oversight

Federal Drug Prices: Effects of Opening the Pharmaceutical Schedule Are Uncertain

Published by the Government Accountability Office on 1997-07-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Health, Committee on
                          Veterans’ Affairs, House of Representatives




For Release on Delivery
Expected at 9:30 a.m.
Thursday, July 10, 1997
                          FEDERAL DRUG PRICES

                          Effects of Opening the
                          Pharmaceutical Schedule
                          Are Uncertain
                          Statement of Bernice Steinhardt, Director
                          Health Services Quality and Public Health Issues
                          Health, Education, and Human Services Division




GAO/T-HEHS-97-171
Federal Drug Prices: Effects of Opening the
Pharmaceutical Schedule Are Uncertain

               Mr. Chairman and Members of the Subcommittee:

               We are pleased to be here today to discuss our recent report on the
               potential implications for the Department of Veterans Affairs (VA) and
               other government purchasers of opening the federal supply schedule (FSS)
               for pharmaceuticals to state and local governments.1 During fiscal year
               1996, the federal government purchased almost $1.3 billion worth of
               pharmaceuticals from this catalog of drug prices. As you know, schedule
               prices are often substantially lower than retail prices and are available
               primarily to federal purchasers. VA used this schedule to purchase about
               $922 million in pharmaceuticals—about 71 percent of the government’s
               total purchases from the schedule.

               In 1994, the Congress authorized the General Services Administration
               (GSA) to administer a cooperative purchasing program that would allow
               state, local, and Indian tribal governments, as well as the Commonwealth
               of Puerto Rico, to purchase pharmaceuticals and other goods and services
               from federal supply schedules.2 VA, to which GSA has delegated
               administration of the pharmaceutical schedule, expressed concern that
               prices on the schedule could increase if it was opened to a larger group of
               purchasers. As a result, GSA proposed that the pharmaceutical schedule be
               excluded from the cooperative purchasing program because GSA did not
               plan to open any schedule to nonfederal entities if higher schedule prices
               would result.

               Because of concerns about the potential effects of opening more than 140
               federal supply schedules, the Congress directed GSA to delay opening any
               schedule pending completion of our assessment of the potential impact.3
               GSA is currently developing its final implementation plan for opening the
               schedules.

               Today I would like to discuss the factors that could affect schedule price
               negotiations between VA and drug manufacturers if the pharmaceutical
               schedule was opened, as well as the opening’s potential effects on the



               1
                Drug Prices: Effects of Opening Federal Supply Schedule for Pharmaceuticals Are Uncertain
               (GAO/HEHS-97-60, June 11, 1997).
               2
                See the Federal Acquisition Streamlining Act of 1994, P.L. 103-355, sec. 1555 (1994).
               3
                See the National Defense Authorization Act for Fiscal Year 1996, P.L. 104-106, sec. 4309 (1996) and
               accompanying conference report, H.R. Conf. Rep. No. 104-450, at 970 (1996). The implications of
               opening other schedules are discussed in Cooperative Purchasing: Effects Are Likely to Vary Among
               Governments and Businesses (GAO/GGD-97-33, Feb. 10, 1997).



               Page 1                                                                            GAO/T-HEHS-97-171
Federal Drug Prices: Effects of Opening the
Pharmaceutical Schedule Are Uncertain




schedule prices that would be available to federal, state, and local
government purchasers.

To assess the potential impact of opening the schedule, we contacted VA,
other federal agencies, and the Congressional Budget Office (CBO). We also
contacted the Public Hospital Pharmacy Coalition,4 the Health Industry
Group Purchasing Association (HIGPA),5 the National Association of Chain
Drug Stores, the Pharmaceutical Research and Manufacturers of America
(PhRMA), and several drug manufacturers.6 In addition, we analyzed
schedule prices and reviewed assessments made by VA, HIGPA, and the
Coalition concerning how opening the schedule could affect schedule and
other drug prices.

In summary, the effects of opening the pharmaceutical schedule on
schedule prices ultimately depend on the outcome of negotiations
between VA and drug manufacturers. Because of many uncertainties
related to these negotiations, it is not possible to predict how the
schedule’s prices would change or what the ultimate impact on VA and
other government purchasers would be.

Although many factors would influence the negotiations between VA and
drug manufacturers, two primary ones are VA’s negotiating ability and
manufacturers’ pricing strategies. Both of these factors would be
influenced by the size of the market represented by combined federal,
state, and local purchasers that would have access to schedule prices.
Moreover, the size of this market could affect the size of any resulting
price changes. The larger the market, the greater the economic incentive
would be for a manufacturer to raise schedule prices to limit the impact of
giving low prices to more purchasers.

At present, federal purchases from the schedule represent about
1.5 percent of the total dollar value of domestic pharmaceutical sales.
Estimates of the size of a combined federal, state, and local market,
however, vary widely because of uncertainty about which state and local
entities would be eligible for schedule prices. If eligibility is not narrowed,
VA, PhRMA, drug manufacturers, and the Public Hospital Pharmacy Coalition


4
 The Coalition represents 70 public hospitals that are owned or controlled by state and local
governments and serve a disproportionate share of Medicaid and indigent patients.
5
 HIGPA is a national trade association that represents 84 organizations and vendors that purchase
pharmaceutical and other medical products.
6
 The manufacturers we contacted were Eli Lilly and Company; Johnson & Johnson; Merck & Co., Inc.;
Pfizer Inc.; and SmithKline Beecham Corporation.



Page 2                                                                          GAO/T-HEHS-97-171
             Federal Drug Prices: Effects of Opening the
             Pharmaceutical Schedule Are Uncertain




             agree that the size of the combined market could be significantly larger
             than the current federal market. Although the Coalition estimates that
             limiting eligibility as it suggests could keep state and local purchases from
             the schedule at between 0.5 and 4.4 percent of domestic pharmaceutical
             sales, this would result in a combined market about 33 to 300 percent
             larger than the federal market.

             Federal efforts to lower Medicaid drug prices suggest how opening the
             schedule could put upward pressure on schedule prices. In 1990, the
             Congress required drug manufacturers to give state Medicaid programs
             rebates for outpatient drugs based on the lowest prices they charged other
             purchasers. Because of the size of the Medicaid market, however, many
             drug manufacturers sought to minimize the impact of the rebates on their
             business by raising outpatient drug prices to some private sector
             purchasers.

             If the pharmaceutical schedule was opened to state and local governments
             and drug manufacturers succeeded in raising their schedule prices in
             response, the impact on different government purchasers would vary. VA,
             along with the Department of Defense (DOD), the Public Health Service,
             and the Coast Guard, would be somewhat protected from price increases
             because the Veterans Health Care Act of 19927 sets maximum prices for
             these agencies for over one-quarter of the drugs on the schedule. Other
             federal purchasers would not have that protection. State and local
             government purchasers, meanwhile, would benefit to the extent that
             schedule prices were lower than the prices they or their representatives
             could negotiate with drug manufacturers.


             The FSS for pharmaceuticals currently contains almost 23,000 products
Background   available to federal agencies and institutions and several other purchasers.
             The purpose of the pharmaceutical schedule, like other supply schedules,
             is to provide eligible entities an efficient and economical option for
             purchasing. These entities can purchase pharmaceuticals, however,
             through other methods. For example, although VA depends on the FSS for
             most of its drug purchases, VA has awarded several national contracts on a
             competitive basis for specific drugs it considered to be therapeutically
             interchangeable.

             Under the Veterans Health Care Act of 1992, drug manufacturers must
             make their brand-name drugs available through the FSS in order to receive

             7
              See P.L. 102-585, sec. 603.



             Page 3                                                      GAO/T-HEHS-97-171
                        Federal Drug Prices: Effects of Opening the
                        Pharmaceutical Schedule Are Uncertain




                        reimbursement for drugs covered by Medicaid.8 The act also requires drug
                        manufacturers to sell drugs covered by the act to four agencies—VA, DOD,
                        the Public Health Service, and the Coast Guard—at no more than
                        76 percent of the nonfederal average manufacturer’s price,9 a level
                        referred to as the “federal ceiling price” (FCP). A drug’s FSS price may be
                        higher or lower than its FCP. If it is higher, the protected purchasers pay no
                        more than the FCP.

                        GSA published in the Federal Register on April 7, 1995, its initial proposed
                        plan for opening the federal supply schedules to state and local
                        governments. The plan proposed excluding from cooperative purchasing
                        the schedule for drugs and pharmaceutical products and one medical
                        equipment and supplies schedule10 because GSA concluded that opening
                        them would have the unintended effect of increasing costs to federal users
                        of the schedules. The plan also proposed that participation in the
                        cooperative purchasing program be optional for sellers and purchasers.


                        Price negotiations between VA and drug manufacturers will ultimately
Impact of Opening the   determine the extent to which opening the pharmaceutical FSS affects the
FSS Depends Largely     schedule drug prices available to federal, state, and local governments.
on Price Negotiations   Opening the schedule could change the dynamics of negotiating FSS prices
                        for both VA and drug manufacturers. Up to now, VA has been able to obtain
                        significant discounts from drug manufacturers by seeking the
                        most-favored customer price. This price represents the same discount off
                        a drug’s list price that the manufacturer offers its most-favored nonfederal
                        customer under comparable terms and conditions, such as length of
                        contract periods and ordering and delivery practices. Many FSS prices are
                        more than 50 percent below nonfederal average manufacturer prices.11

                        Representatives of several drug manufacturers explained that their
                        companies have been willing to negotiate low FSS prices because they
                        consider the FSS to be a special, limited category of pricing.

                        8
                         See P.L. 102-585, sec. 603. The act does not cover generic drugs.
                        9
                         The nonfederal average manufacturer price is the weighted average price of each single form and
                        dosage unit of a drug that is paid by wholesalers in the United States to a manufacturer, taking into
                        account any cash discounts or similar price reductions. Prices paid by the federal government are
                        excluded from this calculation.
                        10
                          VA contended that some items on this schedule, which includes in vitro diagnostic substances,
                        reagents, test kits, and sets, could also increase in price if it was opened. The implications of opening
                        this schedule are covered in GAO/GGD-97-33, Feb. 10, 1997.
                        11
                         The cost of drugs covered by the Veterans Health Care Act that had FSS prices below federal ceiling
                        prices as of Sept. 30, 1996, was, on average, 52 percent below the nonfederal average manufacturer
                        price. See GAO/HEHS-97-60, June 11, 1997.


                        Page 4                                                                             GAO/T-HEHS-97-171
Federal Drug Prices: Effects of Opening the
Pharmaceutical Schedule Are Uncertain




Representatives of two manufacturers specifically noted that their
companies agreed to such prices to help ensure that their drugs were
widely used in VA hospitals, where many of the nation’s physicians receive
part of their training. Some drug manufacturers have indicated an
unwillingness, however, to continue to offer such low prices if the FSS is
opened to a larger group of purchasers and federal purchasers are
combined with other types of government purchasers that the
manufacturers have considered to be part of a separate market.

Although VA would be negotiating on behalf of a larger market if the
schedule was opened, the increased market share might not in and of itself
improve VA’s leverage to negotiate lower prices. Drug manufacturers have
historically offered different prices for the same product to different
purchasers largely on the basis of the purchaser’s ability to influence drug
utilization (sometimes referred to as the ability to move market share).12
For this reason, volume of sales, while integral to price negotiations
between purchasers and drug manufacturers, is not the only important
consideration. A common technique used by large-volume purchasers to
influence market share is to establish a formulary. A formulary is a list of
drugs that a health plan prefers its physicians to prescribe for patients.
Drugs are included on a formulary not only for their medical value but also
for their favorable prices. Both inclusion of a drug on a formulary and the
drug’s cost can affect how much it is prescribed and purchased and,
therefore, have an impact on its market share. Because formularies have
the potential to significantly affect the sales of drugs, large purchasers that
use them have greater leverage in negotiating discounts or rebates with
manufacturers who want their drugs listed as preferred drugs. However,
because the FSS is a catalog of prices, not a formulary, VA lacks that kind of
leverage.

If drug manufacturers are unwilling to extend low FSS prices to state and
local purchasers, VA could experience a “showdown” with manufacturers
over price increases, which it has not experienced before. Drug
manufacturers could respond in several ways. First, they could simply
refuse to offer their products to state and local purchasers at FSS prices, an
option that is permitted under GSA’s current proposal. Representatives of
several manufacturers told us, however, that they do not consider this
option realistic because some competing manufacturers would be likely to
offer FSS prices to state and local purchasers, and no manufacturer would
want to concede the potential business. Second, drug manufacturers could

12
 See CBO Papers: How the Medicaid Rebate on Prescription Drugs Affects Pricing in the
Pharmaceutical Industry (Washington, D.C.: CBO, Jan. 1996).



Page 5                                                                      GAO/T-HEHS-97-171
                              Federal Drug Prices: Effects of Opening the
                              Pharmaceutical Schedule Are Uncertain




                              try to increase FSS prices by raising prices to most-favored customers to
                              change the base on which prices are negotiated with VA. Several
                              manufacturers indicated that this option would depend on the size of the
                              market represented by all government purchasers. Third, drug
                              manufacturers could attempt to negotiate higher FSS prices without linking
                              them to most-favored customer prices. This strategy could result in
                              lengthy, difficult negotiations, which VA has not experienced before with
                              manufacturers.


Size of Market Eligible for   The size of the FSS market if the schedule was opened would be a key
FSS Prices Would Be Key       factor in determining what would happen to drug prices. The larger the
Factor                        market, the greater the incentive would be for manufacturers to raise FSS
                              prices to limit the impact on their business of giving low prices to more
                              purchasers. GSA’s proposed implementation plan for opening the schedules
                              included participation by a state and any department, agency, or political
                              subdivision of a state, including local governments. Representatives of VA,
                              PhRMA, drug manufacturers, HIGPA, and the Public Hospital Pharmacy
                              Coalition agree that unless this definition of an eligible entity is narrowed,
                              the FSS market could expand significantly from its current size of about 1.5
                              percent of domestic pharmaceutical sales.13

                              The Coalition has suggested that GSA’s definition be narrowed to limit
                              access to FSS prices to state and local government entities that purchase
                              drugs for their own use and dispense drugs in their own facilities. The
                              Coalition estimated that defining eligibility this way would result in a state
                              and local FSS market of about 4.4 percent of total dollars in domestic
                              pharmaceutical sales.14 But the market might actually be considerably
                              smaller, according to the Coalition, because some state and local
                              purchasers are subject to procurement laws or regulations that would
                              restrict their participation in cooperative purchasing. Also, eligible state
                              and local purchasers would not buy all their drugs from the FSS because it
                              is likely that not all FSS prices would be lower than other prices available
                              to them. If these two assumptions were considered, the Coalition
                              estimated that state and local FSS purchases would fall from about
                              4.4 percent to 0.5 percent of the total drug market. Therefore, the

                              13
                                According to IMS America, a private vendor of pharmaceutical information, in 1996 the U.S.
                              pharmaceutical market totaled about $85.4 billion in sales, including sales to federal, state, and local
                              government entities. FSS drug sales of about $1.3 billion for fiscal year 1996 represent about
                              1.5 percent of U.S. pharmaceutical sales.
                              14
                               See PRIME Institute, College of Pharmacy, University of Minnesota, Section 1555 of the Federal
                              Acquisition Streamlining Act: Impact of Cooperative Purchasing on the Pharmaceutical Market,
                              prepared for the Public Hospital Pharmacy Coalition (Washington, D.C.: Jan. 15, 1997).



                              Page 6                                                                             GAO/T-HEHS-97-171
Federal Drug Prices: Effects of Opening the
Pharmaceutical Schedule Are Uncertain




Coalition’s estimates mean that the total FSS market would expand by
about 33 to 300 percent if state and local governments are given access to
FSS prices.


As for the impact of procurement laws or regulations on state and local
participation, 27 of 50 respondents15 reported in a September 1996 survey
we conducted that current state competitive-bidding and other laws would
limit their use of federal supply schedules.16 But most state and local
government purchasing officials we contacted indicated that they want the
option of purchasing items from the schedules. How many states and
localities would change purchasing laws and regulations so that they could
participate in the cooperative purchasing program is uncertain. It is also
uncertain how many and to what extent eligible state and local entities
would choose to buy drugs through the FSS.

Although the size of the combined federal, state, and local market that
could have access to FSS prices is unclear, past federal efforts to lower
drug prices for a significant market caused many manufacturers to raise
prices. Before the Medicaid rebate program was enacted in 1990, state
Medicaid programs, which represent about 11 percent of the domestic
pharmaceutical market,17 paid close to retail prices for outpatient drugs.
Other purchasers, such as hospitals and health maintenance organizations,
paid considerably less. Under the program, the Congress required drug
manufacturers to give state Medicaid programs rebates for outpatient
drugs on the basis of the lowest prices they charged other purchasers.

After the rebate program’s enactment, the prices many large private
purchasers paid for outpatient drugs increased substantially.18 In
particular, prices paid by health maintenance organizations rose, on
average, more than twice as fast as the year before the program. On the
basis of its analysis of these price changes for outpatient drugs, CBO
concluded that, because of the size of the market represented by Medicaid,
“pharmaceutical manufacturers are much less willing to give large private


15
  Respondents represented 48 states and 2 territories.
16
  See GAO/GGD-97-33, Feb. 10, 1997.
17
  According to IMS America, in 1995 total sales for the U.S. pharmaceutical market were about
$77.1 billion. According to the Health Care Financing Administration, Medicaid drug expenditures for
fiscal year 1995 totaled about $8.4 billion, including rebates.
18
 See Medicaid: Changes in Drug Prices Paid by HMOs and Hospitals Since Enactment of Rebate
Provisions (GAO/HRD-93-43, Jan. 15, 1993) and Medicaid: Changes in Best Price for Outpatient Drugs
Purchased by HMOs and Hospitals (GAO/HEHS-94-194FS, Aug. 5, 1994).



Page 7                                                                         GAO/T-HEHS-97-171
                            Federal Drug Prices: Effects of Opening the
                            Pharmaceutical Schedule Are Uncertain




                            purchasers steep discounts off the wholesale price when they also have to
                            give Medicaid access to the same low price.”19


                            Although it is uncertain how FSS prices would change if the pharmaceutical
FSS Price Changes           FSS is opened, the factors involved in negotiations between VA and drug
Would Affect                manufacturers have the potential to produce, in general, an upward
Government                  pressure on FSS prices.

Purchasers Differently
For VA and Other Federal    If FSS prices rise after the schedule is opened, all federal purchasers could
Purchasers, Impact of Any   pay higher FSS prices for many drugs covered and not covered by the
FSS Price Increases Would   Veterans Health Care Act. About 73 percent of the roughly 22,800 drugs on
                            the FSS are not covered by the act.20 However, these drugs represent a
Vary                        smaller portion of federal expenditures because they are primarily generic
                            equivalents of brand-name drugs. A VA official estimated that about
                            three-quarters of VA’s total drug expenditures are for covered drugs. For
                            these drugs, VA and the three other protected federal agencies would not
                            have to pay FSS prices that are higher than the FCPs. But as figure 1 shows,
                            they may have to pay more for the 8 percent of all FSS drugs that currently
                            have FSS prices below their ceiling prices if prices rise to or above the FCPs.
                            The FSS prices for these drugs are, on average, about 28 percent below the
                            FCP.




                            19
                              See CBO Papers.
                            20
                             As of Sept. 30, 1996, the FSS included 22,828 products—6,243 were covered drugs and 16,585 were
                            not covered.



                            Page 8                                                                       GAO/T-HEHS-97-171
                                          Federal Drug Prices: Effects of Opening the
                                          Pharmaceutical Schedule Are Uncertain




Figure 1: FSS Price Relative to the FCP
for Schedule Drugs as of                                                                         FSS Price Above FCP
September 30, 1996


                                                                       16.9% •


                                                                               •                 2.4%
                                                                                                 FSS Price Same as FCP
                                                                                   •


                                                   72.7%
                                                      •




                                                                                                 8.0%
                                                                                                 FSS Price Below FCP

                                                                                                 FSS Price Not Subject to FCP




                                                   Not Covered by the Veterans Health Care Act

                                                   Covered by the Veterans Health Care Act



                                          Note: Percentages are based on the number of FSS products, rather than on FSS expenditures.

                                          Source: VA data.




                                          In February 1995, VA presented GSA its analysis of the potential effects of
                                          opening the pharmaceutical schedule on FSS prices and VA drug costs,
                                          taking into consideration the protection the Veterans Health Care Act
                                          provides VA against drug price increases. On the basis of discussions with
                                          representatives of numerous drug manufacturers, VA made two key
                                          assumptions in its analysis about the potential effects of opening the
                                          pharmaceutical FSS: (1) drug manufacturers would eliminate FSS pricing for
                                          all drugs not covered by the Veterans Health Care Act, forcing federal
                                          purchasers to buy these generic drugs at higher wholesale prices, and
                                          (2) FSS prices for all drugs covered by the act would rise to their FCPs.




                                          Page 9                                                                       GAO/T-HEHS-97-171
Federal Drug Prices: Effects of Opening the
Pharmaceutical Schedule Are Uncertain




VA applied those two assumptions to drug purchases it made during the
first 6 months of 1994.21 According to VA, it spent about $37.8 million on
4,877 generic drugs not covered by the act. If it had purchased the same
drugs at wholesale rather than FSS prices, VA estimated that it would have
paid over $79.7 million, or about 111 percent more. In the same period, VA
spent about $118.3 million on 911 brand-name drugs that were covered by
the act and that had FSS prices below their FCPs. Had the manufacturers of
those drugs raised the FSS prices to their FCPs, VA estimated that it would
have paid over $152.9 million, or roughly 29 percent more. Thus, VA
calculated that, on an annualized basis, the impact of giving state and local
governments access to the FSS would have been a $153.1 million increase
in its yearly drug expenditures.

Those federal purchasers that, unlike VA, have no protection from the
ceiling prices established by the Veterans Health Care Act would pay full
FSS prices on all drugs bought from the schedule. As of November 1996,
only 25 of 162 drug manufacturers had FSS prices that were above the FCP.
But, manufacturers may offer purchasers not protected by the act prices
above the FCP. Representatives of several drug manufacturers told us that
their companies would consider this option attractive if the
pharmaceutical schedule was opened because it would allow them to offer
prices above the FCP to state and local purchasers. Federal purchasers not
protected by the ceiling prices would pay the full amount of such price
increases.

The potential impact of FSS price increases on different government
purchasers when purchasing from the pharmaceutical schedule is
summarized in table 1.




21
 According to VA, calculations were based on actual contract purchase prices from VA’s prime vendor
network from Jan. 1 through June 30, 1994.



Page 10                                                                      GAO/T-HEHS-97-171
                                             Federal Drug Prices: Effects of Opening the
                                             Pharmaceutical Schedule Are Uncertain




Table 1: Potential Effects of FSS Price Increases on FSS Prices Paid by Government Purchasers
                                                         FSS price paid
Purchaser                         Before FSS opened                   After FSS opened                     Implications
VA, DOD, Public Health Service,   Lower of FSS or FCP for             Lower of FSS or FCP for              FSS price for 8% of drugs could
and Coast Guard                   covered drugs; FSS for drugs        covered drugs; FSS for drugs         increase up to FCP; FSS price
                                  not covered                         not covered                          could increase for many drugs
                                                                                                           not covered.
Other federal government entities FSS                                 FSS                                  FSS prices could increase for
                                                                                                           many drugs covered and not
                                                                                                           covered.
State and local government        Not applicable— negotiated          FSS                                  FSS prices, even if they
entities                          prices                                                                   increase, could be lower than
                                                                                                           prior negotiated prices; if they
                                                                                                           are not, purchasers could try to
                                                                                                           negotiate lower prices.
                                             Note: For the purpose of this table, federal purchasers are considered to be dependent on
                                             purchasing many of their drugs from the FSS rather than from alternative sources.




State and Local Purchasers                   Opening the pharmaceutical schedule would give state and local
Could Choose Between                         purchasers the choice of buying drugs from the FSS or from other sources.
FSS and Other Drug Prices                    The Public Hospital Pharmacy Coalition contends that state and local
                                             purchasers would benefit from having access to the schedule and
                                             manufacturers would have little incentive to raise FSS or other drug prices
                                             because

                                         •   a manufacturer’s participation in the cooperative purchasing program is
                                             voluntary, thus allowing a company to opt out of the program if it
                                             anticipates any adverse economic consequences;
                                         •   if a manufacturer concludes that it must participate in the program for
                                             competitive reasons, the same competitive forces will keep prices from
                                             rising;
                                         •   the potential size of the state and local market will be small, given the
                                             Coalition’s proposal for determining eligibility to access FSS drug prices;
                                             and
                                         •   market size is but one of many factors drug manufacturers consider in
                                             developing drug pricing strategies.

                                             Assuming negligible adverse effects on FSS prices if the schedule is
                                             opened, the Coalition anticipates considerable financial benefits for many
                                             state and local purchasers. For example, a Coalition analysis of the
                                             differences between FSS prices and the prices nine public hospitals paid for




                                             Page 11                                                                      GAO/T-HEHS-97-171
           Federal Drug Prices: Effects of Opening the
           Pharmaceutical Schedule Are Uncertain




           the 100 drugs each hospital spends the most on showed that FSS prices, on
           average, were lower than the hospitals’ purchase prices for about
           83 percent of the drugs.22 FSS prices were, on average, about 17 percent
           lower than the prices the hospitals paid.

           If the pharmaceutical schedule is opened and FSS prices rise, the extent to
           which state and local government purchasers could benefit is unclear. The
           drug prices paid by the hospitals in the Coalition’s analysis show that
           many FSS prices could rise and still be lower than what some state and
           local purchasers currently pay. If FSS prices remained higher than what
           state and local purchasers were accustomed to paying, they could try to
           negotiate better prices for themselves. However, the incentive for a drug
           manufacturer to negotiate a price below the FSS price would be limited
           because the negotiated price could become the most-favored customer
           price and, thus, potentially affect the manufacturer’s FSS price negotiations
           with VA. In any case, VA and other federal purchasers would still face an
           increase in FSS prices.


           Mr. Chairman, this concludes my prepared statement. I would be pleased
           to respond to any questions you or Members of the Subcommittee may
           have.




           22
             The analysis was based on FSS and hospital purchase prices as of Oct. 1, 1996.



(108338)   Page 12                                                                            GAO/T-HEHS-97-171
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