Spending Debate Heats Up

Healthcare costs and health insurance premiums have soared, and analysts point to double-digit hikes in spending on prescription medicines as a prime culprit. A recent annual survey by the Department of Health and Human Services' (HHS) Centers for Medicare and Medicaid Services (CMS) finds that healthcare spending in 2000 increased 7 percent to $1.3 trillion, the biggest increase in the past decade, outpacing gross domestic product growth. Prescription drug expenditures alone jumped 17 percent, making them the fastest growing service expense for that year. The Kaiser Family Foundation (KFF) also reports that the portion of total healthcare spending devoted to prescription therapies continues to expand. Pharma companies emphasize that increased outlays for medicines reduce total hospital and healthcare outlays, but payers consider pharmaceuticals to be a separate cost item that needs to be controlled.

Those trends affect both public- and private-sector payers and health plans. With Congress and the Bush administration unlikely to agree on an affordable Medicare pharmacy benefit for seniors, policy makers are looking for other cost-cutting solutions:

Curbs on Medicare payments for physician-administered therapies. CMS is working to revise how Medicare pays for injectible cancer treatments, autoimmune therapies, and many other medicines for orphan conditions. A new payment system for hospital outpatient services met strong opposition, partly because it threatened to slash payments for affected pharmaceuticals by almost two-thirds. The cut reflected CMS calculations for additional or "pass through" payments for drugs and biologics under the new reimbursement scheme, but CMS agreed to delay its planned 1 January 2002 implementation for three months.

Congressional leaders have called for CMS to stop using the average wholesale price standard for inhalation and injectible therapies. The current system allows pharma companies to inflate the prices they file with Medicare-which calculates reimbursements to doctors based on those prices-while offering deep discounts to physicians and enabling them to profit from the "spread." Federal investigators claim that Medicare has doled out nearly $1 billion in annual overpayments, and House members are proposing legislation to fix the problem.

Pharmacy discount cards. After being blocked by the courts last year, a federal judge recently allowed CMS to continue efforts to provide some relief to seniors through pharmacy discount programs. Congress' General Accounting Office reported last month that consumers typically can save about 11 percent on retail pharmacy prices and an average 32 percent on generics through such cards. Critics claim this shows that discount cards have little value, but CMS officials insist that a federally endorsed program could do much better. The administration would like Congress to authorize a card program but worries that legislators would tack on various price-control provisions.

Limits on Medicaid coverage and state pharmacy assistance programs. With unemployment rising and revenues falling, state health officials are examining all options for cutting healthcare budgets. Efforts in Michigan, Florida, and other states to establish stricter formularies and mandate steeper discounts have drawn legal challenges from the industry, but state efforts are likely to escalate anyway. States are considering a range of market programs to manage pharmacy benefits, in addition to major reductions in optional coverage plans.

Boosting consumer co-pays. Pharmacy benefit managers are adding high-pay fourth tiers to now common three-tier programs. The fourth tier requires consumers to pay more for costly nonformulary products, injectables, and lifestyle medicines.

Pediatric Exclusivity Extended

Just before leaving Washington in December, the House and Senate agreed to reauthorize the federal program that encourages pharma companies to conduct studies on children to gain pediatric prescribing information. Despite strong bipartisan support for extending the policy, final approval was blocked for weeks by Bristol-Myers Squibb's efforts to increase the added patent exclusivity period for its diabetes therapy Glucophage (metformin). Republican and Democratic legislators opposed the move, as did generics makers and patient advocacy groups.

BMS tried to capitalize on a little-noticed conflict between FDA rules and provisions in the Waxman-Hatch Act of 1984, which provides three years of market exclusivity when an innovator adds labeling information about new indications. A separate FDA policy requires manufacturers to include on labels all information about a product's pediatric use. BMS argued that the FDA law required any generic version of Glucophage to carry the new pediatric labeling, which Waxman-Hatch protects for three years. To avoid such an interpretation, the legislators added language to the bill specifying that new pediatric labeling information will not block generic products from coming to market.

Industry, FDA, and many members of Congress consider the pediatric testing policy a major success. By offering six months of extended patent exclusivity, the policy prompted pharma companies to launch nearly 400 pediatric studies during the past four years, leading to patent extensions for almost 40 products. Generics companies and some patient advocates sought to curb patent extensions for certain blockbuster medicines, but those efforts lost steam as the 31 December 2001 reauthorization deadline drew near.

The final measure also includes another fairly controversial section that attempts to resolve the problem of overlaps between the six months' pediatric exclusivity period and a separate 180-day exclusivity period granted to the first generic product to come to market. The bill ensures that a generics company receives the full 180-day exclusivity it deserves, but no more than that.

The legislation also provides a mechanism for funding pediatric studies for off-patent medicines and low-profit patented products that a company declines to study. A private research foundation will receive resources to support pediatric studies by the National Institutes of Health and other research entities. Additional sections

• require companies to list a toll-free number on labels that consumers can use to report adverse reactions

• establish an FDA Office of Pediatric Therapeutics

• create a new Pediatric Pharmacology Advisory Committee

• call on the Institute of Medicine to examine pediatric research practices.

The intense lobbying over patent exclusivity is likely to encourage Congress to revisit some of those issues in the coming year. To reauthorize the pediatric labeling program before it expired, legislators adopted compromises. But the prospect of continuing court battles over patent policy are expected to generate support for a broader examination of Waxman-Hatch policies. BMS, for example, is still doing battle with generics at FDA and has succeeded in delaying competition for almost six months.