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PRYOR PRICE BILL, WITH TAX-ENFORCED CONTROLS, ANTICIPATED AS CLINTON ATTEMPTS TO MAKE GOOD ON CAMPAIGN RHETORIC: RED HERRING OR PART OF LARGER REFORM PLAN ?

Executive Summary

The research-intensive segment of the pharmaceutical industry is bracing for the reintroduction of Sen. David Pryor's (D-Ark.) tax-enforced price restraints on existing pharmaceutical products as part of the Clinton Administration's 100-day push. The political logic is clear-cut. Candidate Clinton repeatedly included pharmaceutical price increases in his litany of health care problems -- including even a brief mention of pharmaceuticals in his acceptance speech on election night. Sen. Pryor is a close Clinton associate and has quickly emerged in the view of the media as the president-elect's plenipotentiary on Capitol Hill. In S 2000, Pryor has a ready-to- resurrect legislative vehicle from the 102nd Congress. Pryor's bill represents a discreet, relatively small-scale legislative proposal with headline appeal; its legislative progress could help to create the image of quick results by the new administration while it takes on the larger campaign promises of overall health care reform and an economic recovery package. While preparations for a legislative fight over a reprised price bill are based on a reasonable reading of the 1992 election results, they may also represent an example of refighting the last war. S 2000 is a known legislative challenge, and the natural reaction is to prepare for its return. However, the industry could quickly find itself involved in a legislative fight in 1993 on a different scale. If the Democratic leadership decides to include pharmaceuticals under a broader health care plan, the Pryor price controls could quickly become a side show. Earlier this year, it was suggested by Senate Budget Chairman Jim Sasser (D-Tenn.) that elements of Pryor's bill could be folded into larger health care reform packages ("The Pink Sheet" Feb. 24, In Brief). The staffs of the major Capitol Hill figures in the health care area are to begin meeting during the week of Nov. 8-12 under the direction of Senate Majority Leader George Mitchell (Maine) to begin identifying the elements to come under health care reform. Forty-one Democratic senators wrote to Clinton in mid-October pledging to work with him on a major health care overhaul proposal. House Democratic Campaign Head Vic Fazio (D-Calif.) predicted Nov. 5 that health reform would be an "absolute certainty" during the 103rd Congress. Fazio said that Democrats "have made it very clear not only last year but in our campaigns that we intend to pursue [comprehensive health care reform] to conclusion." "While I think we are all going to have to adjust to the fact that the leadership is now going to come from the White House, where Bill Clinton is going to be attempting to discern what it is he wants to get behind, I think you are going to see the Democrats find a combination to get a health care initiative through the House and to the President, certainly in this Congress," Fazio said. He added that although "that's not going to be easy... it's an absolute certainty that we will do it." "If I were to guess," Fazio continued, the health reform plan will "look like the plan that was emerging at the end [of the last Congress] -- heavily impacted by the moderate and conservative Democrats in the House who really want to build competition in, and not just talk about it as we did in the late 70s." There are obviously no open supporters for a Pryor price bill within the drug industry, but there are indications that some see it tactically as a lesser evil and would quietly favor another debate over that bill instead of facing an unknown proposal. The experiences of the OBRA '90 Medicaid rebate program and the 1988 Medicare outpatient drug program are still fresh. In those two situations, major drug programs were caught up and swept along in larger scale legislative initiatives, minimizing the drug industry's opportunity to affect the nature of the final proposal. A lasting vignette from those earlier large-issue debates is a young Office of Management & Budget officer addressing a PMA group during the heat of the OBRA legislative development and telling them that the effect of the rebate plan on future research was not the issue, the Bush Administration needed the added funds from pharmaceutical rebates to the Medicaid programs. Even if a Pryor price bill were enacted by the 103rd Congress along the lines of this year's defeated proposal, it might be a victory for the opponents of drug price controls. A new Pryor bill would take up legislative attention and at the same time could satisfy the Clinton campaign's pharmaceutical price rhetoric. The companies that are likely to be less worried about a Pryor reprise are fairly easy to identify. The Pryor bill's focus on price increases on existing products would affect firms with mature product lines more severely than companies with a full plate of recently-introduced products. The bill's use of cuts in Sec. 936 credits to enforce price restraints would also mean that those companies which rely most heavily on Puerto Rico manufacturing and the associated tax credits have the most to lose. Clinton's campaign visit to Merck highlighted the distinction between the S 2000 concentration on existing product price increases and broader plans which might limit the ability of companies to price new products or to market products in existing classes. Before the visit, the Clinton campaign released broad statements about pharmaceutical price gouging. By the time of the speech, however, Clinton had qualified those remarks to add a statement on the importance of permitting companies to recover the full costs of R&D and to focus his attack more directly "on those companies which do not keep the cost of traditional, already- established drugs within inflation." Clinton took over a half-hour on the day of the speech to talk with a small group of senior Merck executives prior to his speech on Sept. 24 ("The Pink Sheet" Sept. 28, T&G-1). The focus on Sec. 936 credits in the Pryor approach to controlling drug price increases also ironically makes that bill less threatening to the industry in the 103rd Congress. With continued attention on revenue enhancement (tax increases), Sec. 936 credits are in a precarious position in the next Congress whether or not a Pryor bill is passed. House Ways & Means Committee Chairman Rostenkowski declared in July that he plans to seek a 15% cut in the credits during the next session ("The Pink Sheet" July 27, p. 9). If the tax break is likely to be reduced during the next Congress, the industry may be tacitly willing to give it up as part of the Pryor price control plan. The impact of the Pryor bill has already been discounted by the financial community, making it a good fight for the drug industry to take on from a public relations point of view. The familiarity of securities analysts with the bill means it is less likely to precipitate a further market run from the drug companies. The larger legislative threats facing the brandname drug companies from the Clinton Administration are embodied in two of the hot new jargon terms: global budgets and national health boards. Global budgeting is used as a phrase to describe overall government caps on health care spending. The approach has recently migrated from plans such as the American Health Security Plan, supported by Democratic senators Harris Wofford (Penn.), Thomas Daschle (S. Dak.) and Paul Simon (Ill.), and "play-or-pay" programs such as the Democratic leadership's "Health America," to become a feature in managed care reform plans such as one introduced by Sen. Jeff Bingaman (D-N. Mex.) at the end of the 102nd session. Bingaman's proposal includes the prototype of a global budget provision in the establishment of a federal health budget "calculated to cover the expenses incurred by efficient benefit plans in providing the uniform effective benefit packages." The Bingaman bill also espouses the concept of establishing regional health insurance purchasing cooperatives (HIPCs) to permit uncovered individuals to purchase health coverage from accountable health plans (AHPs). The plans would be required to offer a minimum standard package of benefits. The Clinton campaign moved toward a similar description of global budgets and managed care reform as it approached the election. The global budgeting emphasis on spending ceilings would apply pressure throughout the system and tends to support programs to restrict choices in specific drug price categories. The Pharmaceutical Manufacturers Association is watching global budgeting with concern. The association says that global budgets are just another name for "price controls" that would "establish arbitrary limits" on pharmaceuticals and would "curb essential research and development and stifle innovation." The managed care plans rely on the establishment of boards to approve specific private plans for regions and to set minimum coverage packages. The "Jackson Hole Group" proposals from which many of the current plans derive would establish four boards: an Outcomes Management Standards Board; a Health Standards Board; a Health Insurance Standards Board; and a "quasi non-governmental agency," the National Health Board, to act like the Securities & Exchange Commission in the regulation and dispersal of public information about health insurance entities. The proliferation of proposals using boards as regulatory entities in the field of health care expenditures could lend support to nascent calls for pharmaceutical price boards. The idea has been part of Pryor's proposal in the form of a provision to study the adoption of a price board similar to one established in Canada. During the March 11 eight-hour debate on Pryor's bill, the Arkansas senator pulled back on the call for the study of a board and substituted language calling for a study of other forms of pharmaceutical price controls outside the U.S. The use of a price board was picked up by Sen. Riegle (D- Mich.) in a floor speech on Oct. 6 outlining plans to introduce a Medicare extension plan for outpatient drug coverage. Riegle would create a Prescription Drug Expenditure Board "to establish a process for determining reasonable payment rates for covered drugs." Riegle said he intends to offer the proposal as a bill in the 103rd Congress ("The Pink Sheet" Oct. 12, p. 9). PMA has begun to plan for the larger health care reform debate as well as the specific challenge of another Pryor price bill. Favoring small market reform proposals aimed at enabling small employers to purchase insurance, PMA declared in a Sept. 29 summary of its positions on "Healthcare Reform" that prescription drug coverage should "be an option under small group reform." PMA does not expect drug coverage to be included in minimum standard plans but the association urged that the benefit be considered for several of the options. "A prescription drug benefit need not be required in the most basic plan that insurers offer," the PMS statement says, "but should be included in one or more optioned plans that each insurer would be required to offer under reforms of the small group insurance market." The association further outlined its key concerns for pharmaceutical plans: "sound" financing; "appropriate" cost- sharing by patients; and "open-access to all FDA-approved drugs for labeled and generally accepted uses" (i.e. off-label uses as would have been accepted by the Medicare out-patient program had it gone into effect). If the reforms focus on changes to Medicaid, PMA supports "entitling all those with incomes up to 100 percent of the Federal poverty level to an outpatient drug benefit under Medicaid."
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