Issues & Research » Health » Prescription Drugs Overview, Generics, Brands & Purchasing Agreements- Health Cost Containment
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Use of Generic Prescription Drugs and Brand-Name Discounts & Prescription Drug Agreements and Volume Purchasing- Health Cost Containment
Resources Updated May 2013
The following two NCSL issue briefs were distributed to legislators and legislative staff across the country.
#8 Use of Generic Prescription Drugs and Brand-Name Discounts - PDF File
#9 Prescription Drug Agreements and Volume Purchasing
Preferred Drug Lists, Rebates, Multi-state Purchasing and Effectiveness Review of Medicine - PDF File
Cost Containment Strategy and Logic Use of Generic Prescription Drugs and Brand-Name Discounts
Buying more generic prescription drugs instead of their brand-name equivalents and purchasing brand-name drugs with discounts can significantly reduce overall prescription drug expenditures.
Generics. The federal Food and Drug Administration (FDA), which approves all products, certifies the "safety and suitability of generic drugs and encourages their use.” All generic drugs must meet the same strict quality guidelines and have exactly the same active ingredients as brand-name drug equivalents. Brand-Name Drugs. Approximately 48 percent of prescription products are available only in a brand-name product, most of which are from a single manufacturer. The highest-priced medications are brand-names, which means generic drugs are not available for some key medical conditions and categories of patients unless a doctor decides a different form of medication is appropriate. If a physician feels that a brand-name product is beneficial for a patient, he/she may request “brand medically necessary” on the prescription for conditions, such as HIV/AIDS, organ transplants and mental illness.
Actuaries recently reported that the use of generic medication would continue to increase in Medicaid prescription drug rebates, which would slow spending. Eighty percent of all prescription medications dispensed in 2011 were classified as generic drugs, an increase in 13 percent from 2007. In 13 states, pharmacists are required to dispense the generic version when able. In all states, physicians have the authority to order brand name drugs, essentially blocking substitution, if beneficial to patients. [Excerpt from Health: Improving the Bottom Line: June 2012]
Summary of Health Cost Containment and Efficiency Strategies - Brief #8- Use of Generic Prescription Drugs and Brand-Name Discounts
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State/Private Sector Examples |
Strategy Description |
Target of Cost Containment |
Evidence of Effect on Costs |
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Florida, Hawaii, Kentucky, Massachusetts, New York, others; FDA |
Buying more generic prescription drugs instead of their brand-name equivalents and purchasing brand-name drugs with discounts can significantly reduce overall prescription drug expenditures. |
State government-funded pharmaceutical purchasing, including Medicaid, state-only programs and some private-market pharmaceutical purchasing. |
Expanded use of generic drugs is documented to save states 30 percent to 80 percent on certain widely used medications, reducing expenditures by millions of dollars annually. |
Cost Containment Strategy and Logic Prescription Drug Agreements and Volume Purchasing
Medicaid programs spent at least $24 billion to purchase prescription drugs in 2009. Many states now use a combination of approaches to control the cost of prescription drugs. States, typically, draw from a menu of four purchasing options that feature negotiation, evaluation and volume buying: expanded use of preferred drug lists, expanded use of manufacturer price rebates, multistate purchasing and negotiations, and use of scientific studies on comparative effectiveness of products.
Summary of Health Cost Containment and Efficiency Strategies - Brief #9- Prescription Drug Agreements and Volume Purchasing
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State/Private Sector Examples |
Strategy Description |
Target of Cost Containment |
Evidence of Effect on Costs |
Indiana, Iowa, New York, Texas, Utah, Vermont, Washington
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States use combinations of approaches to control the costs of prescription drugs including:
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Preferred drug lists,
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Extra manufacturer price rebates,
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Multistate purchasing and negotiations, and
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Scientific studies on comparative effectiveness.
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Helps state government public-sector programs operate more efficiently and cost effectively. Holds down overall state pharmaceutical spending, but not deny coverage or services to individual patients.
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State Medicaid programs are using preferred drug lists, supplemental rebates and multi-state purchasing arrangements to save between 8 percent and 12 percent on overall Medicaid drug purchases (savings to states nationwide average $1.8 billion annually).
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Additional Resources
Medicaid and State Preferred Drug Lists (PDLs) - published by NCSL, February 2012 (coming soon online)
NCSL provides external and third party web links as a convenience for members; the organization is not responsible for opinions or facts presented on such websites.
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Drug spending falls for first time in 6 decades, according to a recent article published in the Los Angeles Times. “The 1% drop in consumer costs in 2012 is attributed mostly to generics coming onto the market after drug patent expirations, a survey finds.”… ”But their loss is the consumer's gain, according to a report being released Thursday by a leading pharmaceutical research group.” [study was done by: IMS Institute for Healthcare Informatics] By Lisa Girion, May 9, 2013.
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Medicaid Payment for Outpatient Prescription Drugs, a fact sheet that summarizes Medicaid’s role as the major source of outpatient pharmacy services for low-income Americans. Medicaid spent $25.4 billion on prescription drugs in fiscal year 2009, and outpatient prescription drug coverage is an optional benefit that all state Medicaid programs currently provide. By Kaiser Family Foundation, 9/28/2011
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Managing Medicaid Pharmacy Benefits: Current Issues and Options, a report that examines reimbursement, benefit management and cost sharing issues in Medicaid pharmacy programs. The analysis, conducted by researchers from the Foundation and Health Management Associates, focuses on the potential of several measures highlighted earlier this year by Health and Human Services Secretary Kathleen Sebelius to reduce Medicaid pharmacy costs and is informed, in part, by the perspectives of a group of Medicaid pharmacy administrators convened by the Foundation in May to discuss current Medicaid pharmacy issues. By Kaiser Family Foundation, 9/28/2011
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The Role of Clinical and Cost Information in Medicaid Pharmacy Benefit Decisions: Experience in Seven States, a report that provides perspective on the potential for using comparative effectiveness research in Medicaid pharmacy programs by looking at seven states to determine how they currently evaluate relative clinical and cost information about prescription drugs when making coverage decisions for their Medicaid pharmacy benefits. The brief was prepared by researchers at the Foundation and Avalere Health. By Kaiser Family Foundation, 9/28/2011
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"Replacing Average Wholesale Price: Medicaid Drug Payment Policy" - new report by the Office of the Inspector General (OIG), HHS, July 18, 2011.
Federal regulations require that Medicaid reimbursement amounts for prescription drugs not exceed the lower of (1) the estimated acquisition cost plus a dispensing fee or (2) the provider's usual and customary charge to the public for the drug. Of the 45 States that used average wholesale price (AWP) to set reimbursement for prescription drugs in the first quarter of 2011, 20 States did not have definitive plans for prescription drug reimbursement after First DataBank stops publishing AWPs in September 2011.
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"Your Medicaid Program Can Save Money Without Hurting Patient Health" An analysis of using an Average Acquisition Cost (AAC) model for drug pricing, which uses actual pharmacy invoices in determining average acquisition costs to pharmacies. The report claims that "This approach enables states to get a better handle on the "spread" and is more reflective of acquisition and dispensing costs and also ingredient costs for certain specialty drugs. Most states still use Average Wholesale Price (AWP) which has been subject to much gaming by the industry, resulting in many fraud case brought by state Attorneys General and earning the moniker 'Ain't What's Paid.' The Centers for Medicare and Medicaid Services (CMS) is developing a database of National Average Drug Acquisition Costs and is encouraging states to adopt an AAC payment methodology based on this resource. CMS plans to distribute its database at the end of 2011 based on a CMS survey of retail pharmacies." expects to save $1.6 million, or 1 percent of its $160 million fee-for-service Medicaid drug expenditures. Idaho, which is in the process of implementing AAC, expects to save $2 million in state general funds and $4.6 million in federal funds, for a total of $6.6 million. Posted by NLARx, 12/12/2011.
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About this NCSL project
NCSL’s Health Cost Containment and Efficiency Series will describe two dozen alternative policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard Cauchi (Program Director) and Martha King (Group Director) with Barbara Yondorf as lead researcher.
NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.
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