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MEDICAID REBATE REVISIONS WILL BE SOUGHT AS PART OF PMA SUPPORT FOR MEDICARE DRUG BENEFIT: REDUCING OUT-OF-POCKET COSTS FOR ELDERLY IS POLITICAL OBJECTIVE

Executive Summary

Revision of the current Medicaid rebate formula will be sought by the Pharmaceutical Manufacturers Association if the Clinton Administration raises a Medicare outpatient drug benefit, Syntex Chairman Paul Freiman indicated in a March 29 speech at the association's annual meeting. PMA will try to renegotiate a new rebate formula for government purchasers if a Medicare drug benefit is enacted, Freiman said. "We would want to negotiate all government rebates on an equitable basis with the powers that be," the outgoing 1992- 1993 PMA chairman told the annual meeting. With the ceilings ("caps") removed this year from the top rebates to Medicaid and discounting pressures increasing from the private market, the brandname industry is entering into the discussion of a Medicare drug benefit cautiously, well aware of the risks of further reducing price flexibility. Caps on maximum rebates existed during the first two years of the Medicaid program: calendar 1991 and 1992. Those caps, however, expired at the beginning of this year. Drug manufacturers are now supposed to offer rebates to Medicaid to make their government prices equal to their best prices to other purchasers, even if those discounts exceed 50% of the average manufacturer's price. Explaining PMA's support for a Medicare drug benefit, Freiman said: "We fully realize the potential for more rebates on more of our sales under this scheme." The possibility of a government-wide rebate policy on a larger patient population poses a serious challenge to the pharmaceutical industry, Freiman declared. "This is a perilous step for us to take" to support Medicare outpatient coverage, Freiman said. "If Medicaid-type rebates were imposed on Medicare, many of our companies' futures would be imperiled." As 1992 year-end figures become available from the publicly held drug companies, the extent of the rebates is more evident. Merck reports paying approximately $96 mil. in "total domestic rebates and discounts, including those for large pharmaceutical buyers." Even a relatively small company such as Allergan had to pay nearly 1% of its gross margins (.8% or $7.2 mil.) in rebates. PMA continues to cite the Congressional Budget Office estimate of $1.2 bil. in total industry rebate payments in 1992. It is likely that the Clinton Administration or Capitol Hill will push for a rebate system as part of a Medicare outpatient drug benefit. At the time that OBRA was enacted in late 1990, David Schulke, the key aide to Sen. Pryor on the rebate proposal, stated that the next step would be to reconsider Medicare drug coverage and a rebate program ("The Pink Sheet" Nov. 5, 1990, p. 15). Schulke, now an aide to Rep. Wyden (D-Ore.), has been serving on the President's Clinton Health Care Task Force. However, as the Health Care Task Force approaches its so- called tollgate weekend review of options, there are indications in Washington that the Medicare drug benefit may be taking a secondary place to the concern of some elderly groups for a long- term care benefit. The White House is said to be having second thoughts about including both benefits for cost reasons. Freiman's comments on renegotiation point out that there may be positive possibilities for PMA if Medicare coverage is discussed. If the industry can revise the rebate formula, they may be able to ameliorate some of the effects of having to deal with the government as a purchaser of a larger share of their products. PMA's effort to seek lower rebate rates on a larger patient population will come up against a contrary analysis of the basic economics by the Clinton task force. Administration officials have been asking the industry for estimates on the effect of a larger patient population (through Medicare) on unit sales -- implying that a larger patient population and increased unit sales should justify lower per unit product prices. Political realities have pushed PMA toward support for a Medicare drug benefit and Medicaid drug coverage to 100% of the poverty level. PMA President Gerald Mossinghoff noted, for example, that the industry is receiving a disproportionate amount of attention because of the high out-of-pocket expenditures on drugs. According to 1991 figures from the Health Care Financing Administration, total expenditures on hospital services were $289 bil. compared to $36 bil. for prescription drugs. Out-of-pocket expenditures, however, were skewed dramatically towards drugs: $20 bil. for drugs versus $10 bil. for hospitals. "People rarely write their Congressmen or call into talk shows about hospital costs" because of the insulation of third-party payment, Mossinghoff noted. "But they complain very loudly about prescription drug costs. If you have a $3,000 hospital bill but you only have to pay $150 out of pocket, it seems like a bargain," he pointed out. "But it you have to pay all of a $150 prescription charge at a pharmacy, that doesn't seem like a bargain." Analyzing the political constituency of the industry's leading critic in the Senate, Aging Committee Chairman David Pryor (D- Ark.), Mossinghoff noted that out-of-pocket charges are most acute for the elderly. Citing figures from the American Association of Retired Persons, Mossinghoff said that 45% of patients 65-74 lack prescription drug coverage. That figure grows to 60% for patients above the age of 75. The PMA president declared that PMA "must solve the problem of access to drugs, especially for the elderly." Freiman also reiterated a theme from his speech to the previous year's annual meeting: arguments about the cost and success of pharmaceutical R&D will not suffice to defend the industry during the current political discussions about price. "While we were talking about spending $12 bil. on research," Freiman said, "we were not listening to the outcry of nearly 40 mil. Americans who have no health insurance." "Although pharmaceutical expenditures rose imperceptibly as a percent of Gross National Product [from .53% in 1965 to .68% in 1992, according to HCFA figures], this fact was small comfort to an arthritic patient who watched the price he or she had to pay out-of-pocket double during the 1980's," Freiman said. "As we talked about receptor sites and ligands, Congress talked public need, and the public talked cost." PMA's recent adoption of policy positions in support of drug coverage under a minimum benefit package, upping Medicaid drug coverage to 100% of the poverty level and Medicare outpatient coverage in the interim will become more of the association's message to the public. The PMA board endorsed two expanded communication programs at its March 27 session: (1) a grassroots effort to reach employees, retirees and stockholders; and (2) the possible extension of the print advertising program onto TV. PMA has been working with the Baltimore firm of Eisner & Associates on the print ad campaign. They recently have also begun working with Robinson, Lake, Sawyer & Miller to develop message strategies. Freiman referred to the possibility of new forms of advertising in his speech when he noted that not all the new ads would necessarily continue to be in the print media. The grassroots efforts will be undertaken by the individual PMA firms. Twenty-seven members have already committed to start programs. J&J, for example, sent a two-page letter to shareholders with its recently released annual report to explain its position on health care reform and the charges against the drug industry. Responding to criticism that the industry and PMA has not been quick enough or effective in its responses to the Clinton Administration, Freiman included a short statement on the PMA staff and President Mossinghoff. "Gerry has been asked by the board to stand up for us under rigorous and antagonistic crossfire from Congress and industry critics," Freiman noted. "The pharmaceutical industry's views are not always popular, but Gerry stands up there and fights for them." Freiman pointed out that the association represents the views of the board: Mossinghoff's "statements reflect the positions of the board, and this fact should not be lost on PMA's detractors."
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