The transfer of "dual eligible" Zyprexa patients from Medicaid to the new Medicare drug benefit means that Lilly's rebate payments to states will be reduced by about $200 mil. per year.

Under the Medicare legislation signed into law Dec. 8, "dual eligibles" will be covered by the new drug benefit beginning in 2006 - without the mandatory 15% Medicaid rebate.

Zyprexa is one of the largest pharmaceutical line items in the Medicaid program. Lilly estimates that approximately 70% of the drug's use is for the Medicaid population, suggesting sales to Medicaid of about $1.8 bil. for the 12 months ended Sept. 30.

The company estimates that approximately two-thirds of Zyprexa Medicaid patients are dual-eligible, representing about $1.2 bil. in annual sales that will shift to the privately administered Medicare Rx benefit.

Assuming Lilly no longer pays any rebates on those sales, the company would realize an extra $200 mil. in profits simply from the transfer to the new benefit.

The Medicare drug plans will have the authority to negotiate discounts. However, the antipsychotic category has typically been exempt from even the most aggressive cost-cutting efforts in states.

In the long run, Lilly noted, private plans could have the leverage to demand rebates that are steeper than Medicaid, particularly since the new benefit is exempt from the "best price" system (¹ Also see "Lilly Analyzes Medicare Rx; Medicaid Changes May Be Big Plus" - Pink Sheet, 8 December, 2003., p. 4).

However, even if Lilly makes some price concessions to private payors, the relief from direct state action can be considered a significant benefit to the company from the legislation. The dual eligible transfer has been enacted just as state Medicaid programs are beginning to seek supplemental rebates on antipsychotics (² Also see "Lilly Zyprexa Strategies Include Medicaid Disease Management" - Pink Sheet, 15 September, 2003., p. 27).

One challenge will be the potential for disruptions when patients transfer from Medicaid to the new benefit, particularly since eligibility criteria will be different. AIDS patient groups are already flagging the issue for further attention.

Zyprexa Under Medicare: Shift From Medicaid Means $200 Mil. Less Rebates

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