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MEDICARE OUTPATIENT DRUG COST ESTIMATE REDUCED TO $66 BIL. FOR FIVE YEARS UNDER OCT. 27 CLINTON PROPOSAL: LARGER REBATES, REFINED PROJECTIONS CUT $6 BIL.

Executive Summary

Medicare is expected to spend $66 bil. on outpatient prescription drug costs during the first five years of the program under the Clinton Administration's Health Security Act, released Oct. 27. The White House's Sept. 7 draft summary of the proposal had projected that Medicare Rx drug costs during the first five years would be $72 bil. ("The Pink Sheet" Sept. 13, p. 3). Administration officials explained the change in drug expenditures as part of President Clinton's relaunch festivities on Oct. 27. The officials reported that the projection declined $6 bil. when refined estimates of the proposed program resulted in lower calculations of the cost of drug ingredients. A major factor in the reduced ingredient cost is presumably the higher rebates expected from single-source drug manufacturers and marketers of branded products in multi-source categories. The minimum required rebate would be raised by two percentage points to 17% under the proposal, from 15% in the September draft. Generic products would not be subject to rebates in the Clinton proposal. Sec. 1850(c)(4), headed "No rebate required for generic drugs," states that no basic rebates, additional rebates or negotiated new product rebates will be required "with respect to a covered outpatient drug that is not a single-source drug or an innovator multiple-source drug." The section refers to a subsection of the Social Security Act -- 1927(k) -- for elaboration of what constitutes "an innovator multiple-source drug." That language mirrors a request for a change in Medicaid rebates pushed by generic marketers to get rid of the 10% rebates being paid on generic scripts in that program ("The Pink Sheet," Sept. 20, T&G-6). Changes in assumptions regarding induced utilization, generic drug use and the size of the Medicare population also may be reflected in the drug expenditure estimate. Generic drug use, for example, could be estimated to increase as 42 branded products lose patent protection in 1994-1995 before the estimated start-up of the program on Jan. 1, 1996. The group of six manufacturers represented by Rx Partners estimated on Oct. 28 that the 17% minimum Medicare rebate would add "$2 bil.-$3 bil. per year" in taxes paid by the pharmaceutical industry. Rx Partners also expressed particular concern that the legislation gives HHS "new and unprecedented authority to review at any time cost information with regard to" new breakthrough drugs. The revised Oct. 27 proposal would use Medicare rebates as a means to create a "single-price" mandate for manufacturers to offer comparable discounts to comparable purchasers. The measure stipulates that rebate agreements will "guarantee that the manufacturer will offer, to each wholesaler or retailer (or other purchaser representing a group of such wholesalers or retailers) that purchases such drugs on substantially the same terms (including such terms as prompt payment, cash payment, volume purchase, single-site delivery, the use of formularies by purchasers, and any other terms effectively reducing the manufacturer's costs) as any other purchaser (including any institutional purchaser) the same price for such drugs as is offered to such other purchaser." Discounts offered to government purchasers are excluded from consideration under the provision. The intent is said to be that drug manufacturers will offer "substantially the same" price deals to all purchasers if they wish to have their products covered by Medicare. Similar language is expected to be applied to the Medicaid program. Unlike the Sept. 7 draft, the proposal contains no reference to a buyer's ability to "influence physician prescribing behavior" as a justification for differential price breaks. The deletion does not mean that formularies and therapeutic interchange may not be a factor in whether purchasers such as hospitals and HMOs receive price breaks, it means only that they carry no more weight than sheer volume. The bill apparently tries to draw a fine balance between different factors affecting price -- i.e. volume and formulary rules. Under the proposal, a large chain or pharmacy buying group that does not attempt to influence physician prescribing could receive discounts equal to those offered to a small hospital with a restrictive formulary. Another pharmacy-related provision in the proposed Medicare program permits HHS to reduce the dispensing fee for mail-service pharmacies, "based on [their reduced] operating costs and other economies," the Clinton proposal states. The standard dispensing fee for all pharmacies in the first year under the plan is $5, a reimbursement indexed to inflation in subsequent years. The proposal also requires participating pharmacies to counsel Medicare beneficiaries. Pharmacies must "agree to answer questions of individuals [enrollees] who receive a covered outpatient drug from the pharmacy regarding the appropriate use of the drug, potential interactions between the drug and other drugs dispensed to the individual and other matters relating to the dispensing of such drugs," the measure states.
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