DRUG DEAL SCRAPPED BY HMO; BRISTOL-MYERS WOULD HAVE BEEN GIVEN PREFERENCE IN EXCHANGE FOR $1 MILLION A MONTH.

Byline: Ben Sullivan Daily News Staff Writer

Managed-care giant Foundation Health Systems Inc. has scrapped a controversial plan to give preference to Bristol-Myers Squibb drugs in exchange for payments of $1 million a month, the Daily News has learned.

The deal, outlined in a secretive June memo between the two companies but disclosed at a state hearing on HMO drug practices, drew strong criticism from legislators and the medical community. Critics said the proposed arrangement amounted to a kickback for Foundation.

Under terms of the proposed arrangement, Foundation would have instructed doctors to use Squibb drugs when prescribing medicine for patients in five categories, with problems ranging from high cholesterol to bacterial infection.

In exchange, the drug maker would have paid $1 million per month to a Foundation subsidiary that manages its pharmaceutical purchases. The memo stated specifically that the money was not meant to discount the cost of Squibb's products. Rather, the payments would have financed an in-house campaign to persuade doctors to stick with Squibb and other Foundation-approved drugs.

But Ron Yukelson, a spokesman for Foundation's largest HMO, Health Net, said Thursday the deal has been called off, at least for now.

``The deal is, there is no deal,'' Yukelson said. ``What caused this (proposed arrangement) not to happen was that the two companies simply could not come to terms on a meaningful agreement.''

Yukelson claimed media and political pressure played no role, and the proposal changed significantly from what was detailed in the June memo.

If the updated proposal had been enacted, he said, physicians treating members could have prescribed drugs not preferred by Foundation, although Foundation would have paid for the medicine only if approved by an appeals group within the company.

Yukelson said his company has not ruled out a similar deal in the future. ``We do have a very meaningful, ongoing clinical and financial relationship with Bristol-Myers Squibb,'' he said.

Still, legislators took some credit Thursday for getting the deal scrapped. Michael Shapiro, director of the state Senate Committee on Insurance and an aide to Sen. Herschel Rosenthal, D-Van Nuys, said he hopes for greater scrutiny from state regulators so legislators ``won't have to be in the press to embarrass companies to step away'' from future deals.

In separate letters, Rosenthal and Assemblywoman Liz Figueroa, D-Fremont, challenged the state Department of Corporations, which oversees prepaid health plans, to investigate the Foundation-Squibb arrangement.

``I can think of no clearer example of a deal in which the economic incentives that benefit individual companies work to the express disadvantage of patients,'' Figueroa wrote.

Squibb officials could not be reached Thursday for comment.

In related news, Foundation shares sank as much as 23 percent Thursday on warnings from the company that its third-quarter earnings will be hurt by higher-than-expected medical costs. Foundation shares closed at $7, down $1.875.