When asked to name the primary factors contributing to the dizzying growth rate of state health care expenditures in 2003, 40 states fingered prescription drugs. Regardless of where drug costs rank on their list of ills, all 50 states have been actively working on plans to curtail the growth of their spending on pharmaceuticals, especially within their Medicaid programs.
The drug problem has become particularly acute in the past five years. Medicaid payments for outpatient prescription drugs rose more than 18 percent annually between 1997 and 2000, far outstripping the 7.7 percent annual growth for total Medicaid expenditures over the same period.
While nobody is actually forcing the states to pay for outpatient prescription drugs for their Medicaid recipients, all do. "That has not been considered controversial," says Richard Cauchi, a program manager for the National Conference of State Legislatures. "Drugs are considered a cost saver."
It doesn't take an M.D. to see, for instance, that it's a lot less expensive to provide daily insulin injections for a diabetic patient than it is to pay for weeks of hospitalization that can follow an acute diabetic coma. That's long been the case. The new wrinkle today is that innovative drugs have come on the market that offer alternative treatment for ailments that used to require surgery or other therapies--or that simply improve on existing medications. "It's hard to keep your arms around the problem and stay ahead," says Bob Sharpe, Medicaid director in Florida, "and that's because of new drugs, successor drugs and new uses for existing drugs."
Every pharmaceutical advance--however beneficial to the sick--costs money, and the costs of pills are rising faster than those for other goods and services. A recent study by Families USA found, for instance, that the price for the 50 medications most used by senior citizens rose at three times the inflation rate within one year. Between January 2002 and January 2003, eight of these medications increased in price more than 15 percent. Those include the popular antihistamine, Claritin, which increased 21 percent over that period, and Toprol, a beta-blocker used for various heart ailments, which went up 16 percent.
Another factor pushing up the price and use of drugs is advertising. Until the late 1990s, ads for prescription drugs had to include detailed information about their use and potential side effects. When those rules
were relaxed in 1997, the pharmaceutical industry tripled its direct advertising to consumers, from $800 million to $2.7 billion in 2001. Anyone who has watched an hour of primetime television is intimately acquainted with the "purple pill," Nexium, whether or not they actually have acid reflux disease, for which the pill was developed.
Those ads have a direct effect on the Medicaid prescription drug bill. "Medicaid recipients are not immune to ads that show that with a certain drug you can run barefoot through a field of flowers," says Ray Hanley, former Medicaid director in Arkansas. "Patients want what they see on television. These drug ads drive demand for more expensive drugs than are needed."
Drug manufacturers take exception to such arguments. They claim that drug advertising is a reasonable way to educate consumers and that this can only help improve their health.
CASE HISTORY
More than half the drugs that Medicaid buys are for dual-eligibles-- poor elderly or disabled people who receive much of their health care through Medicare but have their prescription drugs paid for by Medicaid. That's why, when the U.S. Congress began debating a Medicare reform bill with a prescription drug benefit at its heart, state officials thought there might be some deliverance from their prescription-cost woes.The bill Congress finally passed and President George W. Bush signed into law in December did not fulfill those hopes. Had it simply shifted pharmaceutical costs from Medicaid to Medicare, it could have had potential savings for the states of $115 billion over the next 10 years. But a provision in the bill requires states to return 90 percent of the potential annual savings in 2006, the first year the legislation takes effect. The percentage declines over time, but the net benefit to the states will shrink to $17 billion over 10 years.
It may not even come to that much. The Medicare bill's drug coverage is inferior to what a number of state Medicaid plans offer. Some of those states will inevitably supplement the Medicare coverage with their own dollars, unmatched by the federal government. If that happens, some states may wind up spending more money on their dual- eligibles than they did before.
The Medicare bill could be problematic in a couple of other ways: It precludes Medicare from trying to obtain discounts through bulk purchases, and it rules out reimportation of drugs from Canada. While it's not certain that this will hurt states' efforts in those directions, it can't do them any good.
COMPLICATIONS
Opposition to state efforts to control drug costs is vigorous, led as it is by the pharmaceutical industry and supported by many of those who do business with that industry. "You're probably dealing with more special interests and agendas in the pharmacy area than in any other health care field," says Hanley. "You've got manufacturers to deal with, pharmacists, advocacy groups and the physicians who write the prescriptions."The Pharmaceutical Research and Manufacturers of America have been active in working to influence state policies--by going to court and by lobbying. "It's got to be that paying the lawyers and lobbyists costs less than the alternatives," says one knowledgeable observer. When a cost-control measure was being discussed in the Maine legislature, observers in the state joked that whatever the outcome of the debate, at least the hotels and restaurants in Augusta were thriving from all the expense-account lobbyists staying there.
"PhRMA has a very aggressive team of folks assisting government affairs people in each state to fight these initiatives," says Charles Duarte, the administrator of the division of health care financing and policy for Nevada. In his state, the pharmaceutical manufacturers were able to get their own bills before the legislature, successfully steering the process away from more extreme efforts to cut drug costs.
"They have an army of lobbyists," says Cheryl Rivers, executive director of the National Legislative Association on Prescription Drug Prices. "They contribute heavily to political campaigns at both the state and federal levels. And they fund front groups that purport to represent seniors."
REMEDIES
The Chosen FewThe maneuver that may well have the greatest potential for cutting the prescription bill is the preferred drug list. It may also be the most controversial.
A preferred drug list, as defined by the National Governors Association, "steers Medicaid beneficiaries toward drugs that are therapeutically appropriate and less expensive." That is what California started to do in the early 1990s, when it became the first state to move down this path. "We basically thought the state ought to apply businesslike practices to get cheaper costs," says Stan Rosenstein, deputy director of the state's Department of Medical Care Services.
Here's how it works: An advisory group comes up with a list of approved drugs. Most of the criteria involve efficacy and safety, but cost is also taken into account. If two drugs are deemed to be equally useful for a specific treatment, the less expensive one makes it onto the list. As a result, manufacturers who want to be included often provide "supplemental rebates" to the state to get their products in the right price range. The rebates are supplemental in the sense that all drugs purchased by Medicaid programs are already discounted deeply by the manufacturers.
Of course, there are times when a drug that doesn't make it onto the list is clearly preferable for an individual patient. In those instances, states with preferred drug lists require that doctors or pharmacists call in for prior authorization from the state to utilize that medication.
The program had a rocky start in California and set off a great deal of controversy. Drug manufacturers, in particular, didn't like the idea; advocacy groups were wary. But some of that initial uneasiness has been ironed out and the program is, according to Rosenstein, "widely accepted by pretty much everybody." Taxpayers should be happy, too. The preferred drug list, along with its supplemental rebates, saves the state and federal governments $366 million a year.
Some states have allowed drug companies to get their products on preferred drug lists by coming up with alternative cost-saving programs. Pfizer, for example, cut a deal with Florida to put some of its drugs on the list in exchange for providing disease-management services for Medicaid patients with congestive heart failure, diabetes, asthma and hypertension. The state expects to save $33 million over the next couple of years from this arrangement.
As more states have followed California and Florida in developing preferred drug lists, PhRMA has fought hard, bringing a series of lawsuits based on the argument that such efforts "deny poor patients access to needed prescription drugs, forcing them to settle for older, less expensive and often less effective medications."
Although the drug companies have lost on all the principal points of the completed suits, there are unquestionably some powerful objections to preferred drug lists and supplemental rebates. For example, although states may argue that it is relatively simple for a doctor to get prior approval for any drug that's genuinely warranted, that may not be the case in the real world.
"If a drug is subject to prior authorization, often the pharmacist will just say, 'Sorry, it's not covered, go back and talk to your doctor and see if he can prescribe something else,'" says Sheldon Toubman, staff attorney of the New Haven Legal Assistance Association. "Or the pharmacist might call the doctor and do the same thing, but rarely." According to Toubman, what happens next depends on who's getting the prescription filled. The healthy mother of a sick kid is likely to be aggressive in actually getting the proper medications, but a disabled person, who might have had difficulties even getting to the drug store, may find revisiting a physician daunting. Or someone on psychiatric medicine may not want to be on that drug in the first place and so may not pursue an alternative.
It's not realistic to expect doctors to know whether a medication is on the preferred drug list, Toubman says. HMOs and insurance companies have their own lists of preferred drugs, which differ from one another as well as from those created by the state. And at any one time, there are literally thousands of drugs going on or off the lists.
Moreover, in some states, there's a powerful suspicion that some drugs aren't included on the preferred drug list primarily because of price, even though the states claim that price is the last, not the first, criterion.
One approach that addresses that concern is to use evidence-based analysis. This leads states to apply great rigor in compiling information about the most effective and efficient drugs to use for any individual purpose. Oregon, which doesn't require prior authorization, has been leading the way on these efforts. The state's Health Resources Commission has been charged with determining within drug classes what is the most effective medication, and it has subcontracted with the Evidence-based Practice Center at Oregon Health and Sciences University to analyze the research that's been done. The commission also accepts information from the drug manufacturers. "There's a real scientific rigor to the process that is used," says Lynn Read, Medicaid director in Oregon. "And it's done in an open forum."
Washington and Idaho are among the states taking the same route, as is Missouri. How the state approaches the program is key, says Christine Rackers, Missouri's Medicaid director. Had Missouri proposed the approach strictly as a cost-savings measure, "it would have been dead on arrival," she says. "But we're just applying what the research studies show is best for this disease, given the drugs that are available. That's definitely sold much better."
Meanwhile, former Oregon Governor John Kitzhaber is part of the Evidence-based Practice Center at OHSU and is working to bring other states into the fold. By pooling resources from many states, Kitzhaber reasons, researchers will have the wherewithal to expand the number of categories of drugs they look at, and states can avoid "reinventing the wheel."
Going Generic
Somewhat less contentious than the preferred list is the move to encourage doctors to prescribe generics instead of brand-name drugs. This approach has been around for more than 30 years, but it's gained steam in the past five or six. In fact, almost every state has adopted laws and regulations that encourage either the generic or therapeutic substitution of drug products. In 2003, nine states moved to toughen up the emphasis on the use of generics legislatively: Colorado, Maine, Maryland, Minnesota, Nebraska, Nevada, New Jersey, Rhode Island and Virginia.
New York's generic-drug program, like that of a number of other states, requires that physicians get prior authorization for most brand-name drugs when a therapeutically equivalent generic is available. The state anticipates savings from the mandate to be in the $20 million range for 2004.
Clearly, any plan that restricts the drugs available to Medicaid beneficiaries is going to dissatisfy some. The Medical Society of the State of New York, for example, came out against the state's mandatory generics program. A spokesman for the group, which represents 27,000 New York physicians, says that the government should not "make clinical decisions" as to what is best for the patient.
Cheaper by the Dozens
Bulk purchasing of drugs is another increasingly popular approach. The concept is simplicity itself. States buy pharmaceuticals for a variety of groups in addition to Medicaid beneficiaries, including their own employees. Combining these purchases gives states the potential to bargain with what traditional retailers call a big pencil: They can push the pharmacies to provide far steeper discounts than would otherwise be available.
Delaware has been a leader in this area. All totaled, the drug needs of its Medicaid patients and state employees make up about one-third of the entire pharmaceuticals market in the state. When Delaware decided to negotiate with pharmacies in the state on behalf of both of those groups combined, it was able to get dramatically better prices. The savings, so far, have amounted to $3.5 million.
How did the pharmacies react? Recalls one state official, "They didn't exactly jump up and embrace it," but eventually, when they recognized that because of the state's financial stresses even more draconian options were possible, "they suggested other ways we can save money, which was a very fruitful effort."
Maine tried to take this same concept in a slightly different direction. The idea there was to use the volume purchases made by Medicaid to help make drugs more available for a portion of the state's population that needed financial help in purchasing drugs but wasn't poor enough to qualify for Medicaid. On the last day of the Clinton administration, the state was granted a demonstration waiver for its Healthy Maine prescription program that allowed up to a 25 percent discount on drugs available to families below 300 percent of the poverty level. The program went into effect in 2001, but a year later, a PhRMA lawsuit led the federal appeals court to strike it down, based on a technicality.
A similar effort called Maine Rx was held up for three years while it wended its way up through the court system, ultimately gaining a hearing before the U.S. Supreme Court. Having survived that test, the program was somewhat modified, becoming Maine Rx-Plus. This authorized the state to negotiate with pharmaceutical companies to get the best price available for its low-income non-Medicaid population, based on the state's total buying power. It was scheduled to go into effect at the beginning of January. But Maine officials delayed the program by a couple of weeks while they scrutinized the new Medicare prescription drug bill.
Another approach to bulk purchasing is to form a multistate pool. A number of states have considered putting together or joining such a group. Michigan and Vermont are the first to do it. "Clearly," says Giovannino Perri, Michigan's chief pharmacist, "the more states involved, the more pressure there would be on the pharmaceutical manufacturers to offer a good price."
The potential of multi-state plans is enormous. As a result, the drug companies haven't been friendly to these efforts. As Perri points out, "If you put all the Medicaid programs together, it's the single biggest purchaser of pharmaceuticals in the country. So, there is a large market. And I think that does pose a threat to the manufacturers."
Mining the Data
By definition, there's a huge amount of information available about prescription drugs: Every pill used by a Medicaid recipient--or anyone else for that matter--tracks back to a prescription written by a doctor, which is entered into a computer database by a pharmacist. As a result, there's a gold mine of data available for analysis, and a growing number of states have realized that this effort can lead to financial savings.
Arkansas uses that data to link pharmacy claims to physician claims. With that information, the state profiles physicians on their prescription patterns and shows them how they compare with their peer group. The state also sends physicians with brand-name prescription preferences a letter to show them how much their brand-name prescriptions were costing, as opposed to generic prescriptions. Hanley points to typical differentials of $25,000 for brand-name drugs versus $6,000 if that physician had written prescriptions for generic drugs.
Arkansas also developed a physician-support program that allows the state to profile claims by diagnosis. For example, the state can pinpoint where its diabetes patients live. Diabetes consumes about one out of seven health care dollars, Hanley notes. "So, after we identified the patients, we brought in Eli Lilly, and they funded the creation of certified diabetes centers." Patients are enrolled at the education centers, which then work with them on particular diabetes issues and see whether individual targeted interventions help improve the patient's health and also help save money.
The state of Washington is moving in a similar direction. It has had point-of-sale information for decades, but outdated state technology precluded it from using the resultant data to help manage its prescription drug costs. The solution was to hire a firm to load point-of-sale information into a data warehouse that can analyze the information. "We'll be able to track, by doctor, who is prescribing in accord with the state's preferred drug list and who is not," says Doug Porter, the state's assistant secretary of medical assistance. Additionally, the state can now tell which physicians are overprescribing and then teach them how to help the state save money through better prescription practices.
Small Fixes
Since many medications cost about the same regardless of the dosage-- a 40 milligram pill costs the same as an 80 milligram pill for certain medications--states can save money if pharmacists prescribe the bigger pill. One anti-psychotic, Giaron, for example, costs roughly $4 per pill, regardless of strength. Prescriptions for Giaron often call for patients to take a 40-milligram capsule twice a day, but one 80- milligram capsule would be just as appropriate. North Dakota is using this approach, and obviously, it works only for medications that can be safely prescribed at higher doses and won't compromise patient care.
The same logic led North Dakota to its "tablet-splitting initiative." Under this program, the state again looked at products that are priced the same across a realm of strengths. It then told pharmacists it would pay them an extra 15 cents a pill for cutting it in half, if the pill had scoring so that the pharmacist could safely do so. A 100- milligram tablet of Zoloft is $2.45, for instance, as is a 50- milligram Zoloft. When the pharmacy splits the tablets, the patient gets two 50-milligram doses for the price of one.
PROGNOSIS
"Everyone is trying everything right now with prescription drugs," says Washington State's Doug Porter. "The silver bullet has yet to emerge."Most of these efforts are sufficiently untested that there simply aren't solid statistics to demonstrate their long-term benefits or potential side effects. Pointing to preferred-drug lists, Josh Weiner of the Research Triangle Institute, notes that the programs probably save money "but I couldn't point to an evaluation that knows that's true in the long term." He adds that the approach might also reduce access to needed drugs by certain populations. "Hard to say whether that's so or not," Weiner says. "I can't point to any study that proves it is or isn't a problem."
One truth emerges: Some combinations of the schemes to hold down drug costs are here to stay. Many, in fact, are not particularly different from those that the private sector has long been using. "Corporations restrict access to certain drugs," says Brandeis University's Michael Doonan. "They have prior authorization. They have co-payments. In fact, state employees are facing increasing co-pays."
States simply cannot afford to continue paying for rapidly escalating prescription drug costs. The dam has burst. And 50 states and their governors are trying to make repairs before education, public safety and other health care needs are swept away in the tide. "There's a point where publicly funded programs will be overwhelmed," says John Chappuis, Montana's Medicaid director.
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