Drug industry at odds with GOP on Medicaid spending

Pharmaceutical companies’ impending fight against proposals that would pinch Medicaid spending on medicines will pit the industry against the nation’s governors and congressional Republicans who are its traditional allies.

As the debate over reducing Medicaid spending moves ahead, the brand-name-drug industry appears poised to urge Congress to look elsewhere for the savings. In a written statement issued Friday, Pharmaceutical Research and Manufacturers of America (PhRMA) Senior Vice President Ken Johnson emphasized that drug costs constitute a small fraction of Medicaid’s expenses that will drastically diminish when Medicare begins covering drugs for senior citizens and the disabled next year.

The House Energy and Commerce Health Subcommittee will examine prescription-drug spending by Medicaid tomorrow. A PhRMA spokesperson said a representative of the organization would not be testifying before the panel.

According to a Congressional Budget Office (CBO) report released Thursday, Medicaid spending on drugs represents about 15 percent of the domestic market. The report was requested by Senate Majority Leader Bill Frist (R-Tenn.).

The subcommittee hearing will follow the full committee’s consideration last Wednesday of the National Governors Association’s (NGA) framework for short-term Medicaid savings and long-term restructuring of the program. The Senate Finance Committee held its own hearing the same day.

Congress is bound by the fiscal year 2006 budget resolution to trim $10 billion from Medicaid. Moreover, the White House and Republicans in Congress are determined to rein in entitlement spending this year.

Pharmaceutical companies will not be the only sector looked to for savings, but the prominence of the drug-related aspects of emerging Medicaid reform proposals strongly suggests that the industry will be targeted with some unpalatable policies.

Rep. Heather Wilson (R-N.M.), who sits on the Energy and Commerce Committee, said Friday that changes to prescription-drug spending inevitably would be part of the Medicaid legislation that the committee develops.

“We need to make these types of changes,” she said, predicting it would be difficult for drug companies to make a convincing case that Medicaid’s current policies result in appropriate reimbursement for medicines. Wilson led a Republican Energy and Commerce Committee working group on Medicaid in 2003 at the behest of then-Rep. Billy Tauzin (R-La.), who chaired the committee at the time and now is president of PhRMA.

Energy and Commerce Health Subcommittee Chairman Nathan Deal (R-Ga.) also was part of the working group.

Health Subcommittee ranking member Henry Waxman (D-Calif.) was more skeptical of Congress’s will to stand up to the drug industry. Waxman, a frequent critic of the GOP’s ties to pharmaceutical companies, said that “it remains to be seen” whether congressional Republicans and the Bush administration would support drug-pricing changes similar to those advocated by the NGA.

In the NGA recommendations, the first target highlighted for savings is prescription-drug reimbursement. The governors outline a series of proposals that are sure to rankle drug makers, ranging from increasing manufacturer rebates to states, restricting what drugs are available to Medicaid beneficiaries and enabling states to band together to purchase drugs to establishing a new “reference price” for medicines. The reference price would serve as an upper limit on what states pay by replacing a formula based on “average wholesale price” (AWP) with one based on a lower “average sales price” (ASP).

Johnson asserted, however, that drug costs would make up only 14 percent of Medicaid’s expenses this year. Citing data from the Centers for Medicare and Medicaid Services (CMS), PhRMA also maintains that projected drug costs constituted 18.8 percent of the increase in Medicaid spending between 2004 and 2005.

The debut of the Medicare prescription-drug benefit next year will have a profound effect on those figures, according to PhRMA. “Medicaid spending on prescription drugs in 2006 will account for only about 6 percent of total Medicaid program costs, with brand-name drugs constituting less than 3 percent of that total,” Johnson said.

The governors’ proposal to enhance the rebates they receive from drug manufacturers is likely to receive intense critical scrutiny from PhRMA. According to 2002 data cited in the CBO report, drug companies issued $5.9 billion in rebates that year. The states also want to maintain the “best price” mechanism that is designed to guarantee that Medicaid never pays more than any other purchaser of prescription drugs.

Another proposal favored, in different forms, by the White House and the governors could set up a contest between the drug companies and retail pharmacists.

Eliminating the much-maligned AWP with an ASP mechanism would affect the complex system through which drug makers and pharmacists receive their reimbursements. ASP already has been adopted for drugs administered to Medicare patients in doctors’ offices. The use of ASP in Medicare was bitterly opposed by specialty physicians during the drafting of the Medicare Modernization Act in 2003. At the time, Tauzin played a crucial role in securing this part of the Medicare law.

ASP would require drug makers to reveal more information about the prices they charge to private health-insurance companies and others — actions the industry has resisted in the past. Proponents maintain the increasing transparency in drug pricing would drive costs downward.

Pharmacists also are concerned about altering Medicaid payments for drugs because their income is tied to AWP (along with a dispensing fee). The administration has proposed protecting pharmacists by setting a reference price of ASP plus 6 percent, but the governors oppose connecting drug prices to pharmacy reimbursements.

An American Pharmacists Association (APhA) spokesperson said the organization is withholding judgment on the Medicaid package for now. APhA believes, however, that pharmacists’ payments should not necessarily be tied to the cost of the drug being dispensed, she said.