New York Medicaid regulators aim to use the threat of imposing increased scrutiny of prescription drugs — such as eyeing their relative effectiveness and their profit margins — to coax additional discounts from drugmakers.
The rules, signed into law in mid-April as part of the state’s budget, don’t go as far as the surcharge that Democratic Gov. Andrew Cuomo originally sought to control the “skyrocketing costs of prescription drugs,” but they retain elements guaranteed to get under a pharmaceutical executive’s skin.
For example, those who don’t agree to voluntarily rebate or pass money back to the state when Medicaid drug spending rises fast could face multiple layers of reviews regarding profit margins and how well their drugs work.
The rules are the latest response to growing dissatisfaction about drug costs from the public, lawmakers and those who run programs like Medicaid, the state-federal health insurance program for low-income people.
“It clearly is going to put more pressure on manufacturers to address prices if they want to stay in business in New York,” said Jack Hoadley, a health policy analyst at Georgetown University who studies Medicaid.
The new law also is part of a growing inclination among states to take on prescription drug costs themselves rather than waiting for a response from Congress or the federal government.
New York’s rules are novel, though, because they are the first to set an annual cap on Medicaid prescription drug spending. The target aims to limit total payments to the sum of medical inflation plus 5 percent, a goal that would have been exceeded in recent years, state officials say.
The law also stands out because — if that target is likely to be exceeded — it explicitly allows regulators to pursue a type of review drugmakers dislike. Such reviews, which are more common in the private sector, use scientific studies and other information to evaluate whether specific medications are overpriced proportionate to their medical benefit.
Drugmakers generally object to such reviews and often dispute their results.
To avoid having their drugs sent for such a review under the law in New York, targeted manufacturers could agree to add additional discounts.
The law “creates an incentive to want to collaborate with us and give us rebates,” said New York State Medicaid Director Jason Helgerson.
Drugmakers had strong objections to the governor’s proposal since its earliest iterations, and Priscilla VanderVeer, a spokeswoman for the industry’s trade lobby, said the group still has “significant concerns” about the price cap and “the chilling effect it could have on New York’s economy,” which she said benefits from 240,000 industry-related jobs.
It’s Not Just New York
States, which pay health costs for millions of employees, prisoners and Medicaid beneficiaries, are particularly sensitive to recent increases in brand and generic drug prices, as well as the introduction of very expensive products, such as treatments for hepatitis C.
New York’s Medicaid program, for example, has seen its drug spending rise on average 8 percent each year over the past three years, after taking into account existing rebates. The program, which uses federal and state funds, serves more than 6 million people. Drugs represent about 5 percent of the cost of the program — with the state paying out $3 billion last year for prescriptions, Medicaid officials said.
Though its law is unique, New York’s efforts are “in keeping with the mood in a number of other states,” said Rachel Sachs, an associate professor at Washington University-St. Louis School of Law who studies intellectual property, health law and food and drug regulation.
A Trigger For Action
Vermont lawmakers last year adopted legislation that requires drugmakers to provide justification for price increases it determines are driving up spending in state programs, such as Medicaid. Maryland lawmakers in March passed legislation, still awaiting the governor’s signature, that directs Medicaid to notify the attorney general when off-patent or generic drugs experience an “excessive price increase” — and sets financial penalties if the drugmaker can’t justify the hike. In Louisiana, officials have asked whether a rarely used federal law could be tapped to sidestep patents and allow government programs to get lower-cost generic versions of pricey hepatitis C treatments.
Under the New York law, everything plays off an annual spending growth cap.
The new rules are triggered if the combination of price increases and use of drugs is forecast to push spending to exceed that target. First, regulators will ask drugmakers seen as driving that spending to voluntarily offer rebates.
No specific drugs have yet been named, and it isn’t clear how they will be chosen.
“This policy will not affect the vast majority of drugs,” said Helgerson, adding that it will target “the manufacturers that attempt to use periods of patent protection to drive outrageous prices.”
Attorney John Shakow, who represents drug manufacturers, said his clients’ reaction is “mystification and concern,” in part because it is unclear how regulators will select which drugs or manufacturers to pursue for additional rebates.
“It seems prone to abuse, if they want to go after a manufacturer for political reasons or otherwise,” said Shakow, a partner at King & Spalding who specializes in drug price cases. “Laws that are this amorphous and nonspecific and vest so much discretion in regulatory authorities strike us as being ripe for challenge.”
Other laws already require drugmakers nationwide to give Medicaid programs their “best price” — equal to or less than what it is paid by private insurers. Most states, including New York, already seek supplemental rebates, often in exchange for priority placement on lists of which drugs can be dispensed.
But the new law goes further in seeking additional rebates on top of those.
If the targeted drugmakers balk at offering discounts, regulators are granted a range of options that ramp up pressure by requiring those uncomfortable reviews.
Regulators, for example, can refer specific drugs to an evaluation by the state’s Drug Utilization Review Board.
The board would recommend a target rebate. If the state could not get the drugmaker to agree to at least 75 percent of that rebate amount, other sanctions could apply. Prior authorization — meaning a doctor would have to get special permission to prescribe — could be placed on the drug. Advocates fear that could make access to needed medications more of a hurdle for patients.
The state could also require drugmakers to disclose how much was spent on research and marketing, what it charges for the drug in other countries and its average profit margin over a five-year period. Such “transparency” rules are strongly opposed by the drug industry, which says they don’t capture all the costs that go into drug development — and won’t help consumers. With a few exceptions, the industry has successfully fought efforts in various states to pass such legislation.
And, finally, the strongest enforcement mechanism would allow the state to bar some medications entirely, so long as they were not the only drug for a particular condition or treatment. It isn’t clear how that would square with other federal requirements.
If it all works according to plan, the state expects to save $55 million this fiscal year and $85 million the next under the law, Helgerson said.
KHN’s coverage of prescription drug development, costs and pricing is supported in part by the Laura and John Arnold Foundation.