Strategy 6: Pharmacy Cost Containment Strategies

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Description of Strategy

According to the Urban Institute, expenditures for prescription drugs in Medicaid grew at an average annual rate of 14.8 percent per year between 1995 and 1998, compared to increases of 2.4 percent for other acute care services and 6.5 percent for long-term care services. Continued increases are predicted for the future. Although many states delegate pharmacy benefit management to health plans for a portion of their population, most states exempt people with disabilities and the elderly from managed care. Together, these two Medicaid populations account for 80 percent of total Medicaid drug expenditures and states are seeking strategies for managing benefits without reducing access of vulnerable populations to the drugs they need.

In general, states that cover outpatient prescription drugs under Medicaid must cover all FDA-approved drugs of every manufacturer that has entered into an agreement with the federal government to pay rebates to states for the products they purchase. States may exclude certain limited classes of drugs, such as lifestyle drugs, vitamins and barbiturates from coverage. Apart from these exclusions, states must make available, either on their formulary or under a prior authorization arrangement, any drug covered by a rebate agreement.

States are using a variety of utilization management and pricing strategies to contain pharmaceutical costs despite federal constraints related to the products that must be covered. (See figure 6.)

Managing Utilization. This strategy uses a number of techniques to control the use and choice of pharmaceuticals.

Prior authorization. States may require physicians to request and receive official permission before a particular drug or set of drug products can be dispensed. If a state requires prior authorization for particular drugs, it must have in place a process for responding within 24 hours to authorization requests and must provide a 72-hour emergency supply of any drug on the prior authorization list. States may identify drugs by name or include entire classes of drugs in their prior authorization program. They may elect to exempt certain vulnerable populations of beneficiaries from prior authorization. Some states are moving to broaden and strengthen their prior authorization programs by setting up preferred drug lists that identify reference drugs within various drug classes based on safety, efficacy and cost. Any more expensive drugs in the same class are subject to prior authorization. Oregon intends to implement such a system in 2002, although court challenges to the program are expected.

According to the National Pharmaceutical Council, all but eight states have prior authorization in their Medicaid pharmacy program, although many use it for limited classes of drugs. States may wish to extend prior authorization requirements to drugs entering the market for which alternative therapies are available, costly brand name drugs having less expensive brand name or generic equivalents, or highly advertised drugs. Prior authorization may alter the prescribing patterns of physicians, leading them to first prescribe drugs that are cheaper and equally therapeutically effective, before turning to expensive options.

Generic drug mandates. States institute "generic substitution" programs, which require pharmacists to dispense a generic substitute if such a substitute is available unless a physician provides specific justification for doing otherwise. A physician must justify the use of a non-generic drug on a case-by-case basis if the physician believes it is warranted. A related strategy is a "fail-first" approach requiring physicians to ensure that older, less expensive therapies are ineffective for a particular patient before moving on to newer, costlier treatments.

Enhanced drug utilization review. States are required by federal law to have in place drug utilization review (DUR) programs. These programs, which assess whether drugs prescribed and dispensed comply with clinical guidelines, include both prospective review conducted at the point of sale with software designed for this purpose and retrospective review based on an examination of records. For example, state DUR activities typically include processes that alert pharmacists to potential adverse effects among prescribed drugs and that guard against refilling a prescription too soon.

States can perform additional benefit management activities through their DUR programs, including management of drug regimens for people with high drug costs, identification of physician prescribing patterns and assessment of adherence of individual physicians to treatment guidelines. These strategies may lead to more appropriate drug utilization and reduced costs.

Beneficiary copayments. States may require certain Medicaid beneficiaries to make nominal copayments for prescription drugs (or other Medicaid services). All copayments must be minimal, generally interpreted by states and the federal government to mean no more than $3 per prescription. An individual who is unable to pay the copayment may not be denied a prescription drug, and states may not impose copayments for children, pregnant women, people in institutions and people receiving emergency services or family planning services.

Although copayments are unlikely to yield substantial cost savings, they may be an element of a broader strategy aimed at utilization patterns. For example, states have the authority to structure copayments to encourage generic use. A state could choose to levy no charges when a consumer uses a generic and impose a copayment when brand name drugs are dispensed. Currently, somewhat more than half the states have some form of cost sharing for prescription drugs.

Pricing Strategies. These strategies are aimed at controlling what the state pays to participating pharmacists and for specific prescriptions.

Pharmacy dispensing fees. States may wish to compare the fees they pay as a dispensing fee to pharmacists to compensate them for their services with those paid by the private sector and adjust them downward if they exceed market rates. According to the National Pharmaceutical Council, these fees range from $3 to $6 per prescription. Another option is to implement tiered fee schedules, paying a lower dispensing fee to providers whose high volume of prescriptions results in lower unit costs. A variation aimed at providing incentives for a change in dispensing patterns would be to provide an incentive to prescribe generics by paying a higher dispensing fee for them.

Prescription payment rates. States may want to compare their payment rates to those in other states to determine if their rates are consistent with the national average. Federal regulations direct states to reimburse pharmacies for the cost of each prescription product based on the lower of the pharmacists' usual and customary charge to the public or the pharmacist's estimated acquisition cost (EAC), plus a reasonable dispensing fee. To meet the EAC requirement, states typically pay the average wholesale price (AWP)-the published list price that a manufacturer suggests wholesalers charge pharmacies-minus a specific percentage. Across the country, these discounts vary from 5 percent to 15 percent, according to the National Pharmaceutical Council. A study in August 2001 by the Office of the Inspector General in the Department of Health and Human Services found that the average discount paid by state Medicaid programs-AWP minus 10.3 percent-is too low. It recommended states increase their discount, that is, reduce their payment rate to more closely match the actual average pharmacy acquisition cost of AWP minus 21.8 percent.

Negotiating additional rebates from pharmaceutical manufacturers. When the national rebate agreement became law in 1990, California's preexisting rebate agreements-which include rebates greater than those in federal law-were recognized as compliant with the rebate statute. Until recently, no other state had attempted to enter into agreements on its own with manufacturers. In September 2001, Florida received approval to negotiate with manufacturers for supplemental rebates and to require prior authorization for drugs of manufacturers that do not agree to pay such rebates. Some manufacturers have negotiated agreements with Florida under which the manufacturers will, in lieu of paying the supplemental rebate, fund disease management and health literacy programs that will generate a specified amount of Medicaid savings. The Pharmaceutical Research and Manufacturers of America has challenged Florida's formulary in Federal court as a violation of Medicaid law.

Joining with other purchasers (state employee groups or state pharmaceutical assistance programs, for example) or other states to achieve economies of scale in purchasing or processing claims. Three states-Maine, New Hampshire and Vermont-awarded a single RFP for services to support their state pharmacy purchasing programs, including employee programs and Medicaid programs. Several groups of states are active in exploring opportunities for joining together to achieve savings in their prescription drug programs. Georgia is using a single PBM to manage pharmacy benefits for state employees, Medicaid beneficiaries (subject to Medicaid rules), and other groups for whom the state purchases drugs.

Pros and Cons

Pros

Several strategies are available to help states control pharmaceutical costs, creating the opportunity for states to determine what would be most appropriate and effective in their environment.

A number of the strategies are relatively easy to implement if the state has the basic infrastructure (e.g., the state could add a generic substitution program to a functioning DUR relatively easily).

Performing additional benefit management activities through state DUR programs may lead to more appropriate drug utilization and reduced costs.

Opportunities exist to obtain economies of scale by working with other purchasers.

Cons

A state may not have the expertise, information and system capacity required to implement these strategies.

Some strategies might produce unintended consequences (e.g., changes in payment rates to pharmacists might result in reducing the number of Medicaid providers, and copayments might discourage patients from taking needed medications).

State Experience

Maine instituted prior authorization in its Medicaid program for the 100 most commonly used drug classes. However, children and nursing home residents are exempted from the program. Many states are strengthening their existing prior authorization programs to cover additional classes of drugs.

Florida has an ambitious drug management program under the auspices of its DUR program. Key program elements include fraud and abuse detection, drug management for high utilizers, identification of prescriber outliers and identification of disease management participants through claims analysis.

States are joining together to design and implement strategies for cost containment. Recently, Maine, New Hampshire and Vermont awarded a contract to a vendor to assist them in managing their prescription drug programs for Medicaid beneficiaries, state employees and other state purchasing groups. At least three additional multi-state groups are engaged in discussions about possible collaboration for purchasing and management of prescription drugs within Medicaid and other state programs.

Design and Policy Issues

Does the state have the information needed to be able to maximize cost savings from utilization management strategies? To achieve cost savings, utilization management strategies should be targeted to heavily used or very expensive drugs or those that are misused or overused. Careful analysis of prescription drug use patterns and trends is essential in order to plan the intervention appropriately.

Does the state have the capacity to provide thorough and accessible consumer education? Consumers will need to understand rules governing prior authorization or preferred drug lists in order to use their benefits efficiently and effectively.

Does the state have the expertise and information systems needed to implement utilization management systems? Utilization management requires extensive medical and pharmaceutical expertise, significant computer programming resources and a considerable investment inpatient, physician and pharmacist education. States may choose to employ pharmacy benefits management companies or other specialized providers to assist them, and must have the expertise to design and oversee contracts.

Does the state have the expertise needed to develop and implement effective rate setting strategies? Adjusting rates paid for dispensing services or for drugs requires rate analysis and rate-setting expertise. Any rate reductions, even those consistent with shifts already made in the private market, will affect the incomes of providers and may be difficult strategies upon which to reach policy consensus. Similarly, pharmacists may view collecting copayments as an unwelcome and costly administrative burden. States must assess the capability of pharmacists to take on the task.

Federal or State Involvement/Constraints

States face two major federal constraints when devising pharmacy benefit management strategies. First, if a state covers prescription drugs in its Medicaid program-all 50 states and the District of Columbia provide such coverage-it must cover all prescription drug products manufactured by a company that has signed a drug rebate agreement. More than 500 manufacturers, representing 55,000 drug products, currently have federal rebate agreements. Second, the terms of the federal rebate agreement limit the price negotiation that can occur between manufacturers and Medicaid programs. The national rebate agreement sets fixed percentage payments-15.1 percent of the average manufacturers' price (AMP) for brand names and 11 percent of AMP for generics-that manufacturers must make in order to participate in the Medicaid program. Under federal law, these payments do not vary by state or by manufacturer. As noted, states can use prior authorization as a technique to give preference to preferred drug products.

Second, at the state level, changes in dispensing fees or payment rates for drugs require a Medicaid state plan amendment.

Certain utilization management programs, particularly those related to payment rates or prior authorization, also may require state legislative or regulatory authority.

Strategy 6: Pharmacy Cost Containment Strategies

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Description of Strategy

Pros and Cons

Pros

Cons

State Experience

Design and Policy Issues

Federal or State Involvement/Constraints

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