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MERCK AND LILLY REJECT MEDI-CAL 25% REBATE SOLICITATION

Executive Summary

MERCK AND LILLY REJECT MEDI-CAL 25% REBATE SOLICITATION: in separate, Sept. 23 letters, the two companies declined to negotiate supplemental Medi-Cal contracts with increased discounts to the state. Lilly CEO Vaughn Bryson declared that the state's "short-term focus on trying to extract additional funds from the pharmaceutical industry is going to cost the state more in the end" by forcing some patients to more costly forms of medical treatment. Merck U.S. Human Health Division President David Anstice called "the establishment of such an arbitrary minimum flat rate...a break in faith with our prior negotiations with the state." Merck also informed California on Sept. 25 that the company plans to initiate a legal action on the grounds that the threat of increased rebates or prior authorization represents an impairment of an existing contract. The state has said that it will require prior authorization for the use of the product from any company that does not have a signed agreement with the state within 60 days of the enactment of the budget legislation. The two firms are among the first to respond to Medi-Cal's Sept. 9 letter seeking supplemental contracts. Due to the foreshortened, two-month period set by the California legislature for renegotiations, the state asked for initial answers to its minimum rebate increase by Sept. 30. Bryson wrote to California Governor Wilson (R); Anstice wrote to Medi-Cal Contracting Branch Acting Chief Michael Neff. The Merck and Lilly responses are significant because the two companies are among those most directly affected by the proposed changes in Medi-Cal rebates. The state's plan to increase the minimum rebates was apparently a plan designed to pull in more payments from those companies with the narrowest price ranges ("The Pink Sheet" Sept. 7, p. 4). Lilly is paying $5.7 mil. in rebates to California for the 12 months ended June 30 under the OBRA rebate requirements. The entire pharmaceutical industry is rebating $77 mil. to the state for that period, Lilly estimated. Without changes to the state program, California's rebates in the current year should grow to $105 mil. Based on the size of existing and projected payments, Lilly questioned the rationale of trying to raise "an additional $10 mil." by upping the minimum rebates. California has cited a higher figure of $27 mil. in additional rebates from the supplementary contracts. Similarly, Merck implicitly questioned the focus of the rebates. The company calculated that California is receiving rebates at a rate in excess of $60 mil. annually, with a large increase possible after Jan. 1, 1993 when the 50% cap on best price rebates is removed. "Now, however, the Department demands a 25% minimum rebate, despite the potential negative implications of such a tax on the entire market," Anstice said. California's "threat of placing all Merck products on prior approval (ignoring for the moment the social cost of such a move) is not a rational cost-saving measure, given the high cost of implementing such an action -- which will require tens of thousands of extra physician visits, wasted medicines and the like," Anstice maintained. Citing the "discounts" of Merck products to competing brands, Anstice said "a discount of 25% off of prices that are quite high compared to the competition may be far less advantageous to the state than getting a 12.5% discount off an already fair price." As one of several examples of Merck discounts, Anstice claimed that Mevacor came to the market at a 13% discount to cholestyramine. The California plan for supplemental rebates would lead to price shifting between customer groups, Merck implied. "The clear message sent to Merck by the Department of Health Services," Anstice said, is that the company's price "moderation benefiting all consumers, including Medi-Cal, should be cast aside in favor of providing to Medi-Cal an extremely large tax in the guise of a discount." Merck maintained that if companies are forced to provide deep discounts to one class of customer, the prices to other customers will shift upward. "It must be remembered that the group that has most suffered from cost-shifting practices that stem from such wide price disparity -- besides Medicaid before OBRA '90 -- are the nation's many senior citizens under Medicare who don't have drug coverage and, therefore, who often pay out-of-pocket for their prescription medicines," Anstice said. Both Lilly and Merck objected strongly to the use of prior authorization as a lever to force companies to renegotiate. Lilly's Vaughn reminded Wilson that HHS Secretary Sullivan sent a letter to governors in mid-February 1991 expressing a concern that prior authorization requirements not be used by states "unfairly to deny access to medically necessary drugs" ("The Pink Sheet" Feb. 18, 1991, p. 3). Sen. Pryor (D-Ark.) agreed with Sullivan's statement one week later. Merck attacked the use of prior authorization against a company's full product line. While OBRA allows "states to use prior authorization systems," Anstice said, "the clear indication was that such systems should be used only on a drug-by-drug basis, and only for exceptional cases -- and not simply to coerce greater rebates." Lilly also noted that California has a significant health care products industry that could be affected by state attempts to design targeted revenue enhancement programs. "Over the past 10 years," Vaughn said, Lilly's presence in California "has grown considerably, and we now have eight medical device and diagnostic companies in California that employ approximately 4,500 people." California is Lilly's second largest center of employment outside of Indiana. "It will, however, be difficult to consider continued expansion of our presence in a state that has arbitrarily chosen to place an unreasonable tax in the form of supplemental rebates on those who develop and manufacture medicines," Vaughn declared.
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