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Price Inflation Rebates And The Spectre Of 100% Discounts In Medicare Part D

Executive Summary

Medicaid programs are essentially getting Humira for free, in large part because of price inflation rebates, according to estimates by Bernstein analysts. Legislation pending in the US Senate wants to bring that dynamic to Medicare.

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MEDICAID DRUG DISCOUNT PLAN BASED ON WYDEN BILL PASSES IN HOUSE ENERGY & COMMERCE BUDGET PACKAGE; SENATE FINANCE CMTE. DISCUSSING 15% DISCOUNTS

The Medicaid drug discount bill adopted by the House Energy & Commerce Committee in a budget reconciliation package on Oct. 11 would set aggregate discounts at a minimum of 10% and cap them at 25% in 1991-1992. The total aggregate value of the discount arrangement for each manufacturer must be at least 10% of total state expenditures attributable to the average manufacturer prices (AMPs) for the manufacturer's drugs. The program sets a rising cap on discounts, from a maximum of 25% for 1991 and 1992 to 50% in 1993 and 1994. After 1994, the cap is lifted, setting up a transition to "best prices." The plan also includes a provision indexing discounts to the general Consumer Price Index (CPI), using the best price available as of Sept. 1, 1990. Rebates will be paid to states on a quarterly basis. As adopted by the committee, the plan is based on the "Medicaid Prescription Drug Fair Access and Pricing Act of 1990" (HR 5589), sponsored by Reps. Wyden (D-Ore.) and Cooper (D-Tenn.). However, the plan differs somewhat from the bill. For example, while not eliminating prior approval requirements, the committee removed language reforming states' prior approval procedures. The bill had required that states provide a response to physicians' prior approval requests 24 hours a day, seven days a week. The pharmaceutical industry had argued that prior approval amounts to a de facto restrictive formulary and should be prohibited when discounts are provided. The bill does not require the establishment of such programs in states that do not already have them. The industry also objects to the best price concept on the basis that it is unfair to those companies that provide deep price discounts to preferred customers. The Pharmaceutical Manufacturers Association has been pushing flat percentage discounts instead. The effective date for the legislation has been changed from April 1, 1991 to Feb. 1, 1991 to accrue greater savings. In addition, language was added clarifying that the program does not supersede current Health Care Financing Administration maximum allowable cost (MAC) limits. The committee estimates that the plan will save the federal government $2.1 bil. from 1991-1995, an amount exceeding the budget summit target of $1.6 bil. The committee elected to use the additional $500 mil. in savings over the five-year period to expand Medicaid coverage for children. Like the Wyden/Cooper bill on which it is based, the committee reconciliation plan requires drug manufacturers to enter into discount agreements with HHS in return for assurance of open access to all states' Medicaid drug formularies ("The Pink Sheet" Sept. 17, p. 11). Discount agreements would apply to single- and multi-source drug products. The plan excludes therapeutic substitution. For generic drugs, the plan calls for a 10% flat discount on total aggregate expenditures on a manufacturer's drugs. The federal government will deny matching funds for the products of any generic drug company that does not have a discount agreement in effect with HHS. Under the legislation, existing discount contracts between states and manufacturers will remain in effect as long as the savings provided by the contracts are at least as good as they would be under the federal plan. In the Senate, a Finance Committee markup of Medicaid legislation within the budget reconciliation package was held during the evening of Oct. 12. Heading into the session, the committee had agreed to several modifications to the drug rebate bill (S 3029) proposed by Sen. Pryor (D-Ark.). Pryor is playing a leading role in putting together a committee agreement on Medicaid drug purchasing. The preliminary Senate agreement requires Medicaid over the first three years of the program to obtain manufacturer rebates of 15% off AMPs established as of Oct. 1, 1990. The baseline prices will be indexed to the general CPI. The committee expects the plan will save $1.8 bil. over five years. In 1994, manufacturers will provide the lower of the indexed AMPs minus 15% or manufacturers' best prices. The plan grandfathers existing company contracts with states, but only for the initial term of the contracts, which generally have been written for one year. Upon expiration of the contracts, companies must offer states rebates that meet the requirements of the legislation. Generic companies are required to offer states rebates of 12% off AMP under the tentative committee agreement. The committee plan also contains three pharmacy-oriented provisions. It sets aside 5% of rebate revenues for "restitution" (enhancement) of pharmacy reimbursements. It provides a two-year moratorium against Health Care Financing Administration efforts to reduce state Medicaid agencies' average wholesale price (AWP)-based reimbursements. Finally, it provides for a one-year study in which states will determine pharmacies' costs of dispensing Medicaid prescriptions. The committee plan requires manufacturers to provide greater savings than S 3029 would have. Under the earlier bill, brandname manufacturers would have been required to provide Medicaid with best prices subject to a minimum 10% aggregate discount but discounts would have been capped permanently at 25%. Generic drugs are required to offer deeper discounts under the committee plan, whereas they would have been reimbursed at a flat 10% rebate under the Pryor bill. Pryor feels he has retreated substantially from his initial proposal (S 2605). The latest agreement excludes provisions for formularies, therapeutic substitution, preferred drugs and national P&T committees -- provisions vehemently opposed by the drug industry. During an Oct. 11 teleconference, the Pharmaceutical Manufacturers Association board "reaffirmed the association's commitment to open access as a necessary part of any Medicaid prescription drug rebate legislation," according to a public statement. PMA added that it will "work with the Senate to ensure maximum feasible access." A revised association proposal sent to Capitol Hill Oct. 6 offered a 15.4% flat rebate on Medicaid drug purchases in return for open access (no formularies, prior approval or other restrictions on dispensing). The association decided to sweeten its previous 10% flat rebate offer ("The Pink Sheet" Oct. 8, p. 5) to provide enough funding to cover the cost of open access to drugs. According to an Oct. 8 outline of the new proposal, the 15.4% rebate will achieve savings to Medicaid of $3.6 bil. in fiscal years 1991-1995. The total includes $1.6 bil. in federal savings, nearly $1.3 bil. in state Medicaid savings and $750 mil. to "offset the expenses of removing state Medicaid restrictions on prescription drugs." PMA also partially conceded on the issue of indexing in its latest proposal. Discounts would be indexed to the CPI-medical component based on prices in effect Sept. 1, 1990. The House and Senate bills will be reconciled at a conference that will be scheduled for the week of Oct. 15. Congress currently is trying to meet an Oct. 19 deadline, after which federal funding under a continuing resolution runs out and sequestration under the Gramm-Rudman-Hollings deficit reduction law is scheduled to become effective.

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