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HHS MEDICARE DRUG COVERAGE EXCLUSION AUTHORITY MAY BE RECONSIDERED BY WHITE HOUSE; MAGAZINER SAYS THAT ADMINISTRATION IS CONCERNED ABOUT BIOTECH FUNDING

Executive Summary

A provision authorizing HHS to exclude "excessively" priced prescription drugs from coverage under a new Medicare pharmaceutical benefit may be deleted from the final draft of the Clinton Administration's health care reform proposal. At a Sept. 15 briefing White House Senior Advisor for Policy Development Ira Magaziner, who heads the staff of the health care reform task force, is understood to have told industry officials that the Administration hopes to preserve incentives for development of breakthrough technologies and will "pull back" the Medicare coverage exclusion provision from the legislative proposal. Magaziner's willingness to reconsider the Medicare exclusion is not universally shared by the drafters of the health care plan: a number of staffers are staunchly defending inclusion of the provision. A tactical argument is being cited for retaining Medicare drug exclusion authority. Its inclusion in the plan as announced gives Congress added leverage in negotiations with industry on the broader legislation. If the provision is removed before the final proposal is published, Congress is considered not likely to reinstate it into the bill. If the exclusion authority does not show up in the plan as unveiled after President Clinton's Sept. 22 speech, it may be the long-awaited stimulus to jump-start the public markets for biotech companies. Even if it drops the Medicare exclusion provision, the Administration appears likely to keep in the price review board. That is more of a public oversight clause, and while it could cause the biotech companies difficulty, it is a form of oversight that the drug industry has learned to tolerate (see related story, p. 14). Industry participants at the briefing included representatives of the Biotechnology Industry Organization, the National Association of Chain Drug Stores and the Pharmaceutical Manufacturers Association. In a memorandum circulated to the PMA board, President Gerald Mossinghoff described Magaziner's remarks on Medicare drug coverage. He acknowledged that the White House's final decision on the issue remains an open question, but the Administration's reconsideration of the issue may indicate a sensitivity to industry concerns. A further possible sign of conciliation is that the various representatives at the briefing reportedly were asked not to characterize White House accommodations of industry concerns as "victory" for a particular group or "loss" for the Administration. President Clinton has bemoaned the tendency for equating desire for "consensus" with "weakness." In the public war of words, the six-company industry coalition Rx Partners responded to the working draft of the Clinton plan by attacking the rebate proposal and price review provisions. Rx Partners contended that "mandated government discounts and price review boards would penalize pharmaceutical companies, which uniquely bear the investment risk of searching for new drugs." While commending Clinton's decision to include prescription drug coverage in the basic benefits package and his expressed rejection of direct price controls for prescription drugs, the coalition's response maintains that "the positive impact of these decisions would be jeopardized by the creation of a National Health Board to determine the 'reasonable' prices of breakthrough drugs and by giving [HHS] the power to 'blacklist' important prescription drugs if their prices do not suit the budgetary goals of government bureaucrats." The group pointed to "recently approved, breakthrough drugs for Alzheimer's disease and multiple sclerosis" -- Warner- Lambert's Cognex and Berlex' Betaseron -- as examples of products that "could have been blacklisted under the Clinton Administration's proposed plan." The coalition also argued that a mandated Medicare rebate would "negate the managed competition model and limit resources available for research and development of new breakthrough drugs, threatening access to those who need these drugs the most -- the elderly." At a Sept. 14 Rx Partners press briefing, Warner Lambert Exec VP Joseph Smith offered his reaction after a preliminary examination of the 245-page draft document: "I'm pretty horrified by the prospect of the 15% Medicare tax and what that might do to our income statements, [and] our operating expenses." Smith downplayed the extent of the increase in volume which would result from the extension of a drug benefit to Medicare participants, as well as to the uninsured or underinsured. A Warner-Lambert analysis estimates the increased volume from Medicare patients at 4%, Smith said, and 1% for the uninsured. He also suggested that under the proposed plan, "you're going to have pressures towards the lower-priced segment, the generic [products]," with the result that "the pharmaceutical industry is probably going to wind up with more units and less revenue than we have now." While met with criticism from industry spokespeople, the 15% government discount/rebate appears to mirror the discounts being demanded (and received) in the private markets. A study commissioned by a group of major drug companies from the Boston Consulting Group indicates that the weighted average discount for all pharmaceutical purchases in 1992 was 16% and much of that figure was derived from 25% discounts to managed retail pharmacy ("The Pink Sheet" April 5, p. 9). The drug industry has not yet composed a firm response to the Clinton proposal or a lobbying strategy, Smith suggested, both because it lacks experience in joining together on a large scale and because the Administration had led it to believe that the plan would not include price controls. However, he said, "the death of price controls seems to be greatly exaggerated, because there are price controls or taxes by a lot of different names" in the plan. The industry will contact Capitol Hill to determine "how do the members of Congress feel about this," Smith said, and it will keep an open dialogue with the White House, because "the President has said that all of these are proposals that we're willing to talk about." Industry success "depends how open minded they are on some of these issues," he added. In a Sept. 17 letter to the President, NACDS and NARD jointly pledged to support the legislative proposal "through our 112,000 community retail pharmacists and our more than 1 million employees." The associations said they are "prepared to communicate aggressively the merits of the evolving plan in our efforts to further enhance and solidify public support" for the proposal. They added that their members interact "with millions of patients each day in more than 60,000 stores." In a same-day letter to White House task force staffer Christopher Jennings, NARD and NACDS said they specifically commend the plan's inclusion of a universal prescription drug benefit; elimination of "the arbitrary and discriminatory pricing practices of drug manufacturers"; establishment of "a Medicare prescription drug benefit with an equitable reimbursement formula, including a realistic $5 dispensing fee"; and modification of "antitrust laws to enable providers to join together to improve efficiencies and the repeal of the McCarran-Ferguson Act." Sen. Pryor (D-Ark.) in a Sept. 15 statement on the Senate floor urged all pharmaceutical manufacturers to sign voluntary price agreements with HHS to limit every drug product's price increase to inflation. Noting the absence in the proposal of direct government price- setting authority and President Clinton's decision to permit the industry to practice voluntary pricing restraint, Pryor proposed what he called "a realistic, meaningful and comprehensive commitment that brandname pharmaceutical manufacturers can make to [HHS] to limit the price increases on their products to the rate of inflation." The senator's proposal would require all manufacturers to limit increases in individual product prices, and therefore increases in average annual weighted prices, to the CPI. Pryor said his plan "reflects some of the manufacturers' very own proposals" and assures that a uniform scheme "would become binding on all manufacturers, not just a few." The senator said such a system would "give manufacturers flexibility in pricing their products across their product line" while assuring retail drug prices "will not increase faster than the rate of inflation."
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