Rx Relief

With prescription drug costs soaring, states are taking bold steps to bring them down.
by | September 2000

Many residents of Maine, especially senior citizens struggling to get by on a fixed income, are fed up with the high prices of prescription drugs. "They're saying, `This is wrong. This is unfair,'" says Senator Judy Paradis, chairman of the Health and Human Services Committee. "They had a job. They worked. They had a fairly good retirement. Then illness hits and it breaks them completely."

So last fall, Paradis sponsored--and the legislature passed--the Maine Resident Low-Cost Drug Program, which requires pharmaceutical manufacturers that do business in the state to provide consumers with a Medicaid-level rebate on all drug purchases.

That was just the beginning, however, as Maine lawmakers soon came to realize that the state budget wasn't immune from the problem, either. "We had a $60 million Medicaid shortfall this year, and most of it was due to the rising cost of prescription drugs," says Chellie Pingree, the Senate majority leader.

In May, Governor Angus King signed into law the nation's first pharmaceutical price-control legislation. The goal of the Maine Rx program is ambitious: It aims to reduce the cost of all prescription drugs sold in the state by approximately 40 percent by July 2003.

Indeed, the appearance of a new generation of very effective, very expensive prescription drugs is squeezing the pocketbooks of both seniors and state Medicaid programs throughout the country. And with proposals for a new Medicare prescription drug benefit bogged down in Congress, states are starting to respond with an array of innovative-- and untested--programs.

According to the National Conference of State Legislatures, more than 20 states debated legislation this year that would in some way help low-income seniors purchase prescription drugs. Most are considering fairly traditional proposals, such as creating senior pharmacy- assistance programs, which pick up part of the costs of seniors' drug purchases, or expanding eligibility for state Medicaid programs. But a handful of states have, like Maine, grown impatient with simply picking up the tab and are pressing ahead with more radical approaches.

In the past year, legislators in the New England states, as well as in California and in Florida, have passed legislation intended to lower the prices of prescription drugs. Massachusetts is seeking to create a statewide bulk-purchasing pool that would use the state's purchasing power to negotiate discounts on prescription drugs for seniors, state employees, and the uninsured. California and Florida are attempting to extend the discounts Medicaid recipients receive on prescription drugs to Medicare beneficiaries. And a growing number of policy makers view price-control measures such as Maine's as their best hope for holding down prescription drug costs. The pharmaceutical industry, however, sees them as a potential disaster in the making.

Most Americans buy prescription drugs at discounted prices through their managed-care plans. Low-income people enrolled in state Medicaid programs get deep discounts, too. Federal law requires that drug manufacturers offer Medicaid programs their "best available prices" for most products. In addition, drug companies generally give state Medicaid programs a rebate on drugs sold to Medicaid recipients.

Medicare, the federal health insurance program for older Americans, is different. Although it covers most medical procedures, it doesn't cover the costs of prescription drugs. Still, many seniors manage to secure prescription drug coverage anyway. Some have access to discounted prescription drugs through the health insurance plans of their former employers. Others buy supplemental "Medigap" insurance. Seniors with incomes below 150 percent of the poverty line often qualify for Medicaid.

But approximately one-third of all Medicare recipients--about 13 million people--don't have access to discounted prescription drugs. These seniors earn too much to qualify for Medicaid and too little to afford supplemental insurance. As a result, when they need to buy a prescription drug, they have no choice but to go to a pharmacy and pay the full retail price. At more than $3 per pill, the retail price for a year's supply of Prilosec, a frequently prescribed ulcer medication, can top $1,400. For people of modest means, that can be financially ruinous.

The problem isn't exactly new. "In some sense, it's an age-old issue," says Richard Cauchi, a senior policy specialist at the National Conference of State Legislatures. "There are some people who cannot afford the prescription drugs they need or their doctors say they need, so there's always an urgent or even desperate medical situation for some individuals." Indeed, many states have long sought to help this population. At least a dozen states have had senior pharmacy-assistance programs since the mid-1980s. This year, four more states--Florida, Indiana, Kansas and South Carolina--created such a program for the first time.

However, what was once a problem has turned into a crisis. In recent years, drug costs have shot through the roof. In 1998, spending on prescription drugs increased 18.4 percent from the previous year, bringing national spending on prescription drugs to almost $80 billion. In 1999, it increased another 18.8 percent.

The primary force behind fast-rising prices is the appearance of a new generation of wonderdrugs. Seniors with arthritis don't want Advil (5 cents a pill) when they can take Celebrex ($2.20 a pill). As drug manufacturers have brought more and more innovative but expensive prescription drugs to market, seniors have devoted even more of their limited resources to buying these products.

Legislators in states with big surpluses might have been content to continue to pick up seniors' drug tabs if they thought drug prices were reasonable. But increasingly, they don't. A series of studies and media stories about how prices for prescription drugs in Canada are often much lower than the prices of the very same drug in the United States have convinced many lawmakers that consumers are getting a bum deal. "The price difference is so dramatic, it just strikes people as something that's unfair," says Maine's Pingree, who was the primary sponsor of the state's prescription drug price-control legislation.

Some state officials suspect they're not getting the best deal, either. Despite being legally entitled to receive the "best available price" (plus a manufacturer's rebate), in practice, state Medicaid programs often don't. While drug pricing is a notoriously murky matter, it's clear that other institutional customers are getting bigger discounts than state Medicaid programs. A recent study by the Lewin Group estimated that big health maintenance organizations buy drugs for 30 to 39 percent less than the retail price. That's at least twice as big as the discounts state Medicaid programs are receiving.

The U.S. Department of Veterans Affairs is also getting much bigger discounts than state governments. By limiting veterans' drug choices to a relatively small number of medicines, and thus assuring drug companies who bid for its business a large market, health policy experts estimate the Veterans Administration's price breaks at between 35 and 40 percent.

After years of basically paying what they were told to pay, states are now starting to question these pricing arrangements. "We have a veterans' hospital right down the road, and the price the federal government has negotiated for veterans' drugs is about as low as the Canadian prices," says Pingree. "So we're saying, how come the feds just down the road from us can purchase drugs for their clients at these much lower prices but we can't?"

In the past year, states' tactics to reduce the cost of prescription drugs have varied widely--from the price-control regime of Maine to the free-market approach of Massachusetts.

The Bay State is attempting to lower Rx prices the same way that HMOs do: by buying in bulk. Last fall, Mark Montigny, chairman of the Senate Ways and Means Committee, inserted language into the commonwealth's fiscal year 2000 budget that directed the executive branch to draft a plan to aggregate state employees, Medicaid enrollees, all of the participants in the state's senior pharmacy- assistance program and the uninsured into a single purchasing pool. Montigny's hope was that this pool, which could potentially amount to more than a million people--roughly the same size as the state's largest private-sector health plan--would be able to negotiate the kinds of deep discounts on prescription drugs that many HMOs had.

Montigny and other backers of the measure, who included former Republican Governor William Weld and former Democratic Congressman Joseph Kennedy, claimed that they were simply trying to harness the state's market power to lower costs for some of the state's neediest citizens. "[N]egotiating volume discounts from drug companies and securing price reductions from pharmacies have become standard practice in the health care industry," wrote Weld and Kennedy in a Boston Globe op-ed supporting the proposal. "The only people who don't benefit from these market mechanisms are those who most need a break-- the 70 million poor and elderly Americans without prescription drug coverage of any kind."

"We view this as a no-brainer," says Doug Brown, chief counsel to the Massachusetts Senate Ways and Means Committee. Pharmaceutical firms and the state's dynamic biotech industry saw the measure differently. "It's not marketplace competition," says Jeffrey Trewhitt, spokesperson for the Pharmaceutical Research and Manufacturers Association (PhRMA).

"When you give a discount to a private-sector health plan, there is still a discussion with the company," he notes. "The company can still sit down with the pharmacy and therapeutics committee of an HMO and make a case that maybe the discount should not be as great as you'd like for it to be and here's why. There's still a back-and-forth discussion, whereas with a government-mandated program, there is no discussion. It's mandated." And with government mandates, Trewhitt adds, "goes the power to put in place price controls or threaten price controls."

Governor Paul Cellucci ultimately signed the legislation that included Montigny's bulk-purchasing plan. However, his administration has yet to implement the program. While the department charged with drafting the plan has cited problems with the legislative language and asked for more time, many legislators see this as an effort to sabotage a piece of legislation that Cellucci signed only reluctantly.

Last fall, at the same time Massachusetts' legislature was attempting to create the country's first statewide bulk purchasing program, lawmakers from four states--Maine, Massachusetts, New Hampshire and Vermont--were meeting to discuss an even more ambitious idea: the creation of a regional, New England-wide bulk-purchasing pool. Since then, the group has expanded to include representatives from all the New England states, as well as New York and Pennsylvania. In June, the group formally organized itself as the Northeast Legislation Association on Prescription Drug Prices and constituted itself as a 501(c)3.

Many state and federal officials are enthusiastic about the idea of a regional bulk-purchasing pool. "I think it's a great idea, and we've been very supportive of the regional approach," says Judith Kurland, the New England regional director for the U.S. Department of Health and Human Services. "When I look at the data, and I look at the purchasing prices of countries throughout Europe"--where brand-name prescription drug prices are often much lower than in the United States--"and I look at populations, I say, `Well, New England is 13.5 million people. That's a nice-sized population, a little smaller than the Netherlands, but if you add New York or Pennsylvania, you're starting to talk about a major country in Europe. If purchasing for such large numbers of people wouldn't achieve substantial reductions, I can't imagine what would."

Still, no one predicts any dramatic movement towards a regional purchasing pool in the near future. "They do have to figure out what they can do with or without common legislation, what they can do with Medicaid, what they could do with Medicare, if there was a prescription drug benefit," Kurland notes. As a result, she and most New England state legislators believe the short-term focus will remain on the individual states or on more modest efforts, such as that made by the governors of Maine, New Hampshire and Vermont to create a joint bulk-purchasing pool for their states.

Others are taking a different tack. In October 1999, California passed legislation authored by state Senator Jackie Speier that aims to extend the discounted Medicaid price to all Medicare recipients. Under the provisions of SB 393, pharmacies that want to continue to participate in Medi-Cal, California's Medicaid program, are required to offer all Medicare beneficiaries the same discounted rates that Medicaid recipients receive. Unlike most state legislation, Speier's legislation targeted pharmacies, not drug manufacturers, and thus avoided the ire of PhRMA.

Several states have passed similar legislation. Florida Governor Jeb Bush signed legislation in February that created a discount prescription drug pricing program based on the Medicaid rates for Medicare enrollees. And this summer, Rhode Island passed legislation sponsored by Lieutenant Governor Charles Fogarty that expanded the state's existing senior pharmacy-assistance program, which includes a mandatory price-rebate provision.

And beginning in November, under its low-cost drug program, Maine will issue Rx cards to any resident who applies for them. Even people who don't currently have some form of drug benefit will realize the lower costs, Pingree says.

Meanwhile, the state will seek to negotiate steep rebate agreements with the various drug companies. In January 2001, Mainers with Rx cards will be eligible to receive a 6 percent discount on all prescription drug purchases at participating pharmacies. (To encourage pharmacies to participate in the program, Maine allows them to charge a $6.50 processing fee for each drug order.) As the rebates from drug manufacturers flood into the state coffers, the discount will gradually increase--and retail prices for prescription drugs will fall. At least, that is the theory.

In practice, Maine officials don't expect that drug companies will be queuing up to offer the state big rebates, "so we structured some `reality' into the bill," says Kevin Concannon, Maine's health and human services commissioner. If a drug company refuses to offer "voluntary" rebates, Maine will retaliate by "prior authorizing" that company's sales to Medicaid. In other words, doctors will have to get approval from the state Medicaid program to prescribe drugs to Medicaid patients. As a result, physicians who dislike the hassles associated with "prior approval" would probably switch to other drugs.

That's not the only "reality" in the Maine Rx program. If the state attorney general determines that prescription drug prices are "unconscionable," the attorney general now has the authority to prosecute drug companies under an old anti-profiteering law. And if that fails, the legislation provides one final remedy: If prescription drug prices at pharmacies are not comparable to the lowest price available anywhere in the state by July 2003, the state commissioner of health and human services may impose a maximum price schedule.

The pharmaceutical industry has threatened to challenge the Maine legislation in court. Even Pingree concedes that the Maine law is unusually ambitious. Nevertheless, similar price-control legislation was introduced in seven other state legislatures last year, including Arizona, California, New York and Pennsylvania. In Vermont, a price- control bill fell through only at the very last minute, when the House rejected the measure that had been approved by the Senate.

The flurry of state efforts to reduce drug prices has alarmed the pharmaceutical industry. "There are no state bills we support," says Jeffrey Trewhitt of PhRMA. "It goes back to the proposition that we don't want a patchwork of 50 state laws that may conflict with one another. So there are no bills that are solutions to the problem because what we need is a uniform national solution to that problem."

To PhRMA, the problem--and the solution--are simple. "The problem is that Medicare, which is supposed to be seniors' comprehensive health care program, has fallen short," says Trewhitt. "It has fallen short because it does not cover medicines outside of the hospital and it should."

Most state legislators agree with this sentiment, but they aren't holding their breath waiting for the federal government to take action. "The pharmaceutical companies say, `You can't do this. Let Washington do it,'" says Maine's Paradis. "It was insulting to me when I'd hear that because we know what happened to the Clinton health insurance plan, and we know who opposed it."

Even if Congress does create a Medicare prescription drug benefit or restructure the program in a way that encourages more health plans to offer a drug benefit, many officials believe the need for state involvement isn't going away anytime soon.

"Whatever Congress does next year is probably going to be rather modest, when all is said and done," predicts Maine's HHS commissioner Concannon. "They're only talking about some benefits for Medicare recipients. They're not taking about all the people who are 50 years old or in their early 60s who don't qualify for Medicare. I think whatever is done nationally, I applaud it, but I think it's going to be additive to what the states are going to have to do."