States try to control prescription costs while expenditures double
April 1, 2002 7 minutes read
States try to control prescription costs while expenditures double
With analysts predicting that annual increases in Medicaid prescription drug costs will continue in double-digits for the foreseeable future, states are increasingly looking for creative and innovative ways to hold down the level of increase.
Although some state actions look promising, Brian Bruen, a research associate with the Urban Institute in Washington, DC, tells State Health Watch it is not likely that significant improvements can be made without federal help, which is not expected to be forthcoming.
Mr. Bruen, who wrote a report on the Medicaid prescription drug problem for the Kaiser Commission on Medicaid and the Uninsured, says that increased spending for prescribed drugs is a major reason that Medicaid spending growth accelerated in the late 1990s and is expected to remain at or near double-digit rates in the future.
"Medicaid expenditures for outpatient prescribed drugs grew more than twice as fast as total Medicaid spending from federal fiscal years 1997 to 2000, accounting for 16% of total expenditure growth over that period," he says. (To see chart, click here.)
Medicaid paid for approximately 14% of all prescriptions written in the United States in 2000. Although states are not required to include prescription drugs in their Medicaid benefit package, every state currently covers drugs for all categorically eligible enrollees and most offer at least some coverage for medically needy enrollees. "Drugs have become a vital part of our health care system," Mr. Bruen says. "There’s a recognition that using drugs is the new way that medicine is being practiced."
Mr. Bruen estimates that total spending for outpatient prescribed drugs under Medicaid — both fee-for-service drugs and drugs provided through Medicaid managed care — was $21 billion in 2000. (To see graph, click here) That amount is roughly 10% of total Medicaid expenditures for the year. Medicaid expenditures for fee-for-service prescription drugs increased by an average of 18.1% per year from 1997 to 2000, compared to a 7.7% increase for total Medicaid expenditures.
The Centers for Medicare & Medicaid Services data indicate that spending for fee-for-service outpatient prescribed drugs increased by 90% or more in Nevada, New York, North Carolina, Oregon, South Carolina, Vermont, and Washington from 1997 to 2000. And no state was able to avoid the upward pressure exerted by rising drug and utilization costs in that period. Even when estimates of drug spending by Medicaid managed care plans are included in the calculations of total prescription drug spending, only two or three states had less than 50% growth in prescription drug spending from 1997 to 2000.
Mr. Bruen notes that state Medicaid programs have considerable flexibility in decisions to cover outpatient drugs. Once the decision is made, however, states have less control over which drugs they will cover. While they can exclude a few limited classes of drugs such as barbiturates, federal law essentially requires that if states are going to have prescription drug coverage, they cover all Food and Drug Administration- (FDA) approved drugs made by manufacturers with federal rebate agreements.
Still, states have some tools at their disposal to try to influence prescribing patterns and use of covered drugs:
- require prior authorization before a particular drug can be dispensed;
- require generic or lowest-cost substitutes;
- can require doctors to prove that an older therapy is ineffective before using newer drugs;
- limit the number of prescriptions beneficiaries can have covered, the number of refills in a specified time frame, or the amount of medication allowed in each prescription.
All states have to have drug utilization review programs to ensure that all drugs paid for by Medicaid are appropriate, medically necessary, and not likely to result in adverse health outcomes.
States can create formularies that limit coverage of a drug if a specially composed committee or board determines that it does not have a significant, clinically meaningful therapeutic advantage over alternative drugs included in the formulary for treatment of a certain disease or condition. And they have control over how much they will pay for covered drugs.
Mr. Bruen says that state efforts to control drug costs fall into three major categories:
- actions intended to influence utilization and prescribing patterns;
- use of formularies to influence utilization and/or pressure manufacturers for price concessions;
- efforts to reduce pharmacy payment levels.
There’s no clear evidence, he says, that any one of these techniques produces superior results over the others.
In the first category, Maine has increased the number of drugs needing prior approval and mandates that certain drugs be prescribed in greater strengths, meaning there are fewer doses. The state also permits coverage for some over-the-counter drugs as alternatives to prescription products and has a 34-day supply limit for some brand name drugs (90 days for generics). A federal judge has upheld Maine’s restrictions against challenges from drug companies
Massachusetts requires Medicaid beneficiaries to receive generic medications in all cases except when physicians demonstrate that a name brand drug is medically necessary and they get prior approval from state officials.
Florida, Georgia, Michigan, and Oregon are in the process of creating or implementing new drug formularies. Officials in these states say they see the potential for greater price concessions from manufacturers, and they want to exert leverage on them through prior authorization controls. Mr. Bruen says that while the federal government might be able to obtain better rebates by exercising the total Medicaid program’s negotiating strength, the absence of such federal action is leading states to take matters into their own hands.
A third cost-containment strategy that states are trying is to change the Medicaid payment formula for prescribed drugs. Illinois, for instance, reduced its payment from average wholesale price (AWP) minus 10% to AWP minus 11% for brand-name drugs and from AWP minus 12% to AWP minus 20% for generics. The state increased dispensing fees at the same time by 55 cents for brand-name drugs and $1.35 for generics. Wisconsin has gone from AWP minus 10% to AWP minus 11.25%, although not as great a cut as the AWP minus 15% originally sought.
Commenting to State Health Watch on the three approaches, Mr. Bruen says there appears to be some promise of cost control in the use of formularies, but it’s too early to tell. With regard to influencing prescribing patterns, state officials have to continually ask whether there is a point at which such efforts defeat their purpose since there have been cases in which states actually have paid more for generics than for brand-name drugs because of the way the rebates work, he says.
The easiest approach to get approved, but the one that has the least opportunity to save money, is cutting reimbursement, Mr. Bruen says. There are some questions whether the multistate purchasing co-ops being tried by some states as a way to gain greater price negotiating strength are actually legal under Medicaid.
Although there is a provision in the Department of Health and Human Services budget request for a change in the federal rebate formula that would result in higher rebates, according to Mr. Bruen, it will draw massive congressional opposition from drug companies if it ever looks as though it might be implemented. "[But] I believe we would get savings if such a change were enacted," he says. "I don’t expect to see much national impact from tinkering around the edges. And a lot of states won’t have the political power to follow the lead of Florida and Michigan in their formulary changes."
Meanwhile, the Blue Cross and Blue Shield Association’s State of the States report says that legislatures have approved a variety of programs to improve access to prescription drugs for targeted populations. New Jersey expanded its pharmacy assistance program for low-income residents to include moderate-income aged and disabled persons who purchase pharmaceuticals. And an Arizona pilot program for low-income senior citizens and the disabled will cover 50% of the cost of prescription drugs for eligible participants. Maine will use a federal Medicaid waiver to provide subsidies to purchase drugs for uninsured residents with incomes up to 300% of the federal poverty level. Maryland and Wisconsin have similar waivers to allow Medicare beneficiaries who lack prescription drug coverage to purchase drugs at the Medicaid price.
On another front, a national coalition of governors, employers, and labor leaders organized as the Business for Affordable Medicine (BAM) coalition in Washington, DC, has called on Congress to change the federal law that governs pharmaceutical competition, claiming that state Medicaid agencies could save $600 million if changes were made.
In calling for changes to the Hatch-Waxman Act, Howard Dean, MD, governor of Vermont, says the law "makes it too easy for drug manufacturers to delay competition at the expense of purchasers across the country." Congress’ intent in adopting Hatch-Waxman was to encourage drug research and improve consumer access to affordable medicines by giving drug companies up to 20 years to obtain FDA approval and sell a drug without competition. Today many stakeholder groups contend that companies take advantage of the law’s provisions to stifle competition after drug patents expire.
The governors of Alabama, Hawaii, Louisiana, Missouri, New Hampshire, Washington, and West Virginia take part in BAM with Mr. Dean. They say governors need to be involved in the effort because the solvency of many state Medicaid agencies is in doubt. "With many states beginning to utilize preferred drug lists, which encourage the use of less-expensive drugs, it is essential that generics are available in the marketplace as soon as brand patents expire," they said in a briefing paper.
[Contact Bruen at (202) 261-5819 and Business for Affordable Medicine at (202) 966-0440.]
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