Bill Strains Republicans' Ties

WSJ.com - Budget Measure Sets Some Industry Allies On a Collision Course By DAVID ROGERS : "Don't look now, but two Republican patrons -- the oil and pharmaceuticals industries -- could end up colliding in House-Senate negotiations on the party's $45 billion deficit-reduction bill.

Oil companies and Republican leaders want to use the year-end budget bill to open up portions of the Arctic National Wildlife Refuge for energy exploration. But to make this happen, a political deal is needed on health-care savings that may require Republicans to reduce the money drug companies can keep on sales of medicines to Medicaid.

Medicaid is a flashpoint because of its effect on the working poor and lower-income Gulf Coast states where the leadership is looking for Democratic votes. Rep. Nathan Deal (R., Ga.), who helped shape the House Medicaid package, wants to maintain some of the structural changes but a rebate increase, he said, is now "a distinct possibility." If it means saving ANWR, the Pharmaceutical Research and Manufacturers of America, the drug industry's lobbying group, could relearn the limits of friendship in Washington.

"They're friends," said one House leadership aide with a laugh, speaking of PhRMA. "But they're captured friends."

Thus far, House leaders have required no increase in the 15.1% manufacturer's rebate on brand drugs bought by the federal-state health-care program for the poor and disabled. But the Senate would raise the minimum Medicaid rebate to 18.1%; a bipartisan panel of governors has proposed 20%, and House Energy and Commerce Committee Chairman Joe Barton (R., Texas) has been contemplating a rebate-increase amendment for weeks.

Mr. Barton is a champion of the ANWR drilling provisions, which passed the Senate but were pulled from the House bill last month to appease about a dozen moderates. If negotiators are to restore ANWR -- as now envisioned -- the leadership must make accommodations to close this gap with Democrats who so far have aligned solidly against the bill.

ANWR is less a cause for big oil companies than for their Western Republican allies in Congress who want the government to do more to tap natural resources. Inside PhRMA, the lines are also murky since individual states have negotiated higher rebates on a case-by-case basis, and the impact varies among manufacturers according to their marketing plans.

But the competition illustrates the political intrigue behind the giant budget bill. Mining companies, dairy farmers, banks and broadcasters all have their pieces in the most intricate legislation attempted by Republicans in this Congress. Failure would have huge implications for the majority party's ability to continue governing without raising income taxes.

Going into the 2006 elections, Republicans are at a crossroads, unwilling to retreat on tax cuts but lacking the votes to proceed with major reductions in benefit programs. To make do, the party must lean on old friends -- as the oil and drug industries are discovering.

The Senate, which approved ANWR drilling, wants to squeeze revenue from oil companies through tax-accounting changes. The hunt for Medicaid savings has led conservatives into a briar patch of rules changes that critics say amount to price controls on drug manufacturers and pharmacists.

Both the House and Senate bills would replace the average wholesale-price index used to calculate what pharmacists earn on drugs sold under Medicaid. In crafting a replacement, the Senate has been more aggressive than the House in forcing down the government's costs.

Community pharmacies complain that some of the Senate savings, such as factoring in cheaper mail-order drug sales, don't apply to their smaller operations. Drug makers say they worry about the effect on their distribution system. Generic companies, who enjoy greater price flexibility in the current system, fear the cost squeeze will hurt their ability to compete with brands.

All told, the Senate pharmacy provisions would save the government $4.6 billion over five years -- more than double the $1.9 billion in the House package. There is sure to be compromise, but that also may increase pressure on the House to move toward the Senate on rebates.

Under current law, brands must pay a minimum rebate to the government of 15.1%; generics pay 11%. The Senate Finance Committee recommended that both be raised to 17%, and then in the course of floor debate, senators raised the rebate for brands further to 18.1% for total savings of $2 billion.

Generic companies, who have a harder time passing costs on to customers, seem sure to win some rollback and say the six-percentage-point increase in their case is excessive. But Mr. Barton appears open to keeping the rebate for brands at the 17% target set by the Finance panel. Both chambers bucked PhRMA by including "best price" language affecting brand manufacturers in partnership with authorized generics.

Under current law, if a brand's patent is successfully challenged by a generic manufacturer, the challenger enjoys six months of exclusive market access before other generic makers of the same drug jump in. To undercut such a challenge, brands can team up with a second generic source of the drug, which will sell below the brand price under its own label.

Since companies must sell to Medicaid at their best price, the legislation now requires brands to charge the government no more than its generic partner's price in these cases. Prasco Laboratories, a privately owned Cincinnati company specializing in such partnerships with brand manufacturers, fears the change will wipe out authorized generics -- all for a projected savings of $180 million over five years.

The Ohio Senate delegation, through the office of Senate Majority Leader Bill Frist (R., Tenn.), arranged a meeting for the company last month with the Congressional Budget Office. Prasco argues that to the extent competition is reduced for those six months, prices in the generic market would be higher, and therefore Medicaid could end up paying more.

PhRMA spokesman Ken Johnson says that Washington is "expanding price controls." But CBO has stood by its estimates, and Republicans need every dollar -- and vote.

Observing the struggle is a Democrat and former chairman who was known as "the Truck" when his party wielded power in the House. "It's like balancing peas on a knife," says Rep. John Dingell (D., Mich.), elected to Congress 50 years ago this month. "Put them on the left, they come off the right, put them on the right, they come off the left.""