[Congressional Record Volume 140, Number 108 (Monday, August 8, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 8, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
CONGRESSIONAL RESEARCH SERVICE REPORTS ON IMPACT OF WAYS AND MEANS BILL 
                       ON PHARMACEUTICAL INDUSTRY

                                 ______


                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                         Monday, August 8, 1994

  Mr. STARK. Mr. Speaker, in the past year, the pharmaceutical industry 
has spent about $24 billion buying each other out or buying drug 
distribution companies. The Pharmaceutical Manufacturers Association 
recently changed their name to Pharmaceutical Research Manufacturers 
Association--but it would have been more accurate to change it to the 
Pharmaceutical Monopoly Association. They are spending more money 
buying market share than they are thinking up new drugs.
  They also spend millions of dollars not researching, but complaining 
that the Ways and Means health reform bill will discourage research.
  Following is a memo from the Congressional Research Service of the 
Library of Congress that points out that the increase in demand for 
drugs once everyone has health insurance will offset any problems in 
the cost containment provisions in our bill. In short, the legislation 
is likely to be a wash in terms of drug company profits: ``These 
findings lead CBO to conclude that the `general level of R&D in the 
pharmaceutical industry may not change much as a result' of the Clinton 
plan. * * * it seems reasonable to expect the Ways and Means version of 
HR 3600 would provide a marginally stronger stimulus to pharmaceutical 
R&D in general and the development of new breakthrough drugs in 
particular than the Clinton plan.''
  Rather than moaning and groaning, the companies should do the right 
thing, and work to ensure that every American has access to the 
medicines they need.
                                   Congressional Research Service,


                                       The Library of Congress

                                   Washington, DC, August 2, 1994.
     Subject: Likely Impact on Pharmaceutical Research and 
         Development of H.R. 3600, as Reported by the House Ways 
         and Means Committee.

     To: Hon. Pete Stark.

     From: Gary Guenther, Analyst In Industry Economics.

       In response to your request, the memorandum discusses the 
     likely impact on investment in the development of new drugs 
     of H.R. 3600, as reported by the House Ways and Means 
     Committee. The analytical foundation for the discussion is a 
     recent study by the Congressional Budget Office (CBO) of how 
     the Clinton Administration's health care reform proposal is 
     likely to affect pharmaceutical research and development 
     (R&D). On the whole, the health care reform bill reported by 
     the Ways and Means Committee represents an amended version of 
     the Administration's proposal. Yet the two proposals contain 
     some similar provisions on prescription drugs. As a result, 
     it is reasonable and useful to view the implications of the 
     Ways and Means bill for new drug development as a variation 
     on CBO's main conclusions about the same aspects of the 
     Clinton plan.


                   main conclusions of the cbo study

       The CBO study tackles the question of how the Clinton 
     Administration's health care reform plan--henceforth referred 
     to as the Clinton plan--would affect pharmaceutical R&D by 
     estimating its likely effect on the expected returns from 
     investing in the development of a new drug that clears 
     regulatory review. To the extent that the plan increases 
     expected returns from investing in new drug development, it 
     would likely stimulate increased spending on pharmaceutical 
     R&D.
       In the CBO study, estimating the direct effect of the 
     Clinton plan on expected returns from new drug development 
     encompasses three discrete steps. The first one looks at the 
     plan's provisions that would directly affect total spending 
     on prescription drugs. CBO then analyzes the provisions in 
     the plan that would attempt to contain the cost of 
     prescription drugs. The final step in the analysis entails 
     estimating the net effect of these two sets of provisions on 
     the average expected return from investing in the development 
     of new drugs.
       Demand for Prescription Drugs. Two elements of the Clinton 
     plan would directly affect the demand for prescription drugs. 
     One is the creation of a universal entitlement to a 
     comprehensive package of health benefits, including coverage 
     of outpatient prescription drugs. The second element is the 
     creation of an outpatient prescription drug benefit under 
     Medicare, which is the primary source of health insurance of 
     Americans 65 and older. In combination, these two elements 
     would extend health insurance with an outpatient prescription 
     drug benefit to the roughly 77 million Americans who 
     currently have no insurance coverage for most of the 
     prescription drugs they use outside a hospital or nursing 
     home. CBO estimates that the Clinton plan would increase 
     total spending on prescription drugs by anywhere from 4 to 6 
     percent. [Emphasis added]
       However, as the study notes, ``a high degree of uncertainty 
     underlies these estimates of what economists call induced 
     demand.'' A primary reason for this uncertainty is that CBO 
     does not take into account the effect that a greater shift to 
     managed health care plans under the Clinton plan would have 
     on the demand for prescription drugs. It is difficult to 
     predict how per capita spending on prescription drugs would 
     respond if a larger share of Americans were to be covered by 
     such plans.
       Cost-Control Mechanisms for Prescription Drugs. As the CBO 
     study points out, by extending a comprehensive package of 
     basic health benefits with coverage of outpatient 
     prescription drugs to all American citizens, the Clinton plan 
     ``could create a windfall'' profit for the pharmaceutical 
     industry. Without any built-in restraints on the added 
     revenues the industry would receive under the plan, it is 
     likely the much of the increase in spending on prescription 
     drugs would further boost the industry's already high 
     profitability. Therefore, to lessen the likelihood of such an 
     outcome and to restrain the cost to taxpayers of providing an 
     outpatient prescription drug benefit to Medicare 
     beneficiaries, the Clinton plan would establish two 
     mechanisms to contain the cost of prescription drugs.
       One is a requirement that manufacturers of branded drugs 
     enter into rebate agreements with the Secretary of Health and 
     Human Services (HHS) if purchases of their branded drugs by 
     Medicare enrollees are to be covered under the proposed 
     Medicare prescription drug benefits. Makes of generic drugs 
     would be exempt from this requirement. Under a typical rebate 
     agreement, a manufacturer would have to pay to the Federal 
     Government a minimum rebate of 17 percent of its average 
     prices received from the retail class of trade (mainly 
     wholesalers and retail pharmacies) on all of its branded 
     drugs dispensed to Medicare beneficiaries. This basic rebate 
     would be larger if the manufacturer's average retail price 
     for a given branded drug were more than 17 percent above the 
     average price received by the manufacturer from institutional 
     buyers (e.g., hospitals and health maintenance 
     organizations). Moreover, the basic rebate would be still 
     larger if the manufacturer's average retail price for the 
     same drug were to rise faster than the Consumer Price Index, 
     relative to a common base period.
       Manufactuers of branded drugs first marketed in the United 
     States after June 30, 1993 might have to pay special rebates 
     if the Secretary of HHS were to determine that their initial 
     prices were excessive or higher than selling prices in a 
     specified group of developed countries (including Canada, 
     France, Germany and Japan). If a special rebate for such a 
     branded drug could not be negotiated, the Secretary could 
     exclude it from reimbursement by Medicare.
       Since the rebates would not apply to drugs used by the non-
     Medicare population, it is likely that under the Clinton plan 
     unit revenues for the same outpatient branded drug would be 
     lower in the 65-and-older population than in the under-65 
     population. However, the loss of unit revenues because of the 
     Medicare rebates would be offset to a minor extent by the 
     repeal of the rebates that drug companies currently pay to 
     the Federal Government on all drugs purchased through 
     Medicaid. CBO estimates that unit revenues for outpatient 
     prescription drugs would rise by 2 percent if the Medicaid 
     rebates were eliminated.
       The second cost-control mechanism for prescription drugs 
     included in the Clinton plan is an Advisory Council on 
     Breakthrough Drugs. The Advisory Council would have the 
     authority to review the ``reasonableness'' or initial or 
     ``launch'' prices for breakthrough drugs, which are new drugs 
     offering significant therapeutic advances over available drug 
     therapies. Unlike the findings of Medicare price 
     investigations for new drugs, the findings of the Advisory 
     Council would be made public, and they would pertain to all 
     users of a breakthrough drug. Nonetheless the Advisory 
     Council's Findings would lack the power of price controls 
     because they would not be legally binding.
       Expected Return on New Drug Development. The stage is now 
     set for assessing how the Clinton plan would affect 
     pharmaceutical R&D. It is clear that the plan would affect 
     expected returns on new drug development because it would 
     alter the amount of drugs (branded and generic) that a 
     company could expect to sell and the unit revenues it could 
     expect to receive. They key question in both cases is to what 
     extent.
       CBO estimates that ``when averaged among all drugs, returns 
     (on new drug development) would increase slightly--less than 
     3 percent of total (current) estimated returns from drug 
     development--under the Administration's proposal.'' Mainly 
     because the proposed Medicare rebate would result in 
     relatively lower unit revenues on drug purchases by people 65 
     and older, CBO further estimates that returns from drugs 
     developed largely for those 65 and older would decline, 
     whereas the returns from drugs developed primarily for those 
     under 65 would increase. (In practice, this distinction may 
     be of little value since most prescription drugs are used by 
     people from both age groups--although the age mix varies by 
     drug.) In making these estimates, CBO assumes that drug 
     manufacturers would not try to increase the prices of 
     existing drugs or set launch prices for new drugs higher than 
     they otherwise would to offset the revenue effects of the 
     Medicare rebates. These findings lead CBO to conclude that 
     the ``general level of R&D in the pharmaceutical industry may 
     not change much as a result'' of the Clinton plan. [Emphasis 
     added]


 pharmaceutical provisions of h.r. 3600, as reported by the house ways 
                          and means committee

       There are significant differences between the provisions 
     related to prescription drugs in the comprehensive health 
     care reform bill reported by the House Ways and Means 
     Committee (H.R. 3600) and those in the Clinton plan. Like the 
     Clinton plan, the Ways and Means bill would create a 
     universal entitlement to a comprehensive package of health 
     benefits, including coverage of outpatient prescription 
     drugs. In addition, both proposals would create an outpatient 
     prescription drug benefit under Medicare, and both would try 
     to contain the cost to taxpayers of providing such a benefit 
     by requiring manufacturers of branded drugs to pay rebates to 
     the Federal Government for purchases of their branded drugs 
     by Medicare beneficiaries in exchange for having purchases of 
     their branded drugs reimbursed by Medicare. And like the 
     Clinton plan, the Ways and Means bill would abolish the 
     existing rebates on prescription drugs dispensed under 
     Medicaid. But the parallels go no further.
       With one exception, the Ways and Means bill would seem to 
     impose fewer constraints on the cost of prescription drugs. 
     This difference is manifest in two ways. First, unlike the 
     Clinton plan, the Ways and Means bill would not create a 
     Federal council with the authority to monitor and pass 
     judgment on the initial prices of breakthrough drugs. 
     Second, the Ways and Means bill would set the minimum 
     Medicare rebate at 15 percent of the manufacturer's 
     average retail price for branded drugs, as opposed to a 
     17-percent minimum rebate in the Clinton plan. And unlike 
     the Clinton plan, the Ways and Means bill would not grant 
     the Secretary of HHS the power to negotiate special 
     rebates for new drugs; rather all approved drugs would be 
     subject to the same minimum rebate. However, unlike the 
     Clinton plan, the Ways and Means bill would lower the cost 
     to Medicare of dispensing outpatient generic drugs to 
     beneficiaries by requiring manufacturers to pay a flat 
     rebate of 10 percent of the average retail price in 
     exchange for having their drugs covered by Medicare; the 
     Clinton plan would exempt generic drugs from any Medicare 
     rebate requirements. As a result, the Ways and Means bill 
     arguably does more to encourage the use of generic drugs 
     by Medicare beneficiaries than the Clinton plan. Greater 
     use of generic drugs can generate substantial cost savings 
     because generic drugs typically are priced about 50 
     percent below their brand-name equivalents within two 
     years of entering the market.


the house ways and means committee version of h.r. 3600 and investment 
                        in new drug development

       Using CBO's analysis of the implications of the Clinton 
     plan for pharmaceutical R&D as a model, it can be argued that 
     Ways and Means version of H.R. 3600 would offer a slightly 
     stronger financial incentive for increased investment in new 
     drug development that the Clinton plan. What is more, the 
     former would appear to place fewer administrative constraints 
     on the pricing of new breakthrough drugs, raising the 
     possibility that expected returns on investment in the 
     development of these drugs might be greater under the Ways 
     and Means bill than the Clinton plan.
       The main reason for these stronger investment incentives in 
     the Ways and Means bill lies in the differences between the 
     two proposals in their cost-control mechanisms for 
     prescription drugs. Of notable importance here is the two-
     percentage-point difference between the two in minimum 
     Medicare rebates for branded drugs. All other things being 
     equal, manufactures of branded drugs could expect to receive 
     slightly higher unit revenues on purchases of their branded 
     drugs by Medicare beneficiaries under the Ways and Means bill 
     than under the Clinton plan. [Emphasis added]
       Thus, because the vast share of new drugs are developed by 
     makers of branded drugs, it seems reasonable to expect that 
     the Ways and Means version of H.R. 3600 would provide a 
     marginally stronger stimulus to pharmaceutical R&D in general 
     and the development of new breakthrough drugs in particular 
     than the Clinton plan. [Emphasis added]

                          ____________________