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MEDI-CAL TO SEEK SUPPLEMENTAL DRUG REBATES UNDER EXPEDITED, TWO-MONTH NEGOTIATING PERIOD: UPCOMING LETTER TO ASK FOR $27 MIL. IN ADDED REBATES

Executive Summary

Medi-Cal is embarking on an accelerated negotiation program to seek amended rebate contracts with drug manufacturers as a result of the California budget cuts incorporated in the fiscal 1993 legislation signed by Governor Wilson (R) on Sept. 2. The budget legislation calls for the director of the state's Department of Health Services aggressively to pursue additional pharmaceutical rebates above existing contracts. The state has had the authority to seek supplemental rebates in the past; the budget law with its exhortation adds impetus to the process and puts it in the context of the state's overall budget problems. The target amount for additional rebate payments is about $27 mil. during the current fiscal year (through June 30, 1993). The first step in the state's attempt to sign supplemental rebate contracts will be a letter from DHS to current contractors in the week after Labor Day. The state is under a tight deadline: the budget legislation calls for signed supplemental rebate agreements by Nov. 1. Suppliers without signed contracts by that date may face prior authorization hurdles for their products in the program. The logistical challenge of revising or replacing existing rebate contracts with drug suppliers within 60 days is daunting. The state will have some extra clout in negotiations from a change in the appeal mechanism for manufacturers affected by adverse decisions. According to the budget package, the appeals are waived until Jan. 1, 1994. The $27 mil. supplemental rebate figure was calculated by California for a 12-month period from July 1, 1992 through June 30, 1993. Because of the two-month delay in the passage of the California budget, the total amount of the supplemental rebates may be smaller. However, the state remains under severe budgetary pressures to find as many savings (including rebate payments) as it can. Single-source product suppliers are likely to be asked to provide California with supplemental rebates above the current Medicaid minimum rebates. That figure is preliminarily being estimated at approximately 10 percentage points more than the current 12.5% discount off the average manufacturer's price (AMP) required by the 1990 federal Medicaid rebate legislation. In its supplemental rebate negotiations with single-source suppliers, the state is not likely to seek equal rebates across the board. That approach would indicate that some of the firms providing large discounts (through rebates based on the "best price" formula) may not be expected to contribute much toward the supplemental rebates. Companies with rebates currently at the minimum will apparently be the focus of the most intense supplemental negotiations. Suppliers of generics are going to be asked for an across-the- board increase in the current 10% rebate figure. If they are, it will represent a change in tack by the state from a proposal earlier this summer. In June, California issued a letter to multi-source suppliers informing them of a plan to ask for bids to select the lowest- priced generics in different categories. By changing back to a flat rebate percentage for generics, the state hopes to make it easier for companies with broad generic product lines to participate. The supplemental rebate agreements will not automatically trigger further "best-price" cuts in other Medicaid programs, California points out. The state maintains that the Health Care Financing Administration has said that additional contracts with state programs will not establish new best prices. Overall, California originally projected savings from the pharmaceutical program of about $78 mil. (for the July 1992 through June 1993 period). The figure cited by state legislative analysts at the signing of the budget bill was lower at $56.5 mil. In addition to the supplemental rebates, the state has three other strategies for cutting drug expenditures: a monthly ceiling on per beneficiary prescriptions; an accounting change in the recording of rebates; and speeding up the process of choosing preferred products in selected therapeutic categories. The state will limit monthly prescriptions for each beneficiary to a maximum of 10. Patients in long-term care facilities and patients with prescriptions for family planning will not be affected by the limitation. Less than 10% of the current Medi-Cal beneficiaries receive more than 10 prescriptions per month. The limitation was calculated to save the state about $6 mil. in the full 12 months of fiscal 1993. The California Pharmacists Association reports that proposals "such as selective contracting for Medi-Cal pharmacies" were rejected during the debate. The state also will get a savings in the current fiscal year by changing from a cash to accrual basis for accounting for rebate payments. That change was expected to add almost $26 mil. to this year's rebate payments. Perhaps the most far-reaching proposal in the pharmaceutical budget cuts is the effort by the state to identify therapeutic categories where it can limit the number of single-source products for coverage. Under previous authority, the state had been moving toward a deadline of Jan. 1, 1993 for setting up therapeutic classifications. The first major steps of that process are now to take place alongside the supplemental rebate negotiations during the next two months. California projects savings in this fiscal year of nearly $18 mil. from the effort. While the state will not have the specific right to choose a preferred product for therapeutic substitution in each category, in effect, that may be the end result. In an early summary of the effects of the California legislation, the Pharmaceutical Manufacturers Association explains that the state is authorized "to determine the number of single-source drugs contracted for in a particular therapeutic category which are 'necessary to meet the health needs' of the Medi-Cal population." State officials note that California can decide that no brandname products are necessary in classes where multi-source products are determined to be appropriate to meet health needs. Some procedural protections for pharmaceutical suppliers were written into the law during the budget process. The state, for example, will have to involve an advisory committee (the Medi-Cal Contract Drug Advisory Committee) in its decisions on the number of necessary products in each therapeutic class and relative merits of each drug in that class. PMA observes that procedure is in lieu of requiring the state to choose a single drug in each therapeutic class. The Medi-Cal Contract Drug Advisory Committee has its first meeting scheduled for Oct. 29. However, in the interim, the state plans to consult with members on the selections. Indicative of the pressure on the state to act quickly, the pharmaceutical program managers are planning to have the first therapeutic categories selected and drugs within those categories reviewed by mid-September. The advisory committee members will then have about two weeks to review those decisions. The state says that the supplemental rebate negotiations and therapeutic category reviews are separate processes which will be occurring simultaneously because of the nature of the state's financial problems. However, the state apparently will have added leverage in the rebate negotiations from its developing therapeutic class proposals. PMA believes that the industry avoided some dangerous precedents during the California budget debates. The association points out, for example, that the law does not identify a specific level of mandatory supplemental rebates; at one point in the debates, there was preliminary language calling for a fixed amount of supplemental rebates. Similarly, the law does not set a mandatory therapeutic MAC or require the state to pick only one drug in each class to reimburse. The association notes that it was able to make a case in the California legislature against specified rebate levels in a "crisis-lie atmosphere."
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