The Senate Squares Off in Drug Discount War

For private health insurers, opting for a cheaper generic version of an expensive name-brand drug is a no-brainer. But Senate Republicans are under fire from Democrats for encouraging just the opposite. The dispute has arisen over how much of a discount pharmaceutical companies should be expected to offer on drugs sold to Medicaid, the health care program for the poor. A deficit-reduction bill under consideration last week by the Senate Finance Committee had included a provision that would increase to 17% the current 15.1% rebate manufacturers of brand-name drugs must offer Medicaid. The Congressional Budget Office estimated this increased discount would save $1.2 billion. But at the last minute, the panel's Republicans—over Democratic objections—added another provision that would also increase the required discount on generic drugs from 11% to 17%.

The CBO estimates the increased discount on generics would save another $300 million, but outside experts such as Stephen Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota, predicts it'll end up being "one of those penny wise, pound foolish decisions." That's because generic drug companies, which have far smaller profit margins than the brand-name firms, warn that the increased discount would squeeze them out of the Medicaid market, leaving the brand-name manufacturers—which can more easily absorb a rebate increase—to cash in when the federal program has to buy the higher priced drugs from them.

"This is a prescription for brand-name drug manufacturers to earn greater profits at the expense of low-income consumers," charges Democratic senator Jay Rockefeller. But aides for Senate Majority Leader Bill Frist and Finance Committee chairman Charles Grassley insist the generic drug companies are exaggerating the pain they'll feel from the expanded discount. They add that the deficit reduction bill, which the full Senate will consider this week, has other sweeteners for the generics companies.

The brand-name manufacturers argue that the generic rebate increase simply levels the playing field. But their case won't be helped by a report due to be released this week by the AARP, which finds that that prices for the generic versions of drugs most widely used by Americans 50 and older increased by just 0.9% over the past year, while the brand-name drugs prices over the same period jumped 6%—or twice the rate of inflation.