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Executive Summary

Senate Finance Committee Chairman Bentsen (D-Tex.) opposes use of the tax code as a lever against pharmaceutical price increases. Near the end of the Senate's March 11 debate on Sen. Pryor's (D-Ark.) unsuccessful drug cost containment amendment (a modified version of S 2000), Bentsen asserted: "There is no question in my mind, it is an attempt to use the tax code to control prices. If you start down that road, where do you stop? Do we deny tax deductions to banks where we think the interest rate happens to be too high?" He added: "You cannot set prices, controls, and expect them to work and use the tax code for that purpose." Bentsen had two problems with the Pryor amendments: (1) his objection to use of the tax code for price control; and (2) the legislative tactics of the 1992 growth package. Bentsen tried to restrain any amendments to the tax and economic growth package. In an attempt to enact the tax and growth bill by the March 20 deadline set by President Bush, Bentsen urged colleagues to draw an "absolute line" against amendments to the package. Bentsen, however, was able to add a health insurance reform and preventive care bill to the package during the Finance Committee's initial markup of the package (see following story). Signaling his impatience to move the tax bill forward, Bentsen announced six hours into the debate on the Pryor amendment that he had expected discussion on the amendment to last only one or two hours. Referring to the amendment's provision to reduce the Sec. 936 tax credits available to pharmaceutical companies if product prices increase faster than general inflation, Bentsen told the Senate that the measure "creates a very complicated formula... [that] makes it very difficult for a business to anticipate its taxes and to set its budget." He also noted the Sec. 936 penalties would apply only to domestic corporations, indicating that the Pharmaceutical Manufacturers Association's use of that argument during legislative briefings was effective. The chairman also expressed reservations about how the bill would affect the economy of Puerto Rico. On the other hand, Bentsen said he has "some concern" about data that companies receive "twice as much in tax benefits as the employees' salaries in Puerto Rico." Sen. Pryor reviewed Treasury Department calculations that corporations receive about $70,000 in Sec. 936 tax credits per individual employed in Puerto Rico but pay about $26,000 per employee annually. Bentsen, who went to shake Pryor's hand immediately after the Senate began voting on his motion to table the amendment, concluded by saying that despite his "respect for the compassion, concern and knowledge of my friend from Arkansas and his leadership on issues of health care," it would be "a mistake to pass" the amendment. The most vocal opponents of the Pryor bill during the day-long debate were Sens. Hatch (R-Utah) and Bradley (D-N.J.); his most stalwart ally was Budget Committee Chairman Sasser (D-Tenn.). Both Hatch and Bradley attended most of the eight-hour debate and spoke several times. Bradley urged that the amendment be rejected while Congress continues to work on more comprehensive health care reform. He told the Senate that pharmaceuticals account for only 7% of U.S. health spending, the same percentage as in 1965. The bill "does nothing" to address hospital, physician and nursing home expenditures, Bradley said, noting that Congress has just begun the health care reform debate. That is similar to arguments used against orphan drug amendments to limit the commercial potential for products developed under the auspices of the orphan act ("The Pink Sheet" Jan. 27, p. 8). The larger-debate arguments further indicate a building backlog of issues for general health care reform measures. Bradley added that the "price controls as envisioned in this amendment will significantly reduce incentives for investment" by the pharmaceutical industry. Similar views were advanced by Bradley's New Jersey senatorial colleague Lautenberg (D) and by Sen. Dodd (D-Conn.). Illustrating the regional as well as the philosophical nature of the debate, Lautenberg noted that the drug industry is one of New Jersey's largest employers, accounting for more than 54,000 jobs. Dodd reported that pharmaceutical companies account for 12,000 jobs in Connecticut. Lautenberg, voicing his concern that the amendment "could also put a halt to the development of life-saving therapies," inserted into the Congressional Record six pages of listings of drugs in development for cancer and other "debilitating" diseases that were compiled by PMA. Sasser maintained though that even if comprehensive health care reform is enacted, "We will still have to find a way to rein in excessive prescription drug prices. None of the proposals presently before Congress, even those...which include a broad system of cost controls, will provide a means to halt what is now unbridled price inflation being sponsored by the pharmaceutical manufacturing companies of this country." Pryor acknowledged that his amendment addresses "one sliver" of health care reform, but he asserted that "this is delivery day" on congressional pledges to begin tackling health care expenditures. Characterizing Sec. 936 as the "mother of all tax breaks." Pryor contended that "enormous profits today are being made, unconscionable profits are being made, by the drug companies who have taken advantage of the tax code of this country, and today should be and must be a day of reckoning." Disputing suggestions that profits are reinvested in R&D, Pryor asserted that the "average CEO" of a pharmaceutical company earns $1.5 mil. annually, plus benefits, in contrast to the average household income for the elderly of "a mere $8,700." According to Pryor, the Joint Tax Committee and Congressional Budget Office project that the bill's Sec. 936 provision would save $1.1 bil. over five years. Providing the lengthiest opposition to the amendment, Labor & Human Resources Committee Ranking Republican Hatch said the amendment constituted "price control" regardless of whether Pryor described it as such and would "change all the free market incentives" that have helped the pharmaceutical industry "flourish." Hatch pointed to the industry's positive balance of trade as well as to the "highly competitive" nature of the U.S. market, where no single company has a market share greater than about 7%. Pryor and Hatch peppered the debate with competing chart and graphs detailing pharmaceutical manufacturer prices, retail prices, R&D costs and international price comparisons. However, Sen. Gramm (R-Tex.) dismissed the information as irrelevant to the key issue -- his contention that the amendment "contains the same old tired socialist proposals" that the rest of the world has rejected. In one of the livelier moments of the debate, Gramm asserted that Pryor opposes capitalism and has designed a bill that is "at variance" with the Constitution's protections of equal treatment under the law and its safeguards against seizure of property. In an effort to gain wider acceptance for the amendment, Pryor made three changes from S 2000, including toning down language calling for an HHS study of the feasibility of a drug price review board similar to the one in Canada. "References to the study of the applicability in the U.S. of a Canadian drug price review board have been restructured so that a broader study of drug cost containment methods used by various industrialized countries is undertaken. (This eliminates specific references to the patent and compulsory licensing issues that the drug industry and the Administration claim have trade implications)," Pryor advised in a March 10 letter to Senate colleagues. In addition, funding for the bill's drug payment review commission and Medicare outpatient drug coverage demonstration projects would be authorized but not directly appropriated. "This avoids any problem with a budget point of order," Pryor said. Further, some of the revenues generated by the bill would help fund expansions of the tax deduction for health insurance premiums paid by the self-employed, described by Pryor as "a high priority for the small business community."

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