In your letter you ask for our comments as to whether the material from We have seen various E-Mycin promotional materials, submitted in 1973 and 1974 pursuant to 21 CFR 430.60(b)(3), Records and Reports Concerning Experience with Antibiotic Drugs, in which comparative products are not identified by brand name or company; in these cases the differences in indicated administration were clearly stated. We have also seen an Upjohn booklet titled "Basics of Bioavailability and Description of Upjohn Single-dose Study Design * * *." This booklet (G-3260-9 October 1973), authored by D.J. Chodos, M.D., and A.R. DiSanto, Ph.D., deals primarily with Upjohn penicillin products and does not name competitive brands in the illustrated studies, using "Treatment A" and "Treatment B," etc., instead. It is not regarded as violative under existing laws and regulations. We are not aware of any other similar Upjohn product promotional material. We have taken regulatory action in the past when various manufacturers have attempted to imply clinical superiority by presentation of serum or other tissue level data that did not constitute substantial evidence of real clinical advantage. We will not hesitate to take future actions along these same lines when improper bioavailability claims are made. Sincerely yours, AM. Schmidt. Alexander M. Schmidt, M.D. Enclosure FEDERAL TRADE COMMISSION, OFFICE OF THE SECRETARY, Washington, D.C., February 24, 1975. HEARING CLERK, Food and Drug Administration, Rockville, Md. DEAR MADAM: This letter is in response to your invitation to submit written comments as to the following proposed rules governing certain of HEW's prescription drug reimbursement programs: "Maximum Allowable Cost for Drugs: Limitations on Payment or Reimbursement for Drugs," 39 Fed. Reg. 40302 (Nov. 15, 1974); and "Reimbursement of Drug Cost-Medical Assistance Program," 30 Fed. Reg. 41480 (Nov. 27, 1974). Please consider the attached statement of Federal Trade Commission Staff for purposes of comment to your proposed rules. This statement has not been adopted as an official statement of the Commission. Very truly yours, Attachment. CHARLES A. TOBIN, STATEMENT OF THE STAFF OF THE FEDERAL TRADE COMMISSION CONCERNING HEW's MAXIMUM ALLOWABLE COST PROPOSAL The Department of Health, Education and Welfare announced on November 15, 1974, by way of a proposed regulation in 39 Federal Register 40302 ("Maximum Allowable Cost for Drugs"), its intention to reduce expenditures for drugs in programs of the Department, principally Medicare and Medicaid. Actual implementation regulations which will change the existing reimbursement policies have been published as to Medicaid-39 Fed. Reg. 41480 (Nov. 27, 1974) ("Reimbursement of Drug Cost-Medical Assistance Program"). The Medicaid program, wherein the Federal Government provides funds to states, is the principal program dealing with reimbursement to out-of-hospital pharmacists. Others typically involve direct reimbursement to institutional providers for inpatient care, including the dispensing of drugs. This comment discusses only the Medicaid program. The implementation regulations as to the Department's other programs were not issued in time to be considered in this analysis. The comment is designed to assist HEW in strengthening its proposals to better achieve certain pro-competitive goals cooperatively embraced by both agencies. 1. INTRODUCTION AND SUMMARY It seems axiomatic that the Federal Trade Commission (FTC) should be interested in creating and sustaining effective competition throughout the prescription drug industry so that prescription drugs are available to consumers at the lowest possible prices. HEW's main thrust in its regulation concerning "Maximum Allowable Cost for Drugs" (MAC) is to assure that the government pays out no more in reimbursement for drugs under Medicaid than is truly necessary for those drugs to be provided.1 As designed, the MAC plan is a utility rate regulation scheme which attempts to simulate, through determination of necessary costs plus a "fair" return, a competitive price. The goals of the two agencies in this respect seem to be in complete alignment. Both agencies recognize that because of competitive problems in the pharmaceutical market, the prices currently prevailing may not be as low as they could be.' However, the position taken by FTC staff is that measures (other than a utility rate regulation approach) to strengthen competitive forces would be less expensive, more straightforward, and totally more satisfactory than a 1 Staff understands that the total reimbursement to a pharmacist (via the state under Medicaid) for dispensing a prescribed drug is composed of two elements: (a) his acquisition cost of the drug; and (b) his charge for dispensing the drug. Numerous sources of competitive problems have been discussed in both the economics literature and in lengthy Congressional hearings. (See, e.g., U.S. Senate. Select Committee on Small Business. Subcommittee on Monopoly. Competitive Problems in the Drug Industry, Hearings. Parts 1-25. 1967-1974 [See part 5 in particular for a discussion of economic issues].) Among those discussed are the abuse of patents and trade names, state antisubstitution laws, restrictions on retail drug price advertising and other laws affecting retail pharmacy operations. 54-476 O 75 - 13 rate regulation scheme. Not only would the former assure HEW of low reimbursement costs, it would assure that all consumers would benefit, including those not covered by Medicaid. Indeed, the FTC is actively considering such pro-competitive measures, including ways to enhance retail competition through increased price disclosure. If HEW and the FTC can work together to increase price competition, not only will this decrease federal insurance payouts but will aid all consumers. Avoiding the regulatory process means avoiding its inevitable mistakes and rigidities, as well as its implementation expenses. Even though the regulatory concept is a second-best solution, the MAC proposal has considerable merit as a temporary measure and staff does support HEW's attempt to promulgate it. Of course, FTC staff have no basis on which to conclude that the present proposal is the best of all regulatory schemes, since staff have not had the opportunity to consider alternatives. Nevertheless, staff is enthusiastic about the proposed price information book for physicians and the maximum allowable cost provisions on multi-source drugs; staff also finds the actual acquisition cost provisions acceptable. However, serious problems abound with respect to determining the reimbursable dispensing cost. Indeed, any attempt to define a dispensing fee in terms of "operating costs", as is proposed by HEW, would be extremely difficult. No good way exists to accurately measure such costs or a "fair" return on capital, and any empirically based measure of costs will reflect non-competitive inefficiencies and may mean that firms with unnecessarily high costs are protected. The easiest solution to these virtually unresolvable problems is to let the dispensing fee element of reimbursement be market-determined, despite the fact that it may for a short time include some non-competitive padding, hence causing HEW to forego some potential short-term savings. However, if, as is suggested here, HEW reimburses pharmacists for the actual acquisition cost plus their “usual and customary" dispensing fee (i.e. the difference between their usual and customary price and their actual acquisition cost), and if competitive forces in the market are strengthened by the FTC and by other measures, then the competitively determined dispensing fee will fall through time, and HEW will realize savings. In other words, the existence of future savings with respect to the dispensing fee element of the reimbursed price will be based on the success of various procompetitive efforts. With the effectiveness of such efforts, the need for the regulations will dissolve naturally over time and HEW can come to rely more and more on the market-determined price as the basis for the total reimbursement. Thus the regulatory scheme could die a natural death if competitive market forces become strong enough to restrain prices appropriately. Staff's independent analyses of the potential benefits from programs designed to stimulate competition suggest that action is indeed warranted. Both agencies have basically similar ends that may be achieved by complementary means. Staff encourages HEW to implement the MAC plan as a temporary measure, with the modifications suggested herein. HEW should remain cognizant of the fact that the FTC is working independently to foster beneficial free and open competition in this market. In this regard, cooperation between the FTC and HEW should exist where pertinent and possible in furthering all such work. II. COMPETITION VERSUS RATE REGULATION ALTERNATIVES If sufficient competition at both the manufacturing and retailing levels exists, then the prices established by the market would in fact represent the lowest possible price. In the prescription drug market, these are the prices that would be paid by non-insured consumers. Each firm will lower its price, in order to take business away from competitors, until it is constrained by its costs from dropping price further. Any excess profit due to monopoly power will thus be squeezed out and high prices reduced accordingly. Also, firms which set prices high because of unnecessarily high costs will be driven by competition either to reduce their costs or to exit from the market; competition leads to the discipline of efficiency. If sufficient competition existed and thus prevailing prices were reliable measures of the lowest possible price, HEW could confidently reimburse pharmacists on the basis of their usual and customary charges, and avoid the complexities, costs and pitfalls of any scheme which tries to stimulate the results of competition. Of course, it is not clear at either the manufacturing or the retailing level that sufficient competition exists to warrant the prevailing prices to be accepted as reliable measures of the lowest prices possible. The best policy is to work to generate competition, which would not only insure that reimbursements would be at the lowest possible level but would also benefit non-insured consumers. Several anti-competitive restraints have been suggested. The Federal Trade Commission is currently investigating what, if anything, should or can be done about state and private restrictions on retail price disclosures of prescription drugs. Enhancement of the ability to compete on price would have a highly salutory effect on retail competition, Publicly available information suggests that consumers would save many millions of dollars each year if such restrictions were removed. Other restrictive regulations, such as pharmacist-ownership laws, should also be subject to scrutiny and perhaps attack. Furthermore, inter-brand competition is inhibited by anti-substitution laws. If such laws were overturned or at least modified where appropriate, both manufacturers and retailers would be subject to much greater competitive pressure on price. One other element of a viably competitive market, and on implicit assumption in the argument that competition will be strengthened by the removal of restraints such as those mentioned above, is that a sufficient amount of consumer search for low prices takes place. If consumers have no incentive to search for the lowest retail price, competition among retailers will be substantially diminished. This incentive is not present for consumers whose drug expenses are fully covered by insurance. However, as of 1973, only 21.4% of out-of-hospital prescriptions in the U.S. were covered by third-party plans. We assume that the shopping behavior of the remaining (79%) non-insured consumers could impose sufficient discipline on prices for the usual and customary charge to be used as the basis for reimbursement. Nevertheless, the proportion of consumers without 11.9% of all out-of-hospital prescriptions in 1969 to 21.4% in 1973, and some observers expect the share to continue to increase.' It may in the future be necessary to develop incentives for consumers to search for low prices. One possible mechanism is a percentage co-payment provision in private and public insurance schemes. While we submit that it is generally better to institute a concerted drive toward removing anticompetitive restraints rather than installing an alternative regulatory scheme, with all its inherent problems and rigidities, we nevertheless do wish to comment specifically on the several sections of the MAC proposal. III. THE SPECIFICS OF THE MAC PROPOSAL: ANALYSIS Staff understands that, at the present time, most reimbursement to out-ofhospital providers is made on the basis of published "average wholesale prices," such as those in the Red Book or Blue Book catalogs which are nationally distributed. According to information supplied by pharmaceutical manufacturers, HEW concludes that the published prices overstate the actual prices paid by pharmacists by an average of 15 to 18 percent. Furthermore, HEW presently contributes to the reimbursement of a pharmacist for whatever the source (company of manufacture, formulation or labeling) of a particular drug the pharmacist actually dispenses. About three-quarters of the drugs commonly prescribed in the United States are available only from a single source. As to these, no problem exists. The remaining fourth, however, are available from multiple sources, often at widely differing prices. In other words, several manufacturers or processers sell a chemically equivalent drug at prices which may be substantially different. The proposed regulations would limit payment for all drugs to the actual cost, as opposed to such things as average wholesale cost, of the drug to the pharmacist. This limitation is expected by HEW to generate a government savings of up to $40.0 million per year. In the case of "multiple-source" drugs, i.al, chemically equivalent drugs formulated or labeled by more than one company, an additional regulation applies which HEW expects to represent an additional savings of $48.4 million per year. FTC staff have not attempted to verify these numbers. A. Actual Acquisition Cost Staff supports that section of the proposed rule which states that dispensers will be reimbursed for actual acquisition cost rather than on the basis of a H.E.W. Press Release, "Fact Sheet, A Three-Part Cost Saving Program for HEW Drug Expenditures" (Nov. 15, 1974). published average wholesale cost figure which does not take into account various and non-trivial discounts. Such a rule appears appropriate. We presume that the accuracy of the reimbursements will be checked by sample audit. We feel that actual acquisition cost could be defined as that which appears on the most recent invoice for that drug prior to the date that the prescription was dispensed. That is, that the cost of the drug be established according to the Last-In-FirstOut inventory method, so as to preserve simplicity. This might involve some windfall gains to pharmacists at first, since they may still have in inventory drugs bought earlier at a lower price. It is possible, but seems less probable, that the opposite might happen. In cases where specific drug prices fall, as might happen when a patent expires, the LIFO system would mean that the pharmacist is reimbursed for less than his actual acquisition cost unless a grace period (e.g. 90 days) is allowed. This problem is especially apparent with respect to MAC prices set for multi-source drugs, as is discussed below. Another resolution of the issue might be to reimburse on LIFO costs unless a pharmacist demonstrates, with copies of invoices, that he is disadvantaged in view of his actual, historical acquisition cost. This, of course, would impose additional administrative costs which might be too great. B. Maximum Allowable Cost for Multiple-Source Drugs The portion of the proposed rule which has most merit is that which leads to the use of low-cost generic equivalents. Staff understands that a specially created Board would identify those multiple-source drugs for which significant amounts of Federal funds may be expended under the relevant medical programs, and for which there are or may be significantly different prices charged by various product formulators and labelers. By liaison with FDA, the Board would also determine which of those identified drugs are believed to be therapeutically equivalent-i.e., which chemically equivalent drugs offer the same therapeutic results in most individuals. The Board would then determine the lowest price at which each such drug is widely and consistently available to providers. This would be the proposed "MAC," the maximum allowable cost beyond which no pharmacy may be reimbursed despite its actual acquisition cost. (Reimbursement will be given for a higher-priced drug only if a physician certifies in writing that the selected brand (or source) is the only source which the patient can tolerate.) As an incentive to purchase below the MAC and prevent the MAC from becoming a floor as well as a ceiling, pharmacists would be permitted to retain 25 percent of the difference between actual cost, if lower than the MAC, and the MAC. It is clear that the MAC regulation will promote competition in such a way that all consumers will be benefited. Manufacturers who charge a price above the MAC price will have to lower the price if they are to retain a share of the Medicaid volume, which is currently about one-sixth of all out-of-hospital prescription sales. Manufacturers will have to charge pharmacists the same prices, on a single drug, regardless of whether the final buyer is a Medicaid or noninsured consumer. Thus, the wholesale cost of drugs dispensed to non-Medicaid consumers will also go down. It also seems reasonably clear that if a pharmacist chooses to stock a MAClevel drug for Medicaid patients, he is more likely to use this low-cost drug in filling generically written prescriptions; this is in contrast to the current situation where pharmacists, perhaps unsure of sufficient demand for non-branded drugs, stock primarily brand-name drugs and often fill generic scripts with these same high-cost products. The benefits involved in the lower acquisition cost of drugs will accrue to non-Medicaid consumers only if a price advantage is passed along to them, and this will depend on the level of competition among retail pharmacists. The savings on acquisition cost will be greater the more intense is the level of competition. Moreover, producers will be under pressure to lower their prices even below the MAC level to maintain or increase sales. This pressure will be strengthened in that pharmacists are given an incentive to seek out low-cost sources; as mentioned, the proposal permits pharmacists to keep 25 percent of the difference between actual acquisition cost and the specified MAC level. As price competition among drug producers proceeds, the MAC price will be revised progressively downward. This downward spiral of the MAC price should in the longer run provide great savings for HEW. Indeed, because of these potentially great savings for HEW and because of the great benefits which will be available to all consumers from the increased competition, the FTC urges that the process be hastened by making the pharmacist's incentive to locate low cost suppliers as |