deep discounts to hospital customers -- Merck, Bristol-Myers Squibb, Pfizer and Burroughs Wellcome -- prefer the best price system. The coalition pointed out that "these non- discounters developed legislation that penalized firms who did discount," enacted as the Medicaid best price rebate requirements in 1990. Among manufacturers that have historically offered price discounts to hospitals, there are firms that fear changing the law even though they would benefit from a move to a fixed-rate rebate. During the Pharmaceutical Manufacturers Association annual meeting last spring, outgoing board chairman Richard Kogan of Schering- Plough urged the industry not to try to tinker with the law but allow its "markets to settle down" ("The Pink Sheet" May 6, 1991, p. 7).

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