THE EFFECT OF THE OMNIBUS BUDGET RECONCILIATION ACT OF 1980 ON COST ISSUES RELATED TO THE PROCUREMENT OF PHARMACEUTICALS

• • . . . . • . • • • • • . • . • • • • . • . . . . . . • . . • . . . • . . . • . • • . . . . . ii ACKNOWLEDGEMENT. . • . . . . . . . . . • . . . . . . . . • . . . • • • • . . . . . . . . • . • . . iv DEDICATION. . • . • . . . . . . • . • . • . • • • . • • • • • • . . . . • . . . . . • • • • • . . . . . v PREFACE •....•.••.•••.....•.......•.••.•..........••....•. vi TABLE OF CONTENTS. • • . • • . . • . • • . • . • . . . . . . . . . . . . . . . . . . . . • • • • ix LIST OF TABLES. . . • • • . . . • . . . • • • . . • • . . • . . . . . . . . . . . . . . . . • . • . x LIST OF FIGURES. • • • • • • . • • • . . • • . . • • • . . . • • . • • . . . . . . • . • • • . . . xi ISSUES/HYPOTHESES. • . . . • • • • . . • • . • . • • . . . . • • • . • . • • . . . • . . . • . . 1 METHODOLOGY. . . . . . . . • . • . • • . . . . . . . • . . . • • • • . • • • • • . . . . . . . . . • • 6 RESULTS/DISCUSSION ••.••••••.•••..•.••••••••••••••.••••••• 20 CONCLUSION. • • • • • • • • • • • . • • • • . • • • • • • • • • • • • • • • • • • • • • • • • • • . • • 89 APPENDIX ONE ••••....••••••••••.•••.•••••••.••••••.•••.••• 97 APPENDIX TWO. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 9 8 APPENDIX THREE ....•••••••.•.•..•.••••••••••••••••••..•.•• 101 APPENDIX FOUR ••••••••••••••••••••••••••••••••..•••.••••.• 103 APPENDIX FIVE ••••.••..•.•.............••••......•..•..••• 105 BIBLIOGRAPHY .•.•••••••••.•..•••.•••••.•.•••.•...••••..... 113

In presenting this thesis in partial fulfillment of the requirements for an advanced degree at the University of Rhode Island, I agree that the Library shall make it freely available for inspection.
I further agree that permission for copying, as provided for by the Copyright Law of the U.S. (Title 17, U.S. Code), of this thesis for scholarly purposes may be granted by the Librarian.
It is understood that any copying or publication of this thesis for financial gain shall not be allowed without my written permission.
I hereby~~~~~~~~~~grant permission to the URI (do/do not) Library to copy my thesis/dissertation for scholarly purposes. To explore these hypotheses a population was defined and a structured, closed end, opinion questionnaire was Responses were analyzed to study bidders opinions on the impact of OBRA '90 on their activities. Questions were designed to explore certain possible areas of OBRA '90 impact thought to be relevant to their daily business routine, that is, the sale of pharmaceuticals, and, particularly, sales by competitive bidding. Essentially, the information sought was: What will be the effect on drug prices in market segments other than Medicaid? Will mandated discounts be a disincentive to manufacturers to provide special pricing to buying groups and institutions?
If profit margins are reduced, will funding for new drug research decline?
viii  Results of question one Results of question two Results of question three Results of question four Results of question five Results of question six Results of question nine Results of question ten Results of question eleven "The characteristic of competitive market conditions was found to significantly influence lowering of prices offered to purchasing groups."6 1 ( Also it is known that prices do vary: " . a major limitation of earlier drug pricing studies was that the data were obtained from published price lists, which do not reflect the actual prices paid. This finding is similar to the conclusion reached by Stigler and Kindhl on the basis of their study of several industrial markets.
They found that published price lists tend to be rigid and do not accurately reflect the behavior of actual transaction prices. For nationally sold products, actual transaction prices tend to be lower and display a mu7h more flexible behavior pattern than catalog prices." The OBRA '90 rebates caused much speculation that a cost shifting would be felt by non-Medicaid purchasers, as manufacturers conceivably sought to recapture lost profit margin: "Pharmaceutical manufacturers are said to be raising prices to other purchasers, including other government agencies, So recover the discounts being offered to Medicaid." Indeed, almost as soon as OBRA '90 was passed, concerns about price increases to non-Medicaid purchasers began to appear in the media. The September, 1990, issue of The Consultant Pharmacist warned.

"
. economic realities suggest there is a strong likelihood that major manufacturers will shift costs to private payers as a 9esult of the proposal's implementation. . . " And, as early as January 14, 1991 . confirms what it predicted last year, that the law would have the unintended effect of raising drug cosrf to hospitals, HMO's, and community health centers." While the most numerous objections found were from the ranks of various pharmaceutical market segments, the objections of pharmaceutical manufacturers were also in evidence. These generally predicted loss of research monies available to develop new pharmaceuticals.
Such as: " . insurers attempts to contain health care costs by controlling pharmaceutical expenditures may decrease incentives to pursue innovation in drug development, and discoura~Z investment in pharmaceutical . this commitment to research will result in future breakthrough drugs . the proposals advanced by Senator David Pryor woy~d clearly dampen the incentives to innovate . " Problem: That the federal government should mandate prices and rebates from private manufacturers is a significant departure from the usual sense of a free market economy, where prices are based on competition. As such, one wonders about the impact of OBRA '90 on a highly competitive procedure such as the bid process. Sentiments reported in the media (above) predicted that forced rebates to one particular market segment, Medicaid, would affect the prices 3 available to other purchasers. The issues are: The existence of the "best price" language may limit manufacturers' ability to offer any buyer a lower price than Medicaid.
Buyers, such as institutions and other competitive bidders, who previously obtained deep discount may be unable to maintain them as manufacturers seek to avoid the additional "best price" rebates such discounts would trigger.
On the manufacturing side, rebates may reduce profits which some have said may lead to a reduction in research funding for new drug products.

HYPOTHESES:
This work seeks to explore the impact of OBRA '90 rebates on pharmaceutical pricing and particularly its effect on competitive bidding for pharmaceuticals in Rhode Island. An anonymous mail questionnaire (see Methodology, Exhibits) was developed to solicit opinion from business insiders (see Methodology) regarding OBRA '90's effects.
Responses were analyzed to sustain or refute the following hypotheses. Hypotheses: Hl. ( HS. That a reduction in profits because of the OBRA '90 mandated Medicaid rebates will be · perceived as causing a reduction in funds available to support research.
H6. That the following effects will occur in drug bid acquisitions: H6a: That OBRA '90 mandated rebates to one segment of the pharmaceutical market will have the unwanted effect of exerting an upward influence on prices available to buyers other than Medicaid.
H6b: That all purchasers do not necessarily pay the same price for pharmaceuticals.
H6c: That OBRA '90 will not cause all purchasers to receive the same price.
H6d: That while a "best price" will be known and established in order to calculate the Medicaid rebate amounts, it will not be made generally available to buyers to serve as a reference tool or benchmark against which they might judge the success of their acquisitions.
H6e: That OBRA '90 will diminish manufacturers ability to offer low bid prices on innovator drugs to competitive bid acquisitions.
H6f: That OBRA '90 will diminish manufacturers ability to offer low bid prices on generic drugs to competitive bid acquisitions.
H6g: That if a competitive procurement group's acquisition can become classified as an "exempt award" and, therefore, not a factor to be considered in the Medicaid "best price" rebate calculations, this will result in lower prices being offered. A copy of the legislation was obtained and reviewed.
Based on this and preliminary literature research, questions were developed, refined and formatted into a survey.

Survey Design:
A structured, undisguised survey design was chosen for ease of tabulation.
Survey scale was selected as a five point scale. This allowed respondents to select a "degree" of response instead of simply an affirmative, negative or "don't know." As percentages were to be calculated on the basis of total surveys returned this effectively proportioned "no answer" responses among the fixed alternatives. Therefore, "no answer" responses would be · tabulated and reported separately so that they could be "distributed by the reader," if desired, which more completely disclosed the results. Structured items on the questionnaire were precoded for ease of tabulation. The necessity of quoting the actual wording used in the OBRA '90 regulations for the sake of clarity caused some questions to be lengthy. Since three pages was the practical limit to the questionnaire because of postage considerations and the desire to improve response by making the survey as brief as 6 ( possible, the number of questions included was sixteen.
These were composed of twelve research questions and four classification questions, an optional job description question and a suitable space for respondent's address, should he/she request a copy of the results.
Of the research questions, questions one through three were designed to ease respondents into the subject matter.
These questions are easy to answer and nonthreatening; sensitive issues are best reserved for later in the work. 14 These questions also e a blish that the respondent is It was possible to employ two strategies 15 to reduce nonresponse: general methods designed to increase initial response rate and a follow-up letter to obtain additional respo n se.
Steps to maximize initial response used were: -an " appeal" for response in a carefully composed cover letter; -the promise of anonymity; -questions designed not to probe sensitive areas because, "non response tends to increase with i:ge sensitivity of the information being sought."; -questions designed not to require such technical or specialized knowledge as only a few respondents might possess; the promise and appearance of brevity in questionnaire design; -the offer of a copy of the results to respondents; -"don't know" and no answers reported separately because they " can be treated as separate categories when reporting the results 17 . . in many ways this is the best strategy . . . " While every effort was made to maximize response by incorporating basic tenets of questionnaire and cover letter design, some nonresponse bias must be assumed in any survey.
Nonresponse bias may be mitigated somewhat in this work because an entire universe was sampled and the population selected was not a random population.  14 The completed questionnaires were then edited to improve the accuracy and clarity of answers and help eliminate inconsistencies and obvious wrong or ambiguous replies.
For instance, if a respondent in an auto owners survey answers that he does not have a car but then in subsequent questions goes on to describe its color, insurance, number of miles driven, monthly payment, pride of ownership, etc., then a researcher can justify recording the respondent as an owner.
In this case the editor would reason that respondent checked "do not own car" by error because that answer would be inconsistent with data collected in following questions.
This editing reduces any imperfections to a minimum and ensures the fullest possible use of the survey returns. As the questionnaires returned were very well completed the amount of editing required was negligible. Hypotheses: The research attempted to explore the following hypotheses: Hl. That most manufacturers on the State of Rhode Island bid list are familiar with the OBRA '90 mandated Medicaid rebate requirements.
H2. That most manufacturers are participating in the OBRA '90 mandated Medicaid rebates.
H3. That most manufacturers will continue to participate or will begin to participate in the OBRA '90 mandated Medicaid rebates in the near term (one year).
H4. That a majority of manufacturers will expect to lose some Gross Profit margin as a result of furnishing Medicaid rebates to each state Medicaid plan. 15 HS. That a reduction in profits because of the OBRA '90 mandated Medicaid rebates will be perceived as causing a reduction in funds available to support research.
H6. That the following effects will occur in drug bid acquisitions: Analysis: H6a: That OBRA '90 mandated rebates to one segment of the pharmaceutical market are likely to have the effect of exerting an upward influence on prices available to buyers other than Medicaid.
H6b: That all purchasers do not necessarily pay the same price for pharmaceuticals.
H6c: That OBRA '90 will not cause all purchasers to receive the same price.
H6d: That while a "best price" will be known and established in order to calculate the Medicaid rebate amounts, it will not be made generally available to buyers to serve as a reference tool or benchmark against which they might judge the success of their acquisitions.
H6e: That OBRA '90 will diminish manufacturers ability to offer low bid prices on innovator drugs to competitive bid acquisitions.
H6f: That OBRA '90 will diminish manufacturers ability to offer low bid prices on generic drugs to competitive bid acquisitions.
H6g: That if a competitive procurement group's acquisition can become classified as an "exempt award" and, therefore, not a factor to be considered in the Medicaid "best price" rebate calculations, this will result in lower prices being offered. Statistical Tests: Regrettably, testing must be done in the aggregate, as response was not sufficient to test the cross tabs.
There are two statistical tests appropriate to this work; they are the Binomial Sign Test of a proportion and the Chi Square "goodness of fit" test. These tests are appropriate to these data characteristics of small sample size, nonrandom population and discrete values. These tests are robust, distribution free nonparametric tests, as such, it is not necessary to assume a normal distribution of the sample population.
The Binomial Test: The binomial formula: is used where p (probability) = .5, indicating a random binomial distribution, and n = trials and a significance level, alpha, as close as possible to .05 is used to test the hypothesis. Because the binomial distribution is a discrete, noncontinuous distribution, a rejection region is found giving the significance level closest to .OS (S% significance level). If the value of the test statistic falls in the rejection region the Null Hypothesis is rejected, the Alternate Hypothesis is accepted and, therefore, statistical significance is accepted.
Null Hypothesis: The distribution of responses observed is a random distribution.
Alternate Hypothesis: A statistically significant preference is exhibited by the responses.
Chi Square "goodness of fit " Test: This test requires two assumptions: 1. All expected frequencies are at least one.

2.
At most, 20% of the expected frequencies are less than S.  For the purposes of this research, respondents were classified as innovator manufacturers if they responded to classification questions by indicating that they were manufacturers who marketed at least one drug protected by exclusive patent either through their own discovery and/or by license agreement. Manufacturers were classified as generic if they indicated that they were manufacturers and did not have any drugs protected by exclusive patent.
"Others" were respondents whose classification questions indicated that they were neither innovator manufacturers nor generic manufacturers, but were qualified on the bid list.   ( 1) 15 ( 9 3 . 8 ) ( 2 ) 0 ( At an alpha value of .032, x = 17, since observed x's = 24, the Null is rejected. The responses exhibit a statistically significant preference.
The results are statistically significant at an alpha value of .000.
Fully 100% of respondents included in the analysis indicated that they were aware of the OBRA '90 provisions.

3.
Results: )very likely )likely )not sure ( 2 ) 0 ( 3) 1 ( 6 . 7 ) ( 4 ) 0 This is a significant victory for all the drug companies since many states do not cover all the drug products of all manufacturers due to cost and patient care reasons.
In addition, there is usually a significant time lag between the markets of a new drug and acceptance by a state Medicaid program. Now, all new drugs will have to be covered immediately by a state Medicaid program for a period of not less than six months after approval.
All these benefits will have significant "spill-over" effects on prescribing of a company's products by physicians i2 4 other sectors of the ambulatory care market." Clearly, Coster makes a strong argument that it is in manufacturers own best interests to participate.
Of respondents who said their company did not participate, those companies may be nonparticipating because their involvement in the pharmaceutical industry may be as other than a manufacturer.
Responders who were unsure or (very) unlikely to participate were composed mostly (66.7%) of those classified as other than a generic or innovator manufacturer. While most respondents from the selected universe sold pharmaceuticals that they manufactured, the list is not restricted to manufacturing.
Other business entities that sell pharmaceuticals such as wholesalers or repackers, to name but two possibilities, may qualify for the list and can and do win bid acquisitions.

.
)some decrease )strong decrease If you answered 1, 2 or 3, please go to question number 6.   " . the Pharmaceutical Manufacturers Association (PMA) estimates that in 1992, $10.9 billion will be invested in R & D which would be 13.5% more than the 1991 expenditure of $9.6 billion.
The industry's investment in R & D has been increasing at a greater rate than its sales . . . but the number of new chemical entities developed through the years has been decre29ing due to the increased cost of research." " . It was felt that directly asking respondents if they were going to "raise prices to everyone else" would sensitize the issue. Such price questions to an industry that is currently receiving unfavorable accounts in the media about prices would likely be inflammatory.
Instead, respondents were asked if they were contemplating other strategies to recoup lost profit margins due to Medicaid rebates. "Reduce research expenditure" was one of the closed end choices.
It was anticipated that a significant number of. )agree strongly 4. )disagree 2.
)no opinion Results: .I n interpreting the significance of the response to this question, it must be acknowledged as a source of bias that manufacturers might find it convenient to blame the government regulations for some of the major price increases described in the media.
A counter argument to this bias is to note that the only two responses that disagreed (disagree strongly) with the notion that Medicaid rebates exerted upward pressure on ( pharmaceutical prices were from the innovator group. These responses are significant because they are contrary to the standard "party line" which seeks to avoid blame for price increases. This dissent, then, tends to support the premise that respondents' answers are unbiased in that respondents seem to answer with their own opinion rather than an association public relations line. given only a 15% discount on drug purchases, that would cause a significant increase in drug acquisition cost.
The upward pressure of mandated Medicaid rebates . has been reasoned and articulated as follows by Cano: . "Economic realities suggest there is a strong likelihood that major manufacturers will shift costs to private payer3 4 as a result of the proposal's implementation." Another source that continues in this vein is a report of topics discussed at the American Pharmaceutical Association (APhA) annual meeting.
The report sa~d: . "Pharmaceutical manufacturers are said to be raising prices to other purchasers, including other government agencies, jg recover the discounts being offered to Medicaid." Because of published statements such as these, it is expected that the majority of responses would blame the OBRA '90 rebates at least somewhat for these reported price 50 hikes.
In conformance with this, 79.2% of respondents agreed or agreed strongly that mandated Medicaid discounts have exerted upward pressure on prices.
Only 8.3% of the respondents opposed, indicating they did not believe the OBRA '90 rebates ex~rted upward pressure on pharmaceutical prices available to the public through channels other than Medicaid.
On this issue, 12.5% expressed no opinion at the time of the questionnaire.
Provision of the mandated Medicaid discounts will cause manufacturers to raise prices in other market segments.
This upward pressure will also affect group bid acquisitions; and questions ten and eleven will examine this issue specifically. 10.

51
)Veterans Administration )chain pharmacy )wholesaler )none of these )all buyers/same price--Go To Question #9.

Which buyer receives your lowest price?
Vot o rnn s Adm .

Statistical Test:
This question is tested in the binomial form, do you charge all purchasers the same price?
A Binomial Sign Test was conducted with n trials = 24.
At an alpha value of .032, x = 17.
Since observed x's = 21, the null is rejected. The responses exhibit a statistically significant preference.

53
The results are significant at an alpha value of .0001.

Discussion:
H6B: Question number seven was designed to test Hypothesis ---That all purchasers do not necessarily pay the same price for pharmaceuticals.
The wide variations in response support the premise that prices do vary among purchasers because many different respondents indicated many different groups of purchasers as recipients of their lowest price. In fact, different segments of the marketplace receive very different prices.
The following attempts a brief explanation of some aspects of pharmaceutical pricing. Most people who think of pharmaceuticals envision a neighborhood drug store. Such drug stores acquire their pharmaceuticals from a wholesaler.
They are charged a "wholesale price"; perhaps they receive an additional discount from this price also, individual arrangements vary greatly. The wholesalers buy their pharmaceuticals from a manufacturer; they pay less than The mechanism most of these purchasers employ to obtain better pricing, sometimes on their own behalf and sometimes through buying services, is the competitive bid. Bids solicit price offers from manufacturers using the force of competition to apply as much leverage as possible in order to obtain better prices.  Even if prices do get closer, however, they may not necessarily become the same for all market segments. This is supported by the questionnaire results. The continued existence of varied pricing means that pharmaceutical buyers will probably still rely on the bid system to obtain low prices through competition. As Lindsay has said regarding competition: "The available data indicate that there is much greater price flexibility and price competition in the pharmaceutical industry than has generally been assumed. Competition in prices between several sets of competing drugs has produced a downward trend 4~n prices, relative to other consumer products." To ensure this competition, bid instruments will still be a valuable tool in market segments that previously relied on competitive bid acquisitions.
Question #9: Base = 24 9. As the legislation requires a 12.5% discount from AMP or a "manufacturers best price," how likely is your company to publish these Medicaid prices, for example, in the company catalog, the REDBOOK, etc., so that other groups may use them as a reference?  ---That while a "best price" will be known and established in order to calculate the Medicaid rebate amounts, it will not be made generally available to buyers to serve as a reference tool or benchmark against which they might judge the success of their acquisitions.
Of the 83.4% who responded in this fashion, fully 54.2% of the total respondents qualified their answer as very unlikely that their company would publish the prices. Only one respondent to the questionnaire thought that his company would publish the prices, while 8.3% of respondents were unsure.

Discussion:
It is easily understood on the basis of competition that manufacturers would prefer their prices to remain confidential. However, it removes the potential of, for instance, the State of Rhode Island accepting the U.S.
Government price or that price plus a negotiated or bid "markup" as the contract price for the manufacturers pharmaceuticals. Accepting such a "Government Price" would save much work and expense by circumventing the formal bid process.
One of the elements needed to do this is, Viewed in this light, it is surprising that any respondents would think that their company would publish sensitive price data.
Respondents who answered unsure may be reflecting the opinion that with the federal government involvement through OBRA '90 that confidentiality might be impossible. For instance, though it does not state that pricing data will be disclosed, the OBRA legislation does provide: '' . That a report on pricing for prescription drugs purchased by the Department of Veterans Affairs, other federal programs, community and hospital pharmacies, and other purchasing groups and managed care plans will be submitted to several designated congressional committees. 1145 This misunderstanding, if indeed present, might have been eliminated if the question had asked respondents to state their company's preference regarding the publication of prices.
For example, "does you company favor publishing these Medicaid prices and/or unit rebates, total rebates, etc:", the response might have been closer to a unanimous negative.
The 83.4 % response is supportive of the hypothesis and could possibly even understate respondents' desire to keep price information confidential. The response also illustrates, it is highly unlikely that pharmaceutical buyers will be able to employ any shortcuts in their bid acquisitions such as may have been provided by the publication of the prices supplies to Medicaid.
Question #10: Base = 24 ***Many segments of the pharmaceutical market practice competitive procurement, that ls, sealed bids, contract purchasing, buying groups and so forth.
The following questions are designed to assess how this legislation will impact the prices your company will offer to these groups.

10.
Because of the OBRA '90 legislation, my company's ability to extend special pricing to competitive procurement groups for single and/or multi -sourced innovator drugs will be .

CHART TEN
Ability to price low innovator drugs? r I 1 : ( : r n ;i ~; n cJ t11 . 71) )decreased )greatly decreased )not affected Results: Table Ten: MFR. "OTHER" TOTAL ANS: Thirty-three point three percent (33.3%) thought this ability would not be affected, while 4.2% did not answer.

Discussion:
It was anticipated that a very large number of respondents would indicate that OBRA '90 mandated discounts to Medicaid would cause price increases to other buyers because Medicaid comprises 10% of the pharmaceutical market in the United States and this is a significant market portion.
As OBRA '90 reserves to Medicaid a substantial rebate from the Average Manufacturers Price (AMP) or the manufacturers "best price," whichever is less, the incentive will be for manufacturers to stop offering deep discounts 70 because: "Medicaid accounts for a sizeable chunk--perhaps 10% on average--of their revenues. Now that Medicaid will be entitled to considerable rebates and eventually to the "best price" available to other buyers, it's only sensible for producer~6 to protect their interests by raising prices . . . " Also, it is reasoned that forced discounts to Medicaid will exert upward pressure on prices available to other market segments as manufacturers attempt to maintain profitability despite significant revenues being consumed by rebates.
. an estimated 3.4 billion dollars over five years .
While 62.5% is not as large a majority as might have Then, it can be reasoned, OBRA '90's "best price" to Medicaid bars nongovernment and nonexempt buyers from receiving a price that is lower. The majority of respondents, which may in fact be understated, have answered that OBRA '90 has diminished their ability to extend special pricing to competitive procurement groups.
Questions ten and eleven were asked of the entire sample.
Those answering that they charged all buyers the same price in question seven, 12.5%, could have answered accurately that OBRA '90 would have no effect on their ability to extend special pricing as they apparently do not pursue this kind of business. While it is appropriate to include these respondents to study if their ability would change, their inclusion in this analysis also lowers the number who said OBRA '90 would affect their ability to extend special pricing.
In addition, some of those respondents who have been classified as other than innovator or generic manufacturer may be wholesalers, or unit dose distributors, or businesses who may not be involved in competitive bid processes.
Wholesalers, while they may be active bidders, are unaffected by legislation that requires rebates from manufacturers and would accurately describe themselves as unaffected.
In question two, it was seen that 8.3% of all respondents did not participate in the rebate program.
Non -participants in the rebate program would also be unaffected by OBRA '90.
Another factor that lowers the majority result is the manufacturers product line. Question ten relates specifically to innovator drugs. Any respondents who market drugs, but not innovator drugs, that is, a generic manufacturer, would appropriately respond that they were not affected.
Finally, it is important to note that no one said they expected the OBRA '90 legislation to allow increased ability to extend special pricing.
For all these reasons then, the 62.5% response that expected a decrease in the ability to extend special pricing adequately supports the hypothesis that purveyors of innovator drugs are less able to extend special prices to ·competitive procurement groups because of OBRA '90 legislation.

11.
Because of the OBRA legislation, my company's ability to extend special pricing to competitive procurement groups for generic drugs (multi-sourced, non-innovator) will be .  The entire sample was polled and this included respondents who answered that they charged all buyers the same price in question seven.
Some respondents classified as other may not be manufacturers and thus not affected by OBRA '90.
Some responders may not supply special discounts to bid acquisitions anyway. 77 Those respondents in question two (8.3 %) who said they did not participate in the rebate program would be unaffected. The numbers claiming that their ability would be unaffected (45.8%) is greater than the number claiming no effect in question ten (33.3%). This may be a sign of an obvious phenomenon, that generic drugs are more price competitive than innovator drugs. For example, if 100 manufacturers produce an acceptable quality Penicillin G and many competitive procurers poll many vendors, the winning price is likely to be very low as manufacturers compete in this example strictly by price. Theoretically, the low price vendor will win the bid. Wholesale prices will also be low due to market pressure as wholesalers may choose one, two or several vendors' Penicillin G to inventory, but not all.
In this case wholesalers may exert downward pressure on prices just as effectively as a competitive procurer can with a bid instrument.
(Recall that the AMP is defined by OBRA '90 as the price manufacturers charge wholesalers.) So, if one accepts this idea of a very narrow trading range, one can see that many multi-source products may have been in no danger of breaking through that "best price" floor.
Those responders who favor this view of the generic market could be more likely to respond in the not affected category.
That the generic drugs are considered more price competitive can be seen in the OBRA '90 legislation which requires smaller rebates on generic drugs than on brand name innovator drugs (see Appendix 3).
Those who felt their ability to extend special pricing would be decreased or greatly decreased comprised 50% of the survey. These responses were the expected majority. Forced discounts to below wholesale prices for Medicaid customers plus the potential for being forced to supply at the "best price" level should disincline manufacturers from bidding at price levels below that obtained for Medicaid. It was reasoned that many respondents aware of this potential would say that their ability to price (low) to competitive procurement would be decreased in some degree. The existence of this "price floor" will affect the success of competitive bid acquisitions in achieving low prices for pharmaceuticals.

Discussion:
The reasons why an exempt bid might win lower prices are as discussed earlier, recall the "best price" and price floor mechanisms. . The lowest price aid by any purchaser (exclusive of depot prices and single award contract prices as defined by any federal agency) . exclusive of nominal pr ices . " The "best price" scenario is well illustrated by 48 Myers: "Consider a company that sells a product at an average manufacturer's price (AMP) of $50.00, but gives a special price to $5.00 (best price) to hospitals or other preferred buyers.
Assume these prices do not change through 1993.
In 1991 this firm will have to provide Medicaid a rebate of $12.50 per unit (25% of AMP); in 1992 the rebate will increase to $25.00 (50% of AMP).
. After 1992, however, the cap is removed, and beginning in 1993 the rebate would be $45.00 per unit.
. To avoid paying such a high rebate a firm may try to raise its prices in the preferred markets.
The closer the best price in the preferred markets comes to the AMP, the lower the firm's rebate . .
(to Medicaid) will be." Because the manufacturer offered this hospital (

II
Since exempt is undefined, many might have selected "unsure" because they felt more information was needed. They might have been concerned that such exempt acquisition by non-Federal purchasers was impossible.
Another possible factor is that the question asks how likely respondent's company is to offer lower pricing.
Responders may have felt that elimination of the "best price" mechanism as a factor would potentially allow lower prices; however, they may have been unsure their company would lower its prices regardless.
Finally, perhaps such a theoretical question was not Therefore, requests for information that could be considered confidential or sensitive were avoided. Therefore, the data are not sufficient to allow stratifying respondents according to extent of pre-OBRA '90 research activity.
Regarding drug bid acquisition effects, findings support the hypothesis that OBRA '90 rebates will result in higher prices to those buyers other than Medicaid. Buyers employing competitive acquisitions, sometimes referred to as ·"preferred" buyers, will probably find that their customary large discounts have been curtailed as a side effect of OBRA '90's best price mechanism. Pricing will still vary customer by customer as the majority of respondents did not predict any incentive to convert to uniform pricing. In addition, most respondents said that buyers will not be provided with published best prices by their company. This would have been useful information for pharmaceutical buyers to gauge the success of their competitive acquisitions.
Hence, buyers with no uniform pricing and no published knowledge of "best price," will still labor to conduct competitive bids, but results (low prices) may be less rewarding than before OBRA '90. This will likely be the result of two factors: one, the upward pressure on product line prices in general, caused by an estimated $4.2 billion dollars of Medicaid rebates over five years, and two, the effect of the OBRA best price mechanism which will tend to limit previously available deep discounts.
Recently, certain purchasers who find themselves disadvantaged by the OBRA '90 best price mechanism are requesting its repeal and some are seeking exemption from the best price calculations in the hope of obtaining better pricing. An amendment to a separate Veterans Administration law engineered by Senator Mikulski (D-MD): " . Has exempted V A (Veterans Administration) drug discounts for six months from use in calculating Medicaid "best price" available rebates. The intent of the amendment was to encourage manufacturers to increase discounts to V A by t~ §ing V A pricing out of the Medicaid rebate equation.'' (Note: these would be acquisitions other than the depot purchases which are already exempt, see reference to FSS below.) And VA Secretary Anthony Principi said he is: " . Pleased with the compromise that would provide a permanent exemption of the FSS (Federal Suppl~0 Schedule) from best price calculations . . " Also, in response to Congressional efforts by certain groups to eliminate the best price mechanism of OBRA '90: "Chairman Henry D. Waxman . . . (House Energy and Commerce Subcommittee on Health and the Environment) . has introduced an amendment that would retain the current 'best price' method of calculating rebates from drug manufacturers to state Medicaid programs through fiscal year 1994, and exclude certain purchasers, including the Department of Veterans Affairs (DVA) and the Indian HeaSth Service, from the calculation of 'best price'." The possibility (question number twelve) of using an exempt status from best price calculations to achieve lower bid prices was also explored. Results were inconclusive at the time of questionnaire response with the majority of respondents saying they were unsure that exemption from best price calculations would result in lower prices.
However, those respondents expressing an opinion numbered approximately 3:1 in the affirmative that exempt bids would achieve lower prices by reason of their exempt status.
While support for the hypothesis that exemption from best price mechanisms would lower bid prices was inconclusive, the actions of various drug procurement groups to remove themselves from the mechanism do support this hypothesis.
As mentioned above, some preferred purchasers and some departments of the Federal government are actively seeking legislative relief from the OBRA '90 best price side effects in an effort to lower their drug acquisition cost.
92 ENDNOTES 1 Note: Medicaid (Title 19 of the Federal Social Security Act) is a program of national health assistance, funded by the Federal government and the states, for low-income individuals and families who are aged, blind or disabled, or members of families with dependent children.
2 Public Law 101-508. "Best Price": . "the lowest price paid by any purchaser (exclusive of depot prices and single award contract prices as defined by any federal agency) . exclusive of nominal prices . " "Average Manufacturers Price: ("AMP " ): " . the average price paid by wholesalers for drugs distributed to the retail class of trade . " Generic Drug: Multi-source drugs whose exclusive patent rights have expired and with proper application to the FDA may be made by various pharmaceutical manufacturers. Also called "non-innovator multiple source drugs".

Generic Rebate Plan:
For 1991 to 1993 the rebate is 10 %; for 1994 and future years the rebate will be 11%.
Innovator Drug: A drug whose exclusive patent rights have not expired.
Patent holder has rights to exclusive manufacturer but may cross license other firms to manufacture.

OBRA, The Omnibus Budget Reconciliation Act:
Provisions of this legislation require manufacturers to rebate certain portions of the purchase price of pharmaceuticals to the Medicaid Program in each state. Sometimes referred to as the Medicaid Prudent Purchaser Requirements. CPI-U: Consumer Price Index-all urban consumers, used to calculate the rate of inflation for drug prices to see if an additional rebate is required. Additional Rebate: An extra rebate that is calculated using CPI-U, on a drug-by-drug basis, to recover the increase in average manufacturers prices over the rate of inflation, with October 1, 1990, used as a baseline for AMP. "Exempt Award": For the purposes of this research an "exempt award" is an hypothetical price agreement between a manufacturer and a purchaser in which the price quoted will not affect the "best price to any purchaser" as defined by OBRA '90.
Such an award will not cause the manufacturer to extend similar pricing to Medicaid or be used in any AMP calculations.  Sole source and innovator multi-source products manufacturers are to pay the following rebates to each state Medicaid program quarterly. 1991: Whichever is greater, 12.5% of the average manufacturers price (AMP) or the difference between AMP and the best price, not to exceed 25%. That is, the amount of rebate is capped at 25% of the AMP.
1992: The same as 1991, except the cap becomes 50%. The potential rebate is increased to 50% of the difference between the AMP and the "best price".
1993: Whichever is greater, 15% of the AMP or the entire difference between AMP and the "best price", for 1993 there is no cap. If you would like a copy of the survey results as soon as available, fill in your name, company and address below. Or, you may ·request the results by sending a stamped, self-addressed envelope under separate cover.
Please return the survey in the stamped envelope provided without delay.
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