Heading for a Hemorrhage

Health care costs are once again poised to create almost unbearable pain for state health officials and legislators.
by | April 2001

Rising health care costs are making state legislators queasy. The early part of this decade is beginning to feel eerily similar to the start of the 1990s. Those were the days when, with health care's double-digit rates of cost increases, Medicaid became the PacMan that ate state budgets.

After a decade of health care inflation hovering around 5 percent, the signs for the coming decade are ominous. This past year, health insurance premiums in the private sector rose at a sharply higher rate, and managed care organizations found it more and more difficult to bludgeon down physician and hospital fees. The public sector essentially mirrored private industry, with double-digit annual increases in the costs of state employee health benefits becoming commonplace. And Medicaid started to produce some eye-popping budget numbers.

Earlier this year, the American Public Human Services Association asked state Medicaid offices to report on their projected budget increases for the next fiscal year. Results from the first dozen states to report their figures were staggering: a 20 percent jump in Washington, 17 percent in Mississippi, 16 percent in Nebraska and 15 percent in North Dakota. The latter also reported a 60 percent rise in Medicaid pharmaceutical costs.

Even more foreboding, those increases are occurring against a backdrop of a slowing economy and its cohort, lagging state tax revenues. "I don't think we're at a crisis level today," says Hersh Crawford, administrator of the Oregon Office of Medical Assistance Programs. "But we're getting close."

State health care officials are ambivalent about what to do to control costs. While acknowledging that economic conditions may necessitate some health care service cuts in the future, most state officials are vowing--at least for now--that their efforts to control Medicaid spending will not be made on the backs of beneficiaries.

That won't be easy. Jumps in enrollment, managed care's diminishing returns in yielding savings and substantial increases in pharmaceutical and long-term care costs are what's driving the Medicaid money-eating machine--and those are tough costs to control.

The enrollment increases, for instance, aren't just a factor of an economic slowdown. John Holahan, co-author of a recent Kaiser Commission report on projected state Medicaid spending and director of the Health Policy Research Center at the Urban Institute, says they are heading up after a period in which welfare-eligibility workers were aggressively disenrolling families from Medicaid in the initial stages of welfare reform. But the current economic slowdown, he adds, will mean lower incomes and even more Medicaid-eligibles, at a time when many states already have been moving aggressively to insure more families through Medicaid and the State Children's Health Insurance Program (SCHIP).

During the 1990s, managed care helped tame spiraling costs. Today, a combination of federal regulation and local pressures to increase provider reimbursement have resulted in managed care reaching a saturation point in its effectiveness, says Nikki Highsmith, director of policy at the Center for Health Care Strategies.

In addition, there have been well-publicized problems with access to care, care quality and provider reimbursement under some statewide Medicaid managed care initiatives, such as the TennCare program in Tennessee. These state experiences have led other states, which were considering a similar course, to hold off or at least rethink the issue. In essence, managed care is no longer seen as the cure it was perceived to be a decade ago.

States have been laboratories for health care reform for several decades, says Trish Riley, executive director of the National Academy for State Health Policy. But given the reality of managed-care issues, she admits that they now may have fewer new ideas at their disposal than they've had in the past.

Hesitant to consider cutting benefits at a time when expanding access to health care retains a strong constituency, many states are responding to the latest Medicaid numbers by looking for ways to attain savings in pharmaceutical spending and in managing Medicaid more actively.

When it comes to prescription drugs, many states are seeing exploding numbers and exacerbating situations similar to those in Oregon. There, pharmaceutical costs in Medicaid are up about 15 to 17 percent a year for the past few years, with categories such as mental health and cutting-edge drug discoveries accounting for most of the increase. Also, the advent of "lifestyle" drugs--medications that have gained appeal through direct marketing to consumers--are contributing to the cost inflation.

In Maine's Medicaid program, which covers 1,900 different pharmaceutical and related items, just under half of the entire drug budget can be attributed to the 100 most popular medications. Medical advances achieved through drugs such as Prilosec--the famed "purple pill" for gastro-esophageal disorders--come at a heavy price to state coffers. In the past two fiscal years, Maine's Medicaid prescription drug program saw spending increases of 24 percent; the state projects an additional 20 percent increase in the fiscal year that ends June 30, says Kevin W. Concannon, the state's commissioner of human services.

Not surprisingly, several states are experimenting with ways to address this killer cost. Maine has taken one of the most aggressive approaches to seeking price concessions from pharmaceutical companies. It is trying to capitalize on the state's potency in the marketplace as a bulk purchaser of prescription drugs. Since January, Maine has required prior authorization for use of certain prescription drugs that have low-cost therapeutic alternatives. Prilosec, for instance, now has a lower-cost alternative called Protonix. "If we can achieve the same results with another drug as we do with the purple pill, we could save millions," Concannon says.

As to the prior-authorization piece of the program, the state Medicaid office is receiving about 100 to 150 telephone calls a day from providers seeking authorization for use of a drug. "Most state Medicaid programs are relatively passive about the use of prior authorization," Concannon notes. While prior authorization does not necessarily reduce the overall use of prescription drugs, the hope is that providers will be persuaded in appropriate cases to prescribe less costly substitutes for drugs on the prior-authorization list.

But Maine's most-publicized effort in the pharmaceutical area actually involves an attempt to expand coverage through a plan called the Maine Rx Program. Maine Rx offers a prescription drug benefit to the 325,000 state residents without prescription coverage; it has no income-qualification guidelines. That effort currently is tied up in court, however, as a federal judge has enjoined the state from implementing parts of the program based on the objections of pharmaceutical manufacturers. The industry opposes extending the generous drug benefit envisioned in Maine Rx to such a large number of state residents.

When state officials realized that implementation of Maine Rx would be delayed, they followed the example of nearby Vermont and sought a federal waiver to expand eligibility for Medicaid prescription drug coverage. The waiver, approved in the waning hours of the Clinton administration, allows the state to offer a limited Medicaid benefit-- prescription drugs only--to any resident with an income below 300 percent of the federal poverty level. This allows the state to purchase drugs for that population (up to 225,000 new eligibles) at the discounted rates that pharmaceutical companies make available for full Medicaid beneficiaries.

Concannon expects the state to be hauled into court over this program, too, just as has already happened to Vermont. "Pharmaceutical companies don't want to extend the discount to people at 300 percent of poverty," he says.

Industry leaders, generally through the activity of the Pharmaceutical Research and Manufacturers of America, have strongly opposed efforts to expand drug price discounts to previously ineligible residents, saying that a lack of access to pharmaceutical coverage requires a national solution. However, more states are showing an inclination to take on the drug companies.

Florida, where prescription drugs have been fingered as a major reason why the state faces a whopping $1 billion deficit in its Medicaid budget, is one of them. The Sunshine State is likely to eclipse all other states this year as a battleground between politicians and pharmaceutical companies, and drug prices are certain to dominate the debate in this spring's session of the Florida legislature. Among a series of potential initiatives, lawmakers will consider Governor Jeb Bush's plan to trim $100 million from the state's Medicaid deficit by requiring drug companies to increase the price rebate they offer to the Medicaid program. Legislators will also be asked to consider a bill sponsored by state Representative Nancy Argenziano that would remove five expensive brand-name drugs from an exclusive list that bars pharmacists from substituting lower-cost generics.

Oregon, meanwhile, is considering more aggressive case management with patients who take expensive newer classes of antidepressants. It also would like to allow use of a drug formulary in the Medicaid program, which had been prohibited by statute--a statute adopted, Crawford says, as a result of pharmaceutical companies' influence.

In addition, Oregon is eyeing a measure that is under consideration in about 20 states: reducing reimbursement to pharmacies dispensing drugs. The state currently pays pharmacies $3.91 to $4.28 per prescription in dispensing fees, and 89 percent of the average wholesale price (AWP) for the cost of the goods. Reducing those numbers to a range of $3.50 to $3.81 and an AWP of 87 percent would still have the state paying pharmacies far better than most commercial health plans do, Crawford notes.

Some states are also trying to remedy part of their Medicaid problem by closer management of the care received by seriously ill patients with ailments that are expensive to treat.

For several years, Florida's Medicaid officials have attempted to achieve savings through "disease management." Considered by some to be an enhanced generation of managed care, disease management involves more aggressive monitoring and coordinated care for patients with high-cost conditions that often yield poor outcomes--illnesses such as HIV/AIDS, hemophilia-sickle cell anemia and chronic renal insufficiency, for instance. Florida officials seek contracts with providers that can demonstrate a savings of at least 6.5 percent off baseline cost projections through disease management strategies. The disease management program is currently linked to a primary care case management program under the Agency for Health Care Administration.

States are also looking to the federal government for relief. Crawford, the administrator of Oregon's Medicaid office, would like to see more elasticity in Medicaid waiver implementation. "Right now, everyone who's covered under Medicaid gets the same benefit package," he explains. "We could do an adequate benefit package to our Medicaid expansion population at 20 percent less cost, but we need more flexibility under our waiver to do that."

So far, most states are resisting the temptation to consider substantial service cutbacks for existing health care beneficiaries. In North Carolina, officials at the Division of Medical Assistance have responded to higher-than-expected SCHIP enrollments not by trimming services but by freezing new enrollments in the program as of January 1. At that time, the names of 1,500 eligible North Carolina children were on waiting lists for SCHIP enrollment. State officials say that until they can secure more funding, their first priority remains to ensure that current beneficiaries don't experience a downgrading of services.

Some states are also attempting to maintain commitments to existing beneficiaries by seeking rate concessions from providers. Payments to hospitals and nursing homes are a savings target in several states this year, including Florida, Indiana and Ohio.

Unlike in the previous decade, when many state officials saw managed care as their escape route from soaring Medicaid costs, the solutions that will be advanced in the coming months are likely to be piecemeal approaches. But the pressure for them to work may be even greater than before.

"The other huge part of state budgets is K-12 education," Crawford says. "Unless states are willing to pull money from this or corrections, there's no other place to go."