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Melanne Verveer's Subject Files
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BIOTECH INDUSTRY
-
Smead.
FLEX-I-VISION® HANGING FOLDER
HASTINGS, MN
LOS ANGELES-CHICAGO-LOGAN, ON
MoGREGOR, TX-LOCUST GROVE, a
PHOTOCOPY
PRESERVATION
BROTECH INDUSTRY
I on
TION
file
PRIVILEGED AND CONFIDENTIAL MEMORANDUM
TO: Hillary Rodham Clinton
January 6, 1994
FR: Chris Jennings
RE: Biotech Industry and the Health Security Act
CC: Melanne
Prior to the holiday break. the President read an article in the
Philadelphia Inquirer about the biotechnology industry and its concerns about
the Health Security Act. He asked, "Isn't there something we can do about
this?"
Ira asked me to prepare some information for him to respond the the
concerns raised by the President. The following is, in essence, that memo.
The short answer to the President's question is yes. The more detailed
response can be found starting on page 4 of this memo. Preceeding this
section is some background information on the biotech industry and on the
relevant (and rationale behind) the provisions of the Health Security Act.
BIOTECH BACKGROUND
Biotechnology pharmaceutical products have great potential to develop
cost-effective "breakthrough" drug treatments and cures for diseases afflicting
millions of Americans that are costing billions of dollars. Because the biotech
industry is the most heavily R&D investment-oriented of all drug
manufacturers and because it allocates much less of its dollars on marketing,
it is frequently (and understandably) cited as the shining star of the
pharmaceutical industry.
Contributing to the industry's positive perception is the fact that the
biotech industry has a relatively solid track record of not increasing prices
significantly above inflation. is pricing its products at levels that largely mirror
the prices that other Western countries pay, and is one of the most
internationally competitive industries in the U.S. As a result, there is no
question that we should avoid unfairly burdening a R&D-intenstive industry
that may well produce great economic and health care dividends.
While the biotech industry has great potential. it is important to note
that there are also significant fears that the manufacturers of these products
will "launch" their products at prices that will threaten the solvency of private
and public insurance plans. A number of examples have been cited in recent
years that illustrate pricing behaviors that support these fears.
Moreover, since many health care experts believe that pharmacological
interventions will represent a larger and larger slice of the medical utilization
pie in the years to come, there is concern that prescription drug costs will be
excessively burdensome on the purchasers of health care. The primary concern
is that "breakthrough" drug products, i.e. those that have no significant
therapeutic alternatives, will have little or no competition in the private or
public sectors to pressure companies to be price sensitive.
The Clinton Health Security Prescription Drug Proposal
The challenge of health reform as it relates to prescription drugs has
always been to achieve the balance of providing prescription drug coverage for
all Americans at an "affordable" price, while retaining adequate incentives for
R&D investment for the industry.
The Health Security Act has attempted to achieve the appropriate
balance by providing for a significant drug benefit for every American ($250
deductible and 80 percent coverage). To address the prescription drug cost
issue the legislation (1) specifically rejected price regulation of drug products
and relies on market purchasing techniques for the under-65 population.
(2) provides for a breakthrough drug review board that will evaluate and
publish (but not regulate) new drug prices that it concludes are excessive, and
(3) holds down Medicare costs by providing for a Medicare rebate for the drugs
it purchases (much like the current Medicaid drug rebate program) and
provides authority for the Secretary to negotiate new drug prices (just as she
has the authority now for drugs covered under the drug immunization bill.) It
is important to note that, even with these provisions, our current
estimates project that the industry will benefit from the new prescription
drug coverage provisions to the tune of increased expenditures over
baseline of between $5 and 10 BILLION A YEAR.
Industry, Consumer, and Congressional Response to Proposal
Pharmaceutical Industry Response
The pharmaceutical industry has raised serious concerns about the
Medicare rebate, the breakthrough drug advisory board. and the provision that
provides the authority for the HHS Secretary the ability to negotiate over the
price of new products. The industry argues that the bill's provisions create an
environment that serves as a disincentive for capital investment.
The evidence on the investment issue is mixed. There is no question
that the biotech industry is being told by many investors that the
Administration's proposal is making it much more difficult to attract capital.
Understandably, this information is driving many within the biotech industry
to allocate a great deal of resources and time in opposing the Medicare drug
cost containment provisions of the Health Security Act. It is interesting to
note, however, that a just released Ernst and Young analysis of biotech
investment has concluded that from 1992 to 1993 "financing is up 21
percent" from $2.65 billion to $3.2 billion. (Please also see attached articles
which also seem to confirm this conclusion.)
While the industry has been very active and effective in raising strong
concerns about the cost containment provisions of the Health Security Act, it
has not acknowledged the many concessions the Administration gave during
the development of the proposal. The bill explicitly rejected price controls,
rejected the ability of the Medicare program to use a formulary, phased out the
Medicaid prescription drug rebate program. provided a huge new market by
requiring that every American have drug coverage, created new incentives for
the covered Medicare population to purchase Medicare-certifled HMO benefits
(which are privately administered plans that use formularies), and modified the
charge of the drug advisory board to review prices in relation to all other
medical interventions (a provision that the biotech industry virtually wrote).
All of these provisions were high priorities for the industry. Regardless,
however, there is no question that the industry has taken the position
that they need to push for changes on Capitol Hill to ensure investment
dollars and that they believe their chances for success are quite good.
Consumer Groups Response
Representatives of consumer groups almost universally support the
pharmaceutical coverage and cost containment provisions in the Health
Security Act. Families USA, AARP. the National Council of Senior Citizens,
Consumers Union, the AIDS Action Council. the National Organization of Rare
Diseases, and other advocacy groups representing tens of millions of
Americans have written in to specifically endorse the prescription drug cost
containment provisions. In so doing. these groups have specifically rejected
the industry's position that the cost containment provisions will reduce
investment in the treatments and cures that would benefit the people they
represent. In fact, some of the groups -- such as Consumer Union -- have
concluded that we have gone too far towards the industry's position. In
addition, the community pharmacists (the National Association of Retail
Druggists and the National Association of Chain Drug Stores) are perhaps our
strongest provider group adovacates in the nation.
Congressional Response
The Congressional response has, in large part, reflected the concern
outlined by the biotech industry. A number of Members, including key
Members on major Committees of jurisdiction. have expressed significant
interest in coming up with biotech industry inspired alternatives to the current
prescription drug cost containment structure. On the other side of the debate,
Senator Pryor's staff has expressed concern about being able to retain the
current provisons of the bill, which the Senator generally supports (although
he wishes that they were stronger on the cost containment front.) The reality
appears to be, however, that the Committees will need to have some leeway to
make changes to attract the votes we need to get the Health Security Act out of
Committee. The key to doing anything will be to make changes that still retain
the support of the aging advocate organizations (and hopefully not overly
alienating the pharmacy groups.)
What Can Be Done to Address the Concerns of the Biotech Industry?
The short answer to the President's question is that there are options
that are now being reviewed by Administration and Congressional
representatives that the the biotech industry finds quite appealing: in fact. the
industry has played a significant role in developing them. In brief, these
proposals would replace the current Medicare cost containment provisions
with contracts to private (primarily managed care) purchasers who are now
administering prescription drug benefits for private insurers. (These
purchasers control costs primarily through the use of drug formularies, prior
authorization techniques, and generic substitution.) The biotech industry is
attracted to these approaches because smaller. private sector purchasers are
much less intimidating to them and their investors than large Government
purchasers (e.g., Medicare).
These alternative proposals have potential. are worth pursuing. and have
already found some responsive ears on Capitol Hill. Even staff from Members
traditionally not sympathetic to the industry (e.g. Senator Pryor and
Congressman Wyden) have expressed interest. Having said this. there remains
many unanswered questions, including:
(1)
Since different purchasers would provide different benefits
(because their formularies would not cover the same medications
and their copayment structures would likely be different). how
would Medicare beneficiaries and (most importantly) their
advocates react to receiving benefits that could be portrayed as not
uniform?
(2)
If we enacted these alternatives, are we prepared to deal with the
possibility that the pharmaceutical industry will step up their
attacks on the use of "restrictive" formularies through the media
and potentially the courts and, in effect, leave both the private and
public sectors unprotected against increasing pharmaceutical
costs?
(3)
How would the community pharmacists (so far, our strongest,
organized provider proponent) react (we suspect negatively) to a
proposal which. in essence, immediately relies on privately
administered managed care purchasing techniques as a
mandatory part of the Medicare program with which they believe
they are not yet able to compete? Perhaps more importantly, how
would we assure that selective contracting with pharmacists
assured convenient access to pharmacies for elderly populations,
particularly those living in rural areas?
(4)
How would we assure that the costs of the Medicare program are
generally consistent with our current cost estimates, which already
are quite imposing? and
(5)
Since the portrayals by the biotech industry may well overstate the
negative economic impact the current legislation may have (or is)
having on the industry. should we send a signal that we are
supportive of an alternative before we have had a chance to
adequately evaluate the economic and political consequences of it?
SUGGESTED ADMINISTRATION POSITION FOR NOW
In light of the outstanding questions about the alternatives now being
developed by the biotech industry and the Congress. I would advise that the
Administration signal a willingness to be open to options that meet the broad
goals of assuring a solid drug benefit, restraining excessive cost increases, and
retaining incentives for investment in R&D. In fact, I would recommend
specifically acknowledging the option that is being propounded by the biotech
industry as one that is potentially constructive and worthy of consideration.
Ira, or some other Administration official, could send a general signal of
responsiveness at an upcoming February conference in late February.
Having said this, it is premature to take an active position of support for
any alternative until we fully understand its policy, economic and political
implications. Even more important, it would not make sense to move any
further toward the drug industry's position until it becomes absolutely certain
that any such changes don't simply become the next starting point for
negotiations with the industry.