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MEDICARE 17% REBATES PROPOSED IN CLINTON PLAN REFLECT AVERAGE PRICE REBATES IN PRIVATE MARKETS, HCFA DEPUTY ADMINSTRATOR SMITS TESTIFIES

Executive Summary

The 17% Medicare drug price rebate proposed in the Clinton Administration's health care reform package reflects the average discount offered to institutional buyers in the private sector, Health Care Financing Administration Deputy Administrator Helen Smits, MD, maintained at a Nov. 16 hearing before the Senate Special Committee on Aging. Smits explained that the increase in the proposed Medicare rebate level to 17% from the originally floated figure of 15% was due to an assessment that the gap between the average private market price and the lowest prices had increased beyond 15%. The increased rebate level in the Oct. 27 plan, she said, "was based in part on a feeling that that gap was larger than we had originally looked at." SmithKline Beecham North American Pharmaceuticals President Jerry Karabelas told a post-hearing press conference that he did not believe that 17% bears a "resemblance really to the discount in the private market." Karabelas surmised that Administration officials "have gone back and refined their models [on the cost of the drug program], and I think they needed more percentage points to meet their [budget] target, whatever that target was. I don't think there is any more logic in it than just that." The SmithKline exec added that "the 17% would probably on average -- I would have to guess now -- would be a bigger discount than what each single company would extend over its entire product line." With products in the competitive ulcer, anti-infective and antidepressant categories, SmithKline is reputed to be one of the more aggressive companies in terms of discounts offered to major purchasers. The 17% figure, however, coincides with a number publicized by the brandname industry itself last spring. In a report by the Boston Consulting Group cited last spring by Pharmaceutical Manufacturers Association Chairman William Steere (Pfizer), the average private market discount in 1992 was estimated at 16%, and more than half of the U.S. pharmaceutical market received discounts of greater than 25% ("The Pink Sheet" April 5, p. 9). Smits maintained that the rebates have correcting mechanisms built into them so that they will adjust to market changes. She noted that there are three types of rebates in the President's proposal: "basic rebates" (17% or the difference between average market price and the best private market prices, if that is larger than 17%); "add-on rebates for drugs with large price increases; and special rebates if new drugs are excessively priced." Based on the Medicaid rebate program, "additional" rebates under the proposed Medicare program "will be paid by manufacturers for each drug whose price increases faster than the rate of inflation," she said. The "special" rebate provision is a part of a new concept in which HHS can "negotiate prices for new drugs that are determined to be overpriced," Smits continued. "Many times, manufacturers have traditionally charged whatever the market will bear when pricing new drugs. The price of a new drug is often high because other manufacturers are prohibited from copying a patented drug." Only if HHS and the manufacturer cannot agree on a special rebate level would the Secretary "be able to exclude coverage of the new drug under Medicare," Smits said. "Exclusion of a new drug from the Medicare program is expected to be a rare occurrence." Criticism of the extension of rebates from the Medicaid program to Medicare came from several fronts at the Pryor hearing. Pointing out that "obviously, this is going to be a cost to the industry," Sen. Grassley (R-Iowa) questioned Smits and HHS Assistant Secretary Philip Lee, NM, about the accuracy of their estimates about payments from drug manufacturers. "Recently, we have enacted Medicaid rebates...and a [Public Health Service] rebate program," Grassley noted. "Just in regard to the Medicaid rebates, as an example, the cost now is two times what [the Congressional Budget Office] originally said." On the verge of a new Medicare benefit, Grassley pressed HCFA to shed light on "how much will be paid by the pharmaceutical companies through these rebates." From another angle, National Organization for Rare Disorders Executive Director Abbey Meyers told the Aging Committee that "rebates should be illegal throughout the entire market -- both public and private." The government should seek lower prices, not rebates, Meyers maintained. The proposed 17% rebate puzzles" NORD because "rebates are often seen as 'kickbacks,'" she said. "Why would the government need a kickback? Why not just tell the companies to reduce their prices by 17%?" A rebate requirement will encourage cost shifting, Meyers contended, and "the American patient is being cost-shifted to death." Health care reform must "find ways to make the free market work to contain drug prices, or we have to do what other countries are doing to restrain prices." The criticism from both flanks may make the rebate proposal a vulnerable piece of the Clinton plan for the drug industry to attack. One of the emerging themes of PMA lobbying is that the drug industry is being hit with a wide array of disguised taxes. PMA President Gerald Mossinghoff declared that the drug Industry is already paying a real tax rate of 44.2% (including Medicaid rebates and user fees) and that rate would jump to 55.3% with the now Medicare rebates. At the start of this year's legislative process, 1992-1993 PMA Chairman Paul Freiman (Syntex) suggested that a recalculation of the Medicaid rebate formula might be one of the silver linings in the discussion of the Medicare outpatient benefit ("The Pink Sheet" April 5, p. 7). While the trend in legislative proposals from the Clinton Administration has been away from changes to benefit the research-based segment of the industry, the lukewarm first reception for the rebate plan at the Pryor hearing may revive some hopes for a favorable change.
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