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States’ Control Of Prescription Drug Spending: A Heterogeneous Approach

Abstract

 
In an effort to balance Medicaid budgets, states use prescription drug cost containment tools in unique ways and in varying combinations. We report on the variability in state-level strategies to control the cost of prescription drugs and describe broad state-to-state differences in per beneficiary spending on drugs. This heterogeneity raises the question of appropriate state program variability. Research is needed to determine the medically, ethically, and legally most suitable means of controlling drug costs, especially as the Medicare Part D drug plan will likely recapitulate the prescription drug program variability observed among the states.

From 1997 to 2000, drug spending increased 18 percent per year and is projected to continue increasing 11.1 percent per year between 2002 and 2012.² This growth reflects greater use among all age groups and substitution of newer, higher-price products for less costly ones.³ Across the nation, this rapid spending increase has contributed to states’ budget crises and prompted a variety of efforts to specifically control prescription drug spending.⁴

Stephen Soumerai reviewed some of the mechanisms used by states to curb Medicaid drug spending.⁵ He found that although these interventions reduce prescription drug spending, they can trigger underuse of essential drugs or increased use of more costly health care services. He also cited examples of cost containment efforts that have resulted in increased patient morbidity. His work illuminates the need for rigorous research to improve our understanding of the impact of restrictions on access to drugs.

To better understand and quantify the extent to which states use cost containment methods, we researched their prescription drug benefit programs. We consider some of the most commonly used cost containment tools and describe states’ implementation patterns (Exhibit 1).

View larger version (18K): [in this window] [in a new window]   EXHIBIT 1 States’ Use Of Pharmaceutical Cost Containment Tools, 2004

Top Study Data And Methods States’ Cost Containment... Discussion NOTES

States’ Cost Containment Tools

Top Study Data And Methods States’ Cost Containment... Discussion NOTES

 
Preferred drug lists. Although the Omnibus Budget Reconciliation Act (OBRA) of 1990 prohibits restrictive formularies, states have developed other methods of influencing patterns of drug use.⁷ Preferred drug lists (PDLs) encourage the use of specific agents deemed by states’ pharmacy and therapeutics (P&T) or drug utilization review (DUR) committees to be the most cost-effective and least hazardous. As of 2003, half of the states had implemented PDLs (Exhibit 1).

The methods by which drugs are selected for PDLs vary from state to state. One-quarter of states have in-house DUR or P&T committees responsible for PDL drug selection, while others contract with outside agencies for this service. Peter Neumann found that ten state Medicaid programs were in the process of adopting explicit, evidence-based guidelines for PDL determination, which suggests that a subset of states are embracing a rigorous approach to the process.⁸

PDLs also give states leverage in negotiating drug prices with drug makers, which are often willing to lower their unit charges in exchange for inclusion on PDLs.⁹ Of states employing a PDL, 40 percent apply it to other state prescription drug purchases such as the State Children’s Health Insurance Program (SCHIP). A uniform, statewide PDL simplifies processes for the states, and the volume increase enhances the states’ leverage in negotiating prices with drug manufacturers.

Prior authorization. While the PDL defines a state’s preferences or recommendations for drug selection, the prior authorization (PA) process serves as its enforcer. It requires prescribers to apply for special consideration for individual patients when nonpreferred drugs are indicated. The complexity of the PA process varies and determines the extent to which it deters use of certain agents or encourages a trial of a PDL agent first.

All states but one report having some PA policy in place, but use of the process varies greatly. In states without a PDL, this process is used to regulate specific drug classes or brand-name products. A KFF survey found that PA denial rates range from zero to 14 percent, with only one outlier, Massachusetts, denying 60 percent.¹⁰ This suggests disparate degrees of rigor and enforcement and raises questions regarding the efficacy of the process.

Rebates. OBRA 90 established a manufacturers’ rebate for all states providing Medicaid drug benefits. Rebates differ for generic and brand-name drugs. For generics, the rebate is 11 percent of average manufacturer price (AMP); for brand-name drugs, it is either 15.1 percent of AMP or the difference between AMP and the best price, whichever is greater.¹¹

States may also negotiate individually or collectively with manufacturers for a supplemental rebate. These are agreed upon in exchange for a guarantee that the manufacturer’s products will be included on PDLs.¹² As of 2003, nine states had successfully negotiated supplemental rebates.

Generic substitution. Although federal regulations prohibit restricted formularies, they do not discourage states’ efforts to maximize the use of generics. States exercise this freedom in diverse ways: 71 percent have laws requiring generic substitution for brand-name products when an equivalent is available; 65 percent of these states permit the prescriber to override the default generic dispensing by simply entering a "brand medically necessary" clause on the prescription.

Cost sharing. Medicaid lets states charge certain beneficiaries nominal fees for certain services.¹³ Seventy-one percent of states charge a prescription copayment, and most of those charge all eligibility groups. Co-payments vary from fifty cents to five dollars per prescription. In the KFF survey, only twenty-two of thirty-six states reporting a co-payment policy were applying a differential charge based on the drug’s price or brand/generic status.¹⁴

Quantity, duration, and refill limits. Federal regulations require states to assure that every service covered by Medicaid is "sufficient in amount, duration, and scope to reasonably achieve its purpose."¹⁵ The flexibility invited by this wording is evident in the states’ different prescription dispensing and refill limits. Fifty states limit the quantity of drug dispensed, generally to a one-month supply; most states also limit refills to six months. The disparate restrictions on total prescriptions allowed for each beneficiary are more striking. Most states impose no cap on total annual or monthly prescriptions. More restrictive states, though, limit drug benefits to three to six prescriptions per month. Others cap only the number of brand-name prescriptions allowed per month, generally three or four.

Pharmacy reimbursement and drug purchasing. States are required to pay a "reasonable dispensing fee" to pharmacists for services provided to Medicaid patients.¹⁶ Most such fees fall between $3.50 and $4.50 per prescription, but they range from $2.25 to $8.04, a nearly four-fold difference.

States are also free to determine the drug purchasing formula used to reimburse pharmacies for the product dispensed. In establishing these formulas, most states begin with the average wholesale price (AWP), a figure determined by the manufacturer, and subtract a percentage meant to account for the difference between AWP and actual acquisition cost.¹⁷ The resulting drug purchasing formula is AWP–X percent. States’ formulas vary widely. Among those using a single formula for generic and brand-name agents, product reimbursements range from AWP–5 percent to AWP–18 percent. States that distinguish between brand-name and generic products use formulas that range as low as AWP–50 percent for drugs that are available from multiple sources.

The final reimbursement to the pharmacy is determined by the dispensing fee and the product reimbursement: (AWP–X percent) + dispensing fee. Occasionally, parsimonious product reimbursement is offset by more generous dispensing fees and vice versa. The range of pharmacy reimbursement observed among the states remains broad even when the combination of product payment and dispensing fees is considered.

Managed care. The portion of Medicaid beneficiaries receiving services through capitated managed care programs greatly increased after the Balanced Budget Act (BBA) of 1997 broadened states’ freedom to require beneficiaries to enroll in managed care plans.¹⁸ States differ in how and how much they exercise this option. In 2003, states’ Medicaid managed care enrollment ranged from zero to 100 percent (median 68 percent).¹⁹ When patients enroll in a capitated plan, states can either include drug benefits in the capitated price or provide them on a fee-for-service basis. Of the thirty-five KFF respondent states reporting some portion of beneficiaries enrolled in capitated plans, 37 percent provide prescription drugs through the traditional fee-for-service method. The majority include drugs in the capitation agreement; this permits managed care organizations to determine most details of beneficiaries’ drug benefits.²⁰

Disease management. To further control drug spending, 18 percent of the states use diagnosis-specific disease management programs (DMPs) for chronic diseases such as asthma, diabetes, and congestive heart failure. These programs are expected to save money by improving appropriate management of the disease and thus limiting the need for expensive services associated with treatment failure, such as hospitalization or emergency room visits.²¹ DMPs can minimize underuse of critical drugs and may provide a balance or safeguard to access restrictions.

Fee-for-service drug spending. Medicaid Statistical Information System (MSIS) data compiled by the National Pharmaceutical Council reveal a wide range of total and per beneficiary drug payments made by the states for their fee-for-service drug benefit recipients (those whose prescriptions are not included in a capitated plan). A fourfold difference is seen in the payments made per beneficiary, and a 4.5-fold difference is seen in the portion of total Medicaid budget consumed by prescription drugs (Exhibit 2).²²

Although this variability might reflect differences in the characteristics of each state’s Medicaid enrollees and in the use of capitated plans for prescription drug management, it is also undoubtedly influenced by states’ differing use of drug cost containment tools.

Discussion

Top Study Data And Methods States’ Cost Containment... Discussion NOTES

 
The variability of states’ management of prescription drug benefits and cost containment efforts underscores the heterogeneity of the Medicaid program and demonstrates states’ ability to exercise autonomy amid federal mandates. The heterogeneity may reflect political priorities but likely also results from the varying degrees to which the states, at differing levels of budget crises, feel pressured to control spending. It highlights the extent of drug benefit experimentation occurring nationwide. Understanding the impact of this variability on health outcomes, patient satisfaction, and overall Medicaid budgets is essential to maximizing quality and cost-effectiveness of one of the largest U.S. health care payers. Unfortunately, it is not clear that the outcomes of these program modifications are being systematically evaluated.

What is appropriate variation? Our findings raise the question of what is appropriate state-to-state variation in Medicaid drug benefits. Are there differences in programs’ quality of care or patient outcomes that can explain these different levels of investment? How much variation is desirable for a program that receives at least half its funding from the federal government?

Regional differences in health care delivery and spending have been studied extensively.²⁴ These studies show that for the services examined, the relationship between health care spending and health reaches a plateau. A similar plateau has not been described for prescription drugs. Medications are believed to be among the most cost-effective health care technologies available, and one might argue that other services are thus better targets of budget-balancing efforts.²⁵ But state resources are limited, and federal regulations restrict cost-cutting options to optional services. States cannot wait for evidence to emerge regarding the best cost containment methods.²⁶

Need for outcomes research. This need to cut budgets without clear evidence on the safest and most effective methods highlights the need to evaluate the states’ successes and failures. We do not know how the various access restrictions, individually and in combination, will ultimately affect the health of Medicaid beneficiaries and downstream Medicaid spending, but it is essential to find out through rigorous outcomes research.

As we seek to define optimal prescription access and use, we must recognize the inherent conflict between chronic disease management, generally achieved largely through optimal medication regimens, and the increasing restrictions we place on medication access.²⁷ If excessive, such restrictions could jeopardize the overall health of beneficiaries, resulting in poor outcomes and magnified downstream costs. We must determine which forms of cost containment are effective and appropriate and which introduce unacceptable costs, risks, ethical conflicts, or legal concerns.

Implications for Medicare. The variability observed among states’ Medicaid programs has important implications for the future of the Medicare Part D prescription drug program. Medicare drug benefits, slated to begin in January 2006, are expected to be managed by primary prescription drug plans or comprehensive managed care plans.²⁸ As these providers will likely have formularies, tiered copayments, limits on drug quantities, and an appeals process comparable to PA procedures, Medicare beneficiaries enrolled in diverse plans across the country might experience drug benefits as heterogeneous as those of the state Medicaid programs. For a federally funded program intended to be uniform for all beneficiaries, how much variability will be acceptable? What criteria for drug access restriction and formulary inclusion will be tolerable? How will the CMS assure quality and equity across the regions? Within the broad range of per beneficiary drug spending seen among the states, where will the Medicare benefit fall? Where should it?

Implementation of Medicare Part D has the potential to permit extensive prescription drug research and to answer questions regarding optimal access and cost control. The natural experiment created by the states’ Medicaid programs will be recapitulated through the individual drug plans contracted to deliver prescription benefits to seniors. The volume of use and the centralized nature of Medicare claims could facilitate outcomes research. To achieve this, prescription drug plan providers must be required to report detailed records of drug dispensing, formularies, and access restrictions. The size and breadth of this program, if it is managed correctly, will give it power to inform drug benefit design.

To extend the research potential and maximize yield from the natural experiment of the proposed program flexibility, the CMS could use this rich database for postmarketing drug surveillance. Such an endeavor would likely be welcomed by the Food and Drug Administration (FDA) and the public in this era of heightened drug safety uncertainty.

Medicaid and the Medicare Modernization Act. The implementation of Medicare Part D will have dramatic implications for state Medicaid programs and their efforts to rein in drug spending. As the drug benefits for dual eligibles shift in January 2006 from Medicaid to Medicare, states will remain responsible for their portion of drug payments for the elderly poor, about half of their current total drug spending.²⁹ Each state’s portion of future Part D spending, known as the "claw-back," will be based on its per capita prescription drug spending for dual eligibles in 2003.³⁰ States that have extended efforts to control drug spending since that time will lose anticipated savings from those efforts with respect to the drug bill for this population. This arrangement will effectively penalize the states that provided the most generous drug benefits in 2003—benefits that varied as much as 2.25-fold. With fewer savings and no way to impose cost control on the clawback, states will likely respond by reducing their expansion programs and further intensifying efforts to limit the drug spending that remains under their control—that of the non–dual eligibles.

As budget tensions increase, some states may make more radical changes. If the states’ portion of Medicare Part D eventually meets or exceeds the dollar value of the federal matching funds received for drug benefits of non–dual eligibles, simple arithmetic may prompt some states to terminate the Medicaid drug benefit altogether. This would be legal, because this benefit is optional. If a state were to provide no Medicaid drug benefit, it would have no responsibility for the drug benefits of elderly dual eligibles. The federal government would then be responsible for the entire drug bill of the elderly poor and disabled residing in the states that were relinquishing their matching funds. States making this decision could truly abandon drug benefits or could provide drugs for poor, nonelderly people through a new state program independent of Medicaid.

The potential for such developments underscores the need to reassess the shared federal and state funding model of drug coverage for dual eligibles. Medicaid’s decentralized nature is intended to permit states flexibility in covering health costs for the poor. Medicare Part D retracts some of this flexibility by obliging states to pay a portion of the prescription bill generated by a federal program. The result is a reverse block grant of sorts, which could prove financially devastating to the states. If no changes are made in the state/federal funding plan for Medicare Part D, researchers and policymakers alike must anticipate the far-reaching implications and closely monitor Part D’s impact on non–dual eligibles, Medicaid benefits, and state budgets.

Editor's Notes

 
Nancy Morden (morden{at}u.washington.edu) is a senior fellow, National Research Service Award, in the Department of Family Medicine at the University of Washington, in Seattle. Sean Sullivan is a professor of pharmacy and health services in the Department of Pharmacy, Pharmaceutical Outcomes Research and Policy Program, at the University of Washington.

The authors gratefully acknowledge the research assistance of Matthew Kerigan and Sheldon Birch.

NOTES

Top Study Data And Methods States’ Cost Containment... Discussion NOTES

 

1. A. Schneider and L. Elam, Medicaid: Purchasing Prescription Drugs, January 2002, www.kff.org/medicaid/4025-index.cfm (4 May 2005).
2. Ibid.; and S. Heffler et al., "Health Spending Projections for 2002–2012," Health Affairs, 7 February 2003, content.healthaffairs.org/cgi/content/abstract/hlthaff.w3.54 (14 May 2005).
3. J. Holahan, J.M. Wiener, and A.W. Lutzky, "Health Policy for Low-Income People: States’ Responses to New Challenges," Health Affairs, 22 May 2002, content.healthaffairs.org/cgi/content/abstract/hlthaff.w2.187 (14 April 2005).
4. M.M. Mello, D.M Studdert, and T.A. Brennan, "The Pharmaceutical Industry versus Medicaid—Limits on State Initiatives to Control Prescription-Drug Costs," New England Journal of Medicine 350, no. 6 (2004): 608–613.[Free Full Text]
5. S.B. Soumerai, "Benefits and Risks of Increasing Restrictions on Access to Costly Drugs in Medicaid," Health Affairs 23, no. 1 (2004): 135–146.[Abstract/Free Full Text]
6. J. Crowley, D. Ashner, and L. Elam, Medicaid Out-patient Prescription Drug Benefits: Findings from a National Survey, 2003, December 2003, www.kff.org/medicaid/4164.cfm (18 February 2004); National Conference of State Legislatures, "Medicaid Benefits: Services Covered, Limits, Copayments, and Reimbursement Methodologies for Fifty States, District of Columbia, and the Territories," January 2003, 207.22.102.105/medicaidbenefits/prescriptiondrugs.html (18 February 2004); and N. Kaye, "Affording Prescription Drugs: State Initiatives to Contain Cost and Improve Access," July 2002, www.nashp.org/_docdisp_page.cfm?LID=666CB5DC-7948-11D6-BD1700A0CC76FF4C (9 May 2005).
7. Restrictive formularies contain a limited list of drugs that may be reimbursed by the payer. In contrast, Medicaid programs generally have broad, inclusive formularies. PDLs represent a subset of this formulary.
8. P.J. Neumann, "Evidence-based and Value-based Formulary Guidelines," Health Affairs 23, no. 1 (2004): 124–134.[Abstract/Free Full Text]
9. Mello et al., "The Pharmaceutical Industry."
10. Crowley et al., Medicaid Outpatient Prescription Drug Benefits.
11. Centers for Medicare and Medicaid Services, Unit Rebate Amount (URA) Calculation, 21 December 2004, www.cms.hhs.gov/medicaid/drugs/drug12.asp (12 April 2005).
12. Mello et al., "The Pharmaceutical Industry."
13. "Applicability; Specification; Multiple Charges," Code of Federal Regulations, title 42, chap. IV, part 447, sec. 447.53 (1 October 2004).
14. Crowley et al., Medicaid Outpatient Prescription Drug Benefits.
15. "Sufficiency of Amount, Duration, and Scope," Code of Federal Regulations, title 42, chap. IV, part 440, sec. 440.230 (1 October 2002).
16. "Drugs: Aggregate Upper Limits of Payment," Code of Federal Regulations, title 42, chap. IV, part 447, sec. 447.331 (1 October 1999).
17. See D.M. Gencarelli, "Average Wholesale Price for Prescription Drugs: Is There a More Appropriate Pricing Mechanism?" National Health Policy Forum Issue Brief no. 775, 7 June 2002, www.nhpf.org/pdfs_ib/IB775_AWP_6-7-02.pdf (14 April 2005).
18. U.S. Department of Health and Human Services, Medicaid 2000: A Profile, September 2004, www.cms.hhs.gov/about/history/premedicaid.asp (14 April 2005).
19. CMS, "Medicaid Managed Care Enrollment as of December 31, 2003," www.cms.hhs.gov/medicaid/managedcare/mmcpr03.pdf (16 May 2005).
20. Crowley et al., Medicaid Outpatient Prescription Drug Benefits.
21. J. Rawlings-Sekunda, D. Curtis, and N. Kaye, Emerging Practices in Medicaid Primary Care Case Management Programs, June 2001, aspe.hhs.gov/health/reports/PCCM/chapt5.htm#Disease (2 January 2004).
22. National Pharmaceutical Council, Pharmaceutical Benefits under State Medical Assistance Programs, 2002, 2003, www.npcnow.org/resources/audience/policymakers.asp (4 March 2004).
23. D.K. Baugh et al., "Medicaid Prescription Drug Spending in the 1990s: A Decade of Change," Health Care Financing Review 25, no. 3 (2004): 5–23.[Web of Science][Medline]
24. See, for example, E.S. Fisher et al., "The Implications of Regional Variations in Medicare Spending. Part 1: The Content, Quality, and Accessibility of Care," Annals of Internal Medicine 138, no. 4 (2003): 273–287[Abstract/Free Full Text]; E.S. Fisher et al., "The Implications of Regional Variations in Medicare Spending. Part 2: Health Outcomes and Satisfaction with Care," Annals of Internal Medicine 138, no. 4 (2003): 288–298[Abstract/Free Full Text]; and C.M. Ashton et al., "Hospital Use and Survival among Veterans Affairs Beneficiaries," New England Journal of Medicine 349, no. 17 (2003): 1637–1646.[Abstract/Free Full Text]
25. J. Avorn, "The Prescription as Final Common Pathway," International Journal of Technology Assessment in Health Care 11, no. 3 (1995): 384–390.[Web of Science][Medline]
26. Soumerai, "Benefits and Risks."
27. J.D. Kleinke, "Access versus Excess: Value-based Cost Sharing for Prescription Drugs," Health Affairs 23, no. 1 (2004): 34–47.[Abstract/Free Full Text]
28. Health Policy Alternatives, Prescription Drug Coverage for Medicare Beneficiaries: A Summary of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, December 2003, www.kff.org/medicare/6112.cfm (18 May 2004); J.P. Newhouse, "How Much Should Medicare Pay for Drugs?" Health Affairs 23, no. 1 (2004): 89–102[Abstract/Free Full Text]; and P.D. Fox, "Prescription Drug Benefits: Cost Management Issues for Medicare," Health Care Financing Review 25, no. 2 (2003): 7–21.[Medline]
29. NPC, Pharmaceutical Benefits under State Medical Assistance Programs, 2003, 2004, www.npcnow.org/resources/PharmBenefitsMedicaid.asp (4 February 2004).
30. A. Schneider, "The ‘Clawback’: State Financing of Medicare Drug Coverage," June 2004, www.kff.org/medicaid/7118a.cfm (13 May 2005).

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