I

103D CONGRESS

1ST SESSION H. R. 1158

To provide for the affordability of prescription drug prices by reducing certain

nonresearch related tax credits to pharmaceutical manufacturers and

to generate previously uncollected tax revenues for the Federal Government.

IN THE HOUSE OF REPRESENTATIVES

MARCH 1, 1993

Mr. MACHTLEY (for himself and Mr. MURTHA) introduced the following bill;

which was referred jointly to the Committees on Ways and Means and

Energy and Commerce

A BILL

To provide for the affordability of prescription drug prices

by reducing certain nonresearch related tax credits to

pharmaceutical manufacturers and to generate previously

uncollected tax revenues for the Federal Government.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Prescription Drug Af5 fordability Act of 1993’’.

6 SEC. 2. FINDINGS AND PURPOSES.

7 (a) FINDINGS.—The Congress finds that—
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1 (1) although prescription drugs represent one of

2 the most frequently used medical care interventions

3 in treating common acute and chronic diseases,

4 many Americans, especially elderly and other vulner5 able populations, are unable to afford their medica6 tions because of excessive and persistent prescription

7 drug price inflation;

8 (2) between 1980 and 1990, prescription drug

9 price inflation was 3 times the rate of general infla10 tion;

11 (3) between 1985 and 1991, the prices of the

12 20 top selling prescription drugs, which account for

13 almost a third of prescription sales, rose 79 per14 cent—nearly 4 times the general rate of inflation;

15 (4) prescription drug manufacturers continue to

16 make enormous profits on the backs of the elderly,

17 poor, and other vulnerable populations that are un18 able to afford their medications;

19 (5) because of the limited availability of private

20 or public prescription drug coverage for the elderly,

21 prescription drugs represent the highest out-of-pock22 et medical care cost for 3 of 4 elderly patients, sur23 passed only by costs of long-term care services;

24 (6) individuals over 65 fill an average of 15

25 prescriptions a year to treat chronic health condi-
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1 tions compared to 5 prescriptions for those under

2 65;

3 (7) the Federal Government and American tax4 payer provide substantial subsidies to the pharma5 ceutical industry in the form of tax incentives, tax

6 write-offs, and grants for non-research activities;

7 (8) for example, in 1987 alone, the pharma8 ceutical industry received a section 936 tax credit of

9 more than $1,400,000,000, and such credit is esti10 mated to have yielded over $2,000,000,000 in tax

11 breaks in 1990 to such industry;

12 (9) when Congress enacted section 936 in 1976,

13 it sought to help Puerto Rico obtain employment14 producing investments, however, in 1987 the phar15 maceutical industry received over half of the tax

16 benefits provided by section 936 but employed less

17 than 20 percent of the workers;

18 (10) the Department of the Treasury will lose

19 $15,000,000,000 in tax revenues during the 1993

20 through 1997 period due to section 936; and

21 (11) 17 of the 21 most prescribed drugs in the

22 United States in 1990 are authorized for Puerto

23 Rican manufacture.
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1 (b) PURPOSES.—The purposes of this Act are to in2 sure that the elderly, the chronically ill, and all Americans

3 have access to reasonably-priced pharmaceutical products.

4 SEC. 3. REDUCTION IN POSSESSIONS TAX CREDIT FOR EX5 CESSIVE PHARMACEUTICAL INFLATION.

6 (a) IN GENERAL.—Section 936 of the Internal Reve7 nue Code of 1986 (relating to Puerto Rico and possession

8 tax credit) is amended by adding at the end the following

9 new subsection:

10 ‘‘(i) REDUCTION FOR EXCESSIVE PHARMACEUTICAL

11 INFLATION.—

12 ‘‘(1) IN GENERAL.—In the case of any manu13 facturer of single source drugs or innovator multiple

14 source drugs, the amount by which the credit under

15 this section for the taxable year (determined without

16 regard to this subsection) exceeds the manufactur17 er’s wage base for such taxable year shall be reduced

18 by the product of—

19 ‘‘(A) the amount of such excess, multiplied

20 by

21 ‘‘(B) the sum of the reduction percentages

22 for each single source drug or innovator mul23 tiple source drug of the manufacturer for such

24 taxable year.
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1 ‘‘(2) MANUFACTURER’S WAGE BASE.—For pur2 poses of this subsection—

3 ‘‘(A) IN GENERAL.—The manufacturer’s

4 wage base for any taxable year is equal to the

5 total amount of wages paid during such taxable

6 year by the manufacturer to eligible employees

7 in Puerto Rico with respect to the manufacture

8 of single source drugs and innovator multiple

9 source drugs.

10 ‘‘(B) ELIGIBLE EMPLOYEES.—The term

11 ‘eligible employee’ means any employee of the

12 manufacturer (as defined in section 3121(d))

13 who is a bona fide resident of Puerto Rico and

14 subject to tax by Puerto Rico on income from

15 sources within and without Puerto Rico during

16 the entire taxable year.

17 ‘‘(C) WAGES.—The term ‘wages’ has the

18 meaning given such term by section 3121(a).

19 ‘‘(3) REDUCTION PERCENTAGE.—For purposes

20 of this subsection—

21 ‘‘(A) IN GENERAL.—The reduction per22 centage for any drug for any taxable year is the

23 percentage determined by multiplying—

24 ‘‘(i) the sales percentage for such

25 drug for such taxable year, by
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1 ‘‘(ii) the price increase percentage for

2 such drug for such taxable year.

3 ‘‘(B) SALES PERCENTAGE.—The sales per4 centage for any drug for any taxable year is the

5 percentage determined by dividing—

6 ‘‘(i) the total sales of such drug by

7 the manufacturer for such taxable year, by

8 ‘‘(ii) the total sales of all single source

9 drugs and innovator multiple source drugs

10 by the manufacturer for such taxable year.

11 ‘‘(C) PRICE INCREASE PERCENTAGE.—The

12 price increase percentage for any drug for any

13 taxable year is the percentage determined by

14 multiplying—

15 ‘‘(i) 20, times

16 ‘‘(ii) the excess (if any) of—

17 ‘‘(I) the percentage increase in

18 the average manufacturer’s price for

19 such drug for the taxable year over

20 such average price for the base tax21 able year, over

22 ‘‘(II) the percentage increase in

23 the Consumer Price Index (as defined

24 in section 1(g)(5)) for the taxable

25 year over the base taxable year.
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1 ‘‘(D) TOTAL SALES.—

2 ‘‘(i) DOMESTIC SALES ONLY.—Total

3 sales shall only include sales for use or

4 consumption in the United States.

5 ‘‘(ii) SALES TO RELATED PARTIES

6 NOT INCLUDED.—Total sales shall not in7 clude sales to any related party (as defined

8 in section 267(b)).

9 ‘‘(E) AVERAGE MANUFACTURER’S

10 PRICE.—The term ‘average manufacturer’s

11 price’ for any taxable year means the average

12 price paid to the manufacturer by wholesalers

13 or direct buyers and purchasers for each single

14 source drug or innovator multiple source drug

15 sold to the various classes of purchasers.

16 ‘‘(F) BASE TAXABLE YEAR.—The base tax17 able year for any single source drug or innova18 tor multiple source drug is the later of—

19 ‘‘(i) the last taxable year ending in

20 1991, or

21 ‘‘(ii) the first taxable year beginning

22 after the date on which the marketing of

23 such drug begins.

24 ‘‘(4) OTHER DEFINITIONS.—For purposes of

25 this subsection—
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1 ‘‘(A) MANUFACTURER.—

2 ‘‘(i) IN GENERAL.—The term ‘manu3 facturer’ means any person which is en4 gaged in—

5 ‘‘(I) the production, preparation,

6 propagation, compounding, conver7 sion, or processing of prescription

8 drug products, either directly or indi9 rectly by extraction from substances

10 of natural origin, or independently by

11 means of chemical synthesis, or by a

12 combination of extraction and chemi13 cal synthesis, or

14 ‘‘(II) in the packaging, repackag15 ing, labeling, relabeling, or distribu16 tion of prescription drug products.

17 Such term does not include a wholesale

18 distributor of drugs or a retail pharmacy

19 licensed under State law.

20 ‘‘(ii) CONTROLLED GROUPS.—For

21 purposes of clause (i)—

22 ‘‘(I) CONTROLLED GROUP OF

23 CORPORATIONS.—All corporations

24 which are members of the same con25 trolled group of corporations shall be
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1 treated as 1 person. For purposes of

2 the preceding sentence, the term ‘con3 trolled group of corporations’ has the

4 meaning given to such term by section

5 1563(a), except that ‘more than 50

6 percent’ shall be substituted for ‘at

7 least 80 percent’ each place it appears

8 in section 1563(a)(1), and the deter9 mination shall be made without re10 gard to subsections (a)(4) and

11 (e)(3)(C) of section 1563.

12 ‘‘(II) PARTNERSHIPS, PROPRI13 ETORSHIPS, ETC., WHICH ARE UNDER

14 COMMON CONTROL.—Under regula15 tions prescribed by the Secretary, all

16 trades or business (whether or not in17 corporated) which are under common

18 control shall be treated as 1 person.

19 The regulations prescribed under this

20 subclause shall be based on principles

21 similar to the principles which apply

22 in the case of subclause (I).

23 ‘‘(B) SINGLE SOURCE DRUG.—The term

24 ‘single source drug’ means a drug or biological

25 which is produced or distributed under an origi-
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1 nal new drug application or product licensing

2 application, including a drug product or biologi3 cal marketed by any cross-licensed producers or

4 distributors operating under the new drug ap5 plication or product licensing application.

6 ‘‘(C) INNOVATOR MULTIPLE SOURCE

7 DRUG.—The term ‘innovator multiple source

8 drug’ means a multiple source drug (within the

9 meaning of section 1927(k)(7)(A)(i) of the So10 cial Security Act) that was originally marketed

11 under an original new drug application or a

12 product licensing application approved by the

13 Food and Drug Administration.

14 ‘‘(5) SPECIAL RULES.—For purposes of this

15 subsection—

16 ‘‘(A) DOSAGE TREATMENT.—Except as

17 provided by the Secretary, each dosage form

18 and strength of a single source drug or innova19 tor multiple source drug shall be treated as a

20 separate drug.

21 ‘‘(B) ROUNDING OF PERCENTAGES.—Any

22 percentage shall be rounded to the nearest hun23 dredth of a percent.’’.
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1 (b) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1993.

4 SEC. 4. ALLOCATION OF ADDITIONAL REVENUES.

5 The additional revenues received in the Treasury dur6 ing any fiscal year by reason of the provisions of section

7 936(i) of the Internal Revenue Code of 1986 (as added

8 by section 3 of this Act) are hereby allocated for account9 ing purposes to a separate account in the Treasury to be

10 used as follows:

11 (1) 75 percent of such additional revenues shall

12 be used for deficit reduction purposes.

13 (2) 25 percent of such additional revenues shall

14 be used for purposes of developing State prescription

15 drug assistance programs (or supplementing existing

16 State prescription drug assistance programs) for

17 those States with the highest percentage of elderly

18 or poor populations (as determined by the Bureau of

19 the Census).

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