Almost Heaven?

In April 2004, several members of the West Virginia House of Delegates flew to Minnesota to speak at a national meeting of the Council of State Governments. The legislators were eager for support from other states to bolster their ongoing effort to force drug companies to lower prices.

Specifically, the West Virginia delegation wanted the council to include its legislation, designed to pressure drug companies to lower prices for state employees and other residents, in the forthcoming book Suggested State Legislation, an annual publication that highlights laws considered innovative and worthy of review. On day one, the West Virginia lawmakers were sent before the group's Health Capacity Task Force, which makes recommendations on which health laws to include in the book. Looking around the room, West Virginia officials were shocked to find that of the 23 members present, only eight were legislators and seven were drug-industry employees. And of the 17 guests who were not representing either the council or West Virginia, nine were drug-company lobbyists. The committee refused to recommend the state's law for inclusion.

Still, the West Virginia legislators were optimistic that they would get support the next day when they went directly before the panel with the final say, the Committee on Suggested State Legislation, which is composed solely of legislators. As they entered the meeting room, they saw 20 members of the committee together at a table. Behind them sat rows of well-dressed onlookers. The panel leaders asked the audience members to introduce themselves. As they did so, West Virginia Delegate Don Perdue, there to speak about the legislation he helped draft, winced. Seated behind the legislative panelists were 21 lobbyists from the pharmaceutical industry. “You know you don't have a chance,” one panelist whispered to Perdue, just in case he had missed what was painfully obvious. Once again the West Virginia law was rejected for the council's book.

The drug industry's determination to block West Virginia from getting wider state support illustrates how intent it is on fighting every effort to limit its revenues. Fearful that any state's success in containing costs might rapidly be adopted by others, the industry tries to squash significant proposals quickly. Especially over the last four years, the industry has spent tens of millions of dollars trying to prevent any significant cost-control measures from passing, hoping it can bar precedents that might spread to other states or even to the federal level, resulting in drastic cuts in profits. These efforts are likely to intensify as states are facing both local fiscal pressures and the recognition that the Bush administration and the Republican-controlled Congress are not likely to impose measures that would impinge on the profits of their pharmaceutical allies.

Beginning in 2001, as the economy worsened and tax revenues slowed, state budget crises deepened. At the same time, increasing enrollment led to a jump in Medicaid budgets, as did skyrocketing drug costs, which also increased state-employee health costs. Pressed to balance state budgets and to help the uninsured, especially the elderly, state officials looked for ways to cut drug prices, which were soaring way above inflation. One strategy, adopted by about half the states since 2001, was to demand Medicaid rebates from drug companies above what was required by federal law. Another was to form buying consortiums to purchase drugs for state employees or Medicaid enrollees. More than 320 bills and resolutions related to discounts, subsidies, buying strategies, manufacturer price disclosure, and other cost-containment measures were introduced, and many seriously considered in 2004, according to the National Conference of State Legislatures. Additionally, in desperation, a number of governors and localities started facilitating drug imports from Canada, where prices are considerably lower.

The industry trade association, the Pharmaceutical Research and Manufacturers of America (PhRMA), is now responding in a big way. While the drug industry has long poured money into federal congressional campaigns, it didn't pay much attention to the states until the recent cost-cutting measures began. In the late 1990s PhRMA ran state lobbying from Washington; now, it has opened eight regional offices and hired at least one person in each state to keep watch. For fiscal year 2004, PhRMA budgeted a whopping $48.7 million for state advocacy, as Robert Pear reported in The New York Times in June 2003.

In 1998, the drug industry contributed $2.6 million to state candidates and party committees, according to a 2003 study conducted by the Institute on Money in State Politics. In 2002, contributions soared to $6.25 million. Overall, from 1998 through 2002, more than $13 million was given to candidates and state parties, more than half of that going to five key states, mostly to people in powerful legislative and executive positions. “The tacit understanding,” says Perdue, “has been if you have larger aims, if you are going to run for wider political office, that the drug industry contributes a lot of money -- and they can really hurt you.”

Another industry tactic, whenever legislation limiting drug-company revenues gets traction in a state, is to use high-priced lawyers, think tanks, and professors to bombard patient groups, businesses, and poorly staffed legislators with reams of data and reports showing the danger of legislative proposals. These representatives warn patient groups that restrictive pricing will also limit funding for research on new cures for disease and could limit access to needed drugs, and they warn business groups and others that drug companies will pass on costs to them to compensate for such price limits. Drug-company executives see such collaboration with advocacy groups as key to defeating many state initiatives. Wyeth CEO Robert Essner, at PhRMA's 2004 annual meeting, lauded “the powerful and effective state-based patient organizations -- groups that we worked arm [in] arm with to defeat restrictive preferred drug lists and burdensome prior authorization requirements.”

When laws have been passed at the state level, PhRMA has moved quickly to delay their implementation or challenge their legality. And while debt-strapped states and poorly funded consumer or labor groups have limited resources to fight these challenges, the drug industry throws unlimited resources to block state efforts.

In 2000, Maine became the first state to seek lower prices for uninsured residents, using its control over Medicaid policy as a club against the drug industry. Maine required drug companies to give the uninsured significant discounts or face roadblocks to using their drugs for Medicaid. The law even gave Maine the power to establish price controls on all drug sales in the state if policies did not, within a few years, make lower prices widely available. Maine's efforts were immediately challenged in court by the drug industry, but in 2003, the U.S. Supreme Court let the state implement the plan while court challenges continued. Faced with years of litigation, state officials made changes they hoped would short-circuit the legal challenges, and, in January 2004, started implementing a modified plan. In 2002, Hawaii enacted a version of Maine's law. By 2003, 18 state legislatures had considered proposals like the Maine plan, and three adopted measures that would force price concessions for residents not covered by Medicaid.

In Ohio, a coalition led by the state AFL-CIO was unwilling to wait and see how the courts handled PhRMA's challenge to the Maine law. In January 2002, the state AFL-CIO and a coalition of 300 groups -- including churches and consumer, senior, and community organizations -- prodded a state legislator to introduce a bill modeled on the Maine initiative. When the Republican-controlled Ohio Legislature and governor kept it bottled up, the coalition decided to force legislative action through a citizens' initiative, which under state law requires legislative action if 96,000 signatures are gathered from half the state's 88 counties. (If legislators still stonewall or oppose a measure, the law allows for a proposal to be taken directly to the voters, if another 96,000 signatures are collected.)

From day one the drug industry fought the coalition. It challenged the initial 100 names the coalition filed to get the petition drive under way, so the coalition submitted a new petition, signed by 100 local and county officials. Once it began, the union-led petition drive collected 143,000 signatures in a mere eight weeks. In virtually every county, PhRMA challenged the petitions. “We spent tens of thousands of dollars fighting the legal challenge,” notes Ohio AFL-CIO legislative director Tim Burga. “I didn't anticipate that PhRMA would use a bottomless pit of money to fight us,” recalls coalition leader Cathy Levine, executive director of the Universal Health Care Action Network. (Both sides decided to eventually negotiate a much watered-down plan, with PhRMA coming around only after the U.S. Supreme Court ruled that Maine could start its program.)

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It's West Virginia that today is sparking national interest. Drug costs are a particular burden in the Mountain State, which has the second-lowest per capita income nationally and the fourth-oldest population. (Seniors use the most drugs and often lack drug-insurance coverage.) In 2002, West Virginians averaged 15 prescriptions per person, when the average in the United States was 10.6. That same year, 25 percent of state Medicaid spending went to medicines; in the United States overall, it was 17 percent.

West Virginia House Speaker Bob Kiss decided to act when he realized that the recently passed federal Medicare prescription-drug bill was not going to help states with their expenses and may have even “installed further protectionism on price.” In late 2003, he asked House health-committee members and staff to develop a plan to lower drug costs, which was introduced early in the 2004 legislative session. The plan they developed required drug companies to sell in the state at prices negotiated by the federal government for some of its own purchases. These federally negotiated prices are known as the federal supply schedule, or FSS, and are mostly more than 50-percent lower than average wholesale prices of branded drugs. Under the West Virginia plan, companies could get a waiver to sell at higher prices, but only if their manufacturing and research costs, not marketing expenses, justified it.

The bill sped through the West Virginia House, passing unanimously within two weeks. But then it bogged down in the state Senate Health and Human Resources Committee, whose chairman represents part of Morgantown, a city where Mylan Pharmaceuticals has a major facility. Finally, legislative leaders decided to hold a joint House-Senate hearing on the bill in February 2004. Citizens representing senior groups, hospitals, and labor and church organizations spoke in support; the drug industry, pharmacists, the West Virginia Camber of Commerce, a television manager, and veterans spoke against it.

PhRMA had been particularly successful in persuading some veterans groups to oppose the measure. The industry organization contacted various veterans groups and invited them in on a conference call about the bill and its effects. During that call, PhRMA essentially fed them misinformation, claiming that the proposal would increase veterans' costs when, in fact, veterans only pay a co-payment determined by Congress, unrelated to what the Department of Veterans Affairs (VA) actually pays. And even if it were related in the future to the VA's own costs, the VA has won prices substantially lower than the FSS level for most drugs.

Veterans responded to PhRMA's briefing by writing to legislators. “I was not aware of it before we were contacted by [PhRMA],” says National Association for Uniformed Services legislative director Ben Butler. “Basically, we drafted our letter based on the information that I was provided in that conference call. So, while I can't remember exactly what was said during the conference call, I can tell you that what was in our letter was a reaction to that.”

The veterans' efforts had a big impact on legislators. “It caused a lot of heartburn with legislators because nobody wants to harm veterans,” says Perdue, who is chairman of the House health panel. The week before the February 2004 hearing, Senate health-panel Chairman Roman Prezioso received a petition signed by some 200 veterans on the issue, plus the letter from Butler, which he read on the Senate floor. Drug-industry lobbyists were quoted in the local press making the same arguments.

During the hearing, Boston University School of Public Health professor Alan Sager, invited to testify by House supporters of the proposal, offered a point-by-point refutation of the arguments put forth by veterans groups and a strong endorsement of the legislation. Within a few weeks, Sally Pipes, president of the free-market think tank Pacific Research Institute, wrote a scathing critique of Sager's testimony and circulated it to lawmakers and the media. Institute officials acknowledge that they receive drug-company money but say it is less than 1 percent of their funds; PhRMA, the Lilly Endowment, and Pfizer are listed among the group's $10,000-and-above donors for 2003.

Finally, on March 13, 2004, the last day of the legislative session, with many senators still amenable to drug-industry arguments, a compromise plan was worked out. Instead of mandating that drug companies sell to the state and the uninsured at FSS prices, lawmakers created a council to choose a pricing schedule, a plan for implementing it, and other ways to lower drug costs. Under the law, whatever pricing schedule the council adopted, the Legislature had to either endorse or reject it by the end of 2005. One of the more innovative and industry-threatening parts of the law allows private insurers, small businesses, and individuals to also take advantage of the program to get lower-cost drugs. And because lawmakers were concerned that the drug companies would stop selling in the state, they included specific provisions to prevent this.

Even though the law did not force drug companies to adhere to the federally negotiated pricing list, the drug industry was nervous. At PhRMA's annual meeting in June 2004, its retiring president, Alan Holmer, citing West Virginia's law and a few other events, warned members that “free-market pricing is now at increasing jeopardy in the U.S.” Immediately after the plan passed, the drug industry went into high gear to make sure the council would put forth innocuous proposals. PhRMA hired six more lobbyists, bringing to nine the total registered with the West Virginia Ethics Commission. Another 26 people were registered by individual drug companies to lobby the Legislature. In the end, in a state with only 138 legislators, the drug and biotechnology industries registered 35 lobbyists.

What's more, PhRMA sought lobbyists with political connections. Perhaps its most significant catch was Phil Reale, hired as local counsel in May. Reale, who used to hold the same position for Wyeth Pharmaceuticals, has been PhRMA's chief spokesman on the fight over pricing in West Virginia. What has a number of Democratic officials outraged is that Reale is also the general chairman of the West Virginia Democratic Legislative Council, an arm of the Democratic Party charged with maintaining and increasing Democratic control of the Legislature. Reale says not to “attach much significance” to his being the council head, saying it is not an important post in West Virginia. But the group's official Web site quotes a number of legislators who attributed their election victories to its help. In the 2001–02 campaign cycle, its political action committee spent almost $163,000 (a small but helpful amount in tiny West Virginia), which included salary for a staffer, direct mail, and get-out-the-vote and media efforts, according to the Center for Public Integrity.

Another important lobbyist for the industry in West Virginia is Thom Stevens, who represents Purdue Pharmaceuticals, Glaxo Wellcome, and Eli Lilly. Legislators raise concerns that he also lobbies for the American Academy of Family Physicians. They believe he has tried to bias doctors against the legislative efforts through comments in the legislative newsletter he sends out on behalf of family physicians.

From April through October of 2004, the West Virginia Legislature's drug-pricing council met every two weeks, developing a benchmark for price negotiations, a plan to simplify access to free drugs for the poor, and other proposals to make lower-priced drugs more available. The meetings were open to the public, and at times, say attendees, council members were outnumbered by a platoon of pharmaceutical lobbyists who came armed with briefings and reports from their lawyers. “In a state where most legislators are part time … and the Legislature has a small staff,” says Kevin Outterson, a law professor at West Virginia University and a council member, “the industry can roll in, bring in national experts, have responsive memos to relatively minor points pushed out by gigantic law firms.”

Despite this, the council in September recommended that West Virginia use the federal government's negotiated price list (the FSS) as a base for determining prices with drug companies. The council concluded that if the state bought drugs at the federally negotiated rate, it could save $24 million for Medicaid and $19 million for state employees per year just on the 25 most commonly used drugs. The council also recommended a cabinet coordinator for state drug purchases and encouraged West Virginia to join other states for greater leverage. These proposals were unanimously endorsed at a special legislative session in mid-November, and two weeks later, the governor created the cabinet-level coordinator post.

The catch is that it will be up to the next governor to appoint a negotiator, reach out to other states, oversee how tough the negotiations will be, and decide if there will be any penalties for companies that refuse to give major price concessions. The drug industry is hoping that the new governor, Democrat Joe Manchin, will be more cooperative than confrontational. For one thing, Manchin's daughter is vice president of government and public relations for Mylan Pharmaceuticals, a generic-drug firm that recently bought a brand-name company. With election reports incomplete, tallies thus far indicate that the drug industry contributed more than $73,000 to Manchin's 2004 campaign, much of it from Mylan employees, according to the Institute on Money in State Politics.

Many states have been watching West Virginia closely. First, they wanted to see what the Legislature would do. Now, they are waiting to see how successful the state is in lowering prices.

These state-level efforts are critical. The Bush administration has just come down against allowing lower-priced drug imports, and neither the administration nor Congress is likely to squeeze their drug company allies for major pricing concessions in Medicare, Medicaid, or otherwise. What will keep the drug companies' feet to the fire will be continued public agitation. Chellie Pingree, the former Maine Senate majority leader and current Common Cause president, who introduced the Maine drug-discount bill, notes that the keys to her success in Maine were the phone banks organized by seniors groups and the large public meetings of grass-roots supporters, which swayed key officials to back her bill despite tremendous drug-industry opposition. After all, even PhRMA knows the customer is always right.

Barbara T. Dreyfuss is a freelance writer in the Washington, D.C., area.