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Executive Summary

Merck is proposing a voluntary price restraint plan under which the company would roll back prescription drug prices if they increase faster than rates agreed to under a contract with the Health and Human Services department. Under the plan, Merck would sign a memorandum of understanding with HHS for three years, 1994-1996, in which the company would reduce net average prices (factoring for discounts and rebates) that increased faster than the Consumer Price Index and would roll back the price of any single product that increased faster than the CPI plus one percentage point. In addition, revenues from price increases that exceeded the stipulated rates would be paid to HHS, which would "allocate any payment by the provision of health care for low- income Americans," the draft memo states. The draft contract commits Merck to submit reports on its pricing within 60 days after the end of each calendar year. Reports would "be audited and certified as accurate by Merck's outside financial auditors," the draft agreement states. Merck Chairman Roy Vagelos estimated that the proposal, "if adopted industry wide," would reduce national prescription drug costs by $7 bil.-$9 bil. during the three-year period of the agreement. Added to the $5.4 bil. in Medicaid rebates the drug industry anticipates paying under current law, Merck said the plan could result in "more than $14 bil." in savings on U.S. prescription drug expenditures over the three years. Officials within the Clinton Administration are said to be considering the Merck plan as a possible option for interim drug price controls until a fully reformed health care system can be instituted. The Administration and Congress may insist on legislating price controls, not only for purposes of enforcement but also so that anticipated savings can be scored in budget projections. Merck is offering its plan as a voluntary program but will propose it as a model for legislation if the Administration makes clear a bill is necessary. Administration officials also note that the Merck proposal does not offer a means to control prices of newly launched pharmaceuticals, and it permits drug prices for the retail market to continue to rise faster than inflation. The Administration's task force may propose a drug price review board, which has the support of legislators like Sen. Pryor (D-Ark.), and a limit on price increases for every drug to CPI. Several other companies have announced support for voluntary price control commitments similar to the Merck plan. Syntex has pledged to limit average weighted price increases across its entire Rx line to general inflation and to limit price increases for any single product to no more than 1% over the CPI. In an April 12 announcement of the pricing policy, Chairman Paul Freiman explained that Syntex is "concerned" about the rising cost of health care "and about the charges that some companies in the pharmaceutical industry have been too aggressive in raising drug prices." The company is "trying to hold down drug prices," Freiman said, "even though our costs to discover and develop new drugs are going up more than 14% this year." He added that Syntex "took no price increases on its prescription medicines in the U.S. for a 16-month period between April 1991 and August 1992," and when annualized, weighted prices across the firm's entire line were raised an average of 3.8%.

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