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Prescription Drug Payola
Merrill Matthews, Center for Medical Progress, 11-3-05

Remember the old payola scam? Radio stations and disc jockeys discovered they could boost their incomes significantly by requiring record companies to fork over some cash if those companies wanted to get their records on the air. More airtime usually meant more sales and higher profits. Basically, you had to pay to play.

Although everyone now concedes that payola was wrong, some states are telling drug manufacturers that if they want their products on the Medicaid formulary (i.e., list of approved drugs for Medicaid recipients), they must pay a “supplemental rebate” on top of the roughly 15.1 percent rebate that drug companies already pay the states — and which the nation’s governors now want to raise to 20 percent. Those drug companies that are unwilling or unable to hand over some extra cash will find most or all of their drugs left off of the state’s formulary.

These proposals have put the drug industry in a difficult ethical quandary: patients often need one company’s particular drug, which may be the only one that works for that particular patient. If a company refuses the payola scheme, some patients could be harmed. Just consider:

The Medical Problems with Rebates

Mental Illness:
Most drugs are effective for most people with a medical condition for which that drug is approved. Unfortunately, the same cannot be said for diseases of the mind. Drugs for such diseases as schizophrenia and manic-depressive disorder are often only effective for 50 percent of the patients, which means doctors have to try other drugs until they find one that works. Limiting drug choices means that some mentally ill patients simply won’t have the drug they need.

Impact on Minorities:
Drugs affect different people differently — because we all have different genetic make-ups. For example, blacks with high blood pressure tend to respond to diuretics much better than whites, and Asians respond to some anti-psychotic drugs at one-tenth the dosage required for whites. For patients with access to virtually all drugs, doctors can switch from an ineffective one to something that works.

But formularies limit the number of drugs available, and requiring an additional rebate will exclude even more of them. Since minority representation in Medicaid is disproportionately high, they are the ones who will bear the brunt of the reduced access to drugs.

Reducing Research:
Supplemental rebates also reduce the amount of money available for research, since the states are taking more of it from the pharmaceutical companies. Perhaps drug companies facing the dilemma of the out-stretched political hand should funnel most of their research dollars to medical schools in states that don’t require manufacturers to pay additional rebates.

The Ethical Problems with Rebates

There are two major ethical problems with supplemental rebates: they are anti-competitive and corrupting. Americans recognize that competition is the best way to keep quality high and prices low. Allowing some third party to decide who can and cannot participate limits the competition — especially when the price to compete is to pay a “rebate” to the person making the decision.

More importantly, supplemental rebates open the door for political corruption. Politicians may contend that the money goes to the state treasury rather than to them personally (as in payola), but they still can use that money for political purposes.

Supplemental Rebates Are a Tax

Many states expanded Medicaid coverage when state coffers were overflowing only to cut the programs when budgets declined. So they are looking for new revenues, and supplemental rebates look like part of that solution — hence the NGA’s proposal to raise the standard rebate from 15 to 20 percent. Supplemental rebates are simply an attempt to raise revenues without raising taxes. But they are, nevertheless, a tax on drug manufacturers, and state legislators should recognize them as such. A vote for higher rebates is a vote to raise taxes.


The last thing we need are politicians devising one more way to extract money for government programs. Prescription drug payola is bad medicine and it’s bad politics. Everyone knows the old payola scam was wrong; when will they recognize that the new version of payola is even worse?

Project FDA.
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