SENS. PRYOR AND KENNEDY CONSIDERING PLAN TO GIVE V-A AND PHS DRUG PRICES BASED ON 1990 (PRE-MEDICAID REBATE) LEVELS WITH PRICE UPDATING BY PPI INDEX

Executive Summary

A proposal to roll back Federal Supply Schedule outpatient drug prices to levels based on prices 19 months ago is being circulated by a formidable group of five senior Democratic senators led by Aging Committee Chairman Pryor (Ark.) and Labor & Human Resources Committee Chairman Kennedy (Mass.). The Senate group represents leaders of all the key committees whose jurisdictions include groups affected by the Medicaid rebate law. Finance/Medicare and Long-Term Care Subcommittee Chairman Rockefeller (W.Va.), V-A Committee Chairman Cranston (Calif.) and Appropriations/V-A Subcommittee Chairwoman Mikulski (Md.) have signed onto the plan with Pryor and Kennedy. The five senators wrote to Finance Committee Chairman Bentsen on April 20 to outline their current strategy to remedy increased drug costs being experienced by other federal purchasers since the enactment of the Medicaid rebate program. The letter encloses a summary of "legislation being considered" by the five senators. In essence, the proposed legislation is a price control plan for the full government market in response to the alleged drug cost-shifting between government programs brought about by the Medicaid rebate plan. The legislation appears designed to force drug marketers to offer all of their products to all federal government purchasers at favorable rates. To accomplish this objective, the proposal would establish the steeply-discounted FSS price levels of Sept. 1, 1990 as the reference prices for all government contracts. Drug manufacturers wishing to provide drugs to Medicaid or Medicare would have to sign a contract covering both rebates to the Medicaid program and the reduction of FSS prices. The bill would assure that Public Health Service-funded clinics would have access to the revised FSS prices as well as current users of that service -- including the V-A and the Department of Defense. The further application of those FSS prices to Medicaid (instead of the current rebates) is also suggested. FSS prices would be set based on the levels in existence before the round of price changes begun in the late fall of 1990. Marketers would be permitted to update the Sept. 1, 1990 prices by a factor for inflation. The index suggested as an inflation factor is the "all items" index of the Producer Price Index. The pharmaceutical component of the PPI has shown a moderating trend in the past two years. However, it is still significantly higher than the overall PPI: the drug index showed a 7.1% increase in 1991 versus a 0.1% decrease in the all-item index ("The Pink Sheet" Feb. 10, p. 5). The new Senate proposal draws on several pending plans for post-Medicaid rebate remedies. For example, the plan presumably would supercede S 1729, the Kennedy/Hatch (R-Utah) bill that would give PHS clinics prices set at either FSS or Medicaid rebated levels. That bill cleared the Labor Committee in February and is pending on the Senate floor calendar ("The Pink Sheet" Feb. 10, p. 3). While "various congressional committees of jurisdiction are currently addressing some of the concerns raised in this letter," the five Democrats said, "we are committed to introducing legislation shortly that encompasses the proposals for non- Medicaid health care programs described [in the letter]." In addition to lowering FSS prices, the bill would require that manufacturers return to the FSS lists any drugs that were deleted from the listing after Jan. 1, 1990. Terms of the federal contract also would require that "any new drug first marketed after Jan. 1, 1990 would have to be added to the manufacturer's current FSS contract within six months after the data of enactment, or drugs approved for marketing after the date of enactment, three months after FDA approval," the summary says. Prices for new products would be capped at a level not to exceed an as-yet unspecified percentage of the average manufacturer's price. The Senate proponents of the new government pricing plan are apparently hoping to entice some drug manufacturers to support them. The main allurement is the potential substitution of fixed percentage discounts for the current "best price" formula for determining Medicaid discounts. The disparity in the size of rebates from various manufacturers to Medicaid has created a fissure within the industry ranks which is attractive to the politicians. One manufacturer, Glaxo, apparently had to contribute as much as one- sixth of the total rebates in the first year of the program ("The Pink Sheet" March 9, In Brief). The senators' plan proposes to take the FSS prices out of the rebate calculations -- thus letting them go as low as FSS can negotiate without affecting the Medicaid prices. The senators express interest in further modifying the Medicaid rebate program to unwind the best price formula. The letter notes that the senators are not yet proposing any remedies for price increases to private purchasers -- such as health maintenance organizations and hospitals. If, however, an upcoming General Accounting Office analysis "documents significant increases in prices charged to private bulk purchasers," the letter says, "we believe that two options should be considered to change the law." Those options include either a flat percentage rebate or giving "Medicaid access to FSS prices as established in accordance with the provisions described above." To make up for any lost savings to the states from the removal of best prices, the Senate draft plan would tailor the size of the fixed percentage rebate to generate more payments from companies. The Medicaid program would get a similar payment to the current levels; the specific amounts paid by each firm would be changed. The plan is being circulated at this time in part because the legislators believe the pharmaceutical industry did not respond to an opportunity to help out V-A under provisions of the "Mikulski amendment." That stopgap amendment provided that for six months, Medicaid's rebate formula will not take into account discounts to V-A ("The Pink Sheet" Nov. 11, 1991, T&G-7); the Pharmaceutical Manufacturers Association had urged members to "cooperate fully" in negotiations with V-A under the Mikulski amendment ("The Pink Sheet" Oct. 14, 1991, T&G-6). V-A is expected to report on the amendment's impact in late June but in a recent draft informed Congress that its interim analysis found that the majority of companies have been "unresponsive" to its request for revised price offers. One notable exception is Bristol-Myers Squibb. The draft report states that 25 companies reduced their drug prices to the agency, but "an analysis of V-A's utilization experience with those items reveals insignificant cost reductions...with the one exception of reductions offered by Bristol-Myers Squibb." The Pharmaceutical Manufacturers Association indicated they will oppose the legislation. PMA spokesperson Jeffrey Trewhitt called the proposal "inherently unfair" and an "unwarranted disruption in the U.S. free market system." Maintaining that it would penalize most severely those companies that had provided the deepest discounts to V-A, the Defense Department, PHS and the FSS, Trewhitt said the "change would come before the full impact of the major market changes mandated by [the 1990 Medicaid rebate law] has become clear." The Senate plan could establish the framework for a single- buyer approach to cover all government purchases. It would "give V-A the authority to negotiate and award pharmaceutical contracts, referred to as Uniform Pharmaceutical Award Contracts, on behalf of governmental entities, including federal, state, county and municipal health care programs." Under the Senate approach, agencies participating in the uniform contract would have to commit to buying a specified quantity of a drug during the contract period and "provide adequate proof of fiscal resources set aside to meet the volume commitment." Rep. Wyden (D-Ore.) also has floated several pricing proposals including the idea of having V-A negotiate on behalf of a consolidated government purchasing group ("The Pink Sheet" Oct. 21, 1991, p. 3). Wyden was in on the early discussions of the Senate plan and is also pursuing his own legislation; he has recommended that any approach should also address private purchasers. Though the letter indicates the senators might consider doing away with Medicaid "best prices" if warranted by the GAO data, they stress that the modification would have to obtain the same amount of savings as under "best prices." In addition, it appears that a revised Medicaid formula would be pegged to savings actually yielded by the program rather than the cost projections used by Congress when it designed the Medicaid rebate program. When the rebate legislation was adopted in 1990, the Congressional Budget Office had projected that Medicaid would save about $300 mil. in 1991; most industry observers estimate that actual savings will come in at double that figure, at minimum. In a same-day letter to CBO, the senators ask for estimates of "what percentage discount would be necessary to produce savings equivalent to those CBO now estimates Medicaid will receive under current law for each of the five fiscal years from FY 1992 through FY 1996," assuming the best price formula was revoked. CBO also is asked to estimate the budget impact of replacing best prices with "the lower of the FSS prices in effect on September 1, 1990 (indexed for subsequent inflation by the Producer Price Index-All Items) or a 15% discount off the average manufacturer's price." Other issues that CBO is asked to analyze include the "extent and direction" of changes in best prices and projections of changes over the next five years; changes in FSS; how Medicaid- rebated prices compare to current FSS levels and the levels in effect on Sept. 1, 1990; the impact on FSS of Mikulski amendment; and, total state and federal savings from the Medicaid rebate program in 1991, including those attributed to the best price component and those attributed to the program's provision to recoup certain increases that exceed inflation. To monitor and make recommendations on federally-funded pharmaceutical benefits in the future, the Senate plan proposes to establish an 11-member Federal Prescription Drug Payment Review Commission. "RxPRC" would be modeled on the present Medicare hospital Prospective Payment Review Commission and Physician Payment Review Commission. Sen. Rockefeller is also a member of the Senate V-A Committee. If the legislation is taken up by the Finance panel, it probably will be reviewed by the Health for Families and the Uninsured Subcommittee, which has jurisdiction over Medicaid, as well as Rockefeller's Medicare subcommittee. The chairman of the Health for Families Subcommittee, Sen. Riegle (D-Mich.) has not yet taken a position on revisions to the Medicaid rebate program.