Throwing Darts at HR3200 - Day 7

William A. Jacobson
This is the seventh and last of a series of posts analyzing randomly selected provisions in HR3200, the House Democratic health care restructuring bill. The hope is that through random selection of pages from the House Bill, using the dartboard method, some light will be shed on the otherwise dense House Bill.

The page selected for today’s post is page 794 of the House Bill, which is part of Section 1742 – “Prescription Drug Rebates.”  Section 1742 is just over two pages.  This should be easy.  How hard could it be to understand, and who could be against, prescription drug rebates?

Section 1742 has two sections, an Additional Rebate for New Formulations of Existing Drugs, and an Increase Minimum Rebate for Single Source Drugs.  One would think this would be simple, but see if you can follow the formula for rebates on new formulations of existing drugs:

In the case of a drug that is a line extension [i.e., extended release formulation] of a single source [i.e., generic drug with no generic equivalent] drug or an innovator multiple source drug that is an oral solid dosage form, the rebate obligation with respect to such drug under this section shall be the amount computed under this section for such new drug or, if greater, the product of—
(i) the average manufacturer price of the line extension of a single source drug or an innovator multiple source drug that is an oral solid dosage form;
(ii) the highest additional rebate (calculated as a percentage of average manufacturer price) under this section for any strength of the original single source drug or innovator multiple source drug; and
(iii) the total number of units of each dosage form and strength of the line extension product paid for under the State plan in the rebate period (as reported by the State).

Okay, well that cleared it up.  The sub-section on an Increase Minimum Rebate for Single Source Drugs amends Section 1927(c)(1)(B)(i) of the Social Security Act to increase the discount to 22.1%.  If I am reading Section 1927(c)(B)(i) correctly, since 1995 the discount has been 15.1%.

What does all this mean? It sounds to me like the government is planning to squeeze the pharmaceutical companies for larger drug discounts.  Who could be against that?

Well, for starters, people who are not on a government plan who will end up subsidizing the discounts.  Am I wrong on this?

A Congressional Budget Office report in 1996 examined the effect of these rebates, and found:

Although the basic rebate has lowered Medicaid's expenditures on outpatient prescription drugs, spending on prescription drugs by non-Medicaid patients may have increased as a result of the Medicaid rebate program.

This makes sense.  Unless pharmaceutical companies are to lower their research and development budgets, which are enormous, the companies have to make up the revenue from the private sector purchasers of their products.  

There is no free lunch when it comes to rebates forced on the pharmaceutical industry by government.  Either private purchasers pay, or society pays through decreased research and development.

The House Bill increases the rebate on prescription drugs dramatically.  Will there be unintended consequences?  While beating up the pharmaceutical companies will be popular, from where will the next miracle drugs arise?  The same drugs which, while expensive, prolong lives, ease suffering, and often eliminate the need for expensive surgery.

When it comes to beating up the pharmaceutical industry, don’t wish too hard for something, you may get it.

William A. Jacobson is Associate Clinical Professor of Law at Cornell Law School in Ithaca, NY, and author of the Legal Insurrection Blog (www.legalinsurrection.com).   


This is the seventh and last of a series of posts analyzing randomly selected provisions in HR3200, the House Democratic health care restructuring bill. The hope is that through random selection of pages from the House Bill, using the dartboard method, some light will be shed on the otherwise dense House Bill.

The page selected for today’s post is page 794 of the House Bill, which is part of Section 1742 – “Prescription Drug Rebates.”  Section 1742 is just over two pages.  This should be easy.  How hard could it be to understand, and who could be against, prescription drug rebates?

Section 1742 has two sections, an Additional Rebate for New Formulations of Existing Drugs, and an Increase Minimum Rebate for Single Source Drugs.  One would think this would be simple, but see if you can follow the formula for rebates on new formulations of existing drugs:

In the case of a drug that is a line extension [i.e., extended release formulation] of a single source [i.e., generic drug with no generic equivalent] drug or an innovator multiple source drug that is an oral solid dosage form, the rebate obligation with respect to such drug under this section shall be the amount computed under this section for such new drug or, if greater, the product of—
(i) the average manufacturer price of the line extension of a single source drug or an innovator multiple source drug that is an oral solid dosage form;
(ii) the highest additional rebate (calculated as a percentage of average manufacturer price) under this section for any strength of the original single source drug or innovator multiple source drug; and
(iii) the total number of units of each dosage form and strength of the line extension product paid for under the State plan in the rebate period (as reported by the State).

Okay, well that cleared it up.  The sub-section on an Increase Minimum Rebate for Single Source Drugs amends Section 1927(c)(1)(B)(i) of the Social Security Act to increase the discount to 22.1%.  If I am reading Section 1927(c)(B)(i) correctly, since 1995 the discount has been 15.1%.

What does all this mean? It sounds to me like the government is planning to squeeze the pharmaceutical companies for larger drug discounts.  Who could be against that?

Well, for starters, people who are not on a government plan who will end up subsidizing the discounts.  Am I wrong on this?

A Congressional Budget Office report in 1996 examined the effect of these rebates, and found:

Although the basic rebate has lowered Medicaid's expenditures on outpatient prescription drugs, spending on prescription drugs by non-Medicaid patients may have increased as a result of the Medicaid rebate program.

This makes sense.  Unless pharmaceutical companies are to lower their research and development budgets, which are enormous, the companies have to make up the revenue from the private sector purchasers of their products.  

There is no free lunch when it comes to rebates forced on the pharmaceutical industry by government.  Either private purchasers pay, or society pays through decreased research and development.

The House Bill increases the rebate on prescription drugs dramatically.  Will there be unintended consequences?  While beating up the pharmaceutical companies will be popular, from where will the next miracle drugs arise?  The same drugs which, while expensive, prolong lives, ease suffering, and often eliminate the need for expensive surgery.

When it comes to beating up the pharmaceutical industry, don’t wish too hard for something, you may get it.

William A. Jacobson is Associate Clinical Professor of Law at Cornell Law School in Ithaca, NY, and author of the Legal Insurrection Blog (www.legalinsurrection.com).