WHAT WORKS
Purchasing Pools
States purchase pharmaceuticals for various populations, including public employees, dependents and retirees, Medicaid recipients, the uninsured, and prisoners. In most states, the best price is negotiated for each population and these purchases are made independently. But there is strength in numbers. The more people in a population, the better prices a purchaser can negotiate. To maximize their bargaining power-and save on administrative costs-some states are combining their various intrastate purchasing populations (Massachusetts, Texas, Georgia) or forming multi-state groups (New England Tri-State Prescription Drug Purchasing Cooperative, Southern States Coalition).
The Georgia legislature passed legislation in 1999 to streamline the State's various health planning functions under the authority of the Department of Community Health. The next year the State began implementation of a consolidated drug-purchasing program which includes Georgia Medicaid, PeachCare for Kids (Georgia's SCHIP program), public employees and university teachers. The purchase group covers 1.2 million people.
Georgia has made other changes to its pharmacy program. A common preferred drug list was customized for Georgia by Express Scripts, the pharmacy benefit manager chosen in a competitive bidding process, and instituted across all groups. Plan design was also altered for state employees and the Board of Regents to create a three-tiered formulary; Georgia Medicaid uses a similar three-tiered copayment structure. Finally, the state expanded its Maximum Allowable Cost (MAC) list from 186 to 857 drugs. MAC sets a price ceiling on generic drugs and encourages the use of generics where medically appropriate. As a result of these changes, the cost increase trend-line is beginning to shift, from 26% increases to 17% six months after implementation. Having a common PBM is also allowing Georgia to pursue other long-term cost-saving strategies, such as disease management.
Mandating Discounts
While multi-state groups pool more people to achieve savings, the pharmaceutical discounts they have managed to garner to this point remain smaller than discounts currently available through each state's Medicaid program. Drug manufacturers are required to provide rebates to Medicaid programs in order to have their products covered by Medicaid nationwide. About 500 manufacturers have rebate agreements with the Centers for Medicare and Medicaid Services (CMS). The rebate amount is determined by a CMS formula based on the average manufacturer's price for a particular drug or the "best price" obtained by other purchasers. Some innovative states, such as Maine, are trying to capitalize on these rebates by extending them to other populations.
Maine has long been a leader in prescription drug law and policy. The Healthy Maine Prescriptions Program was enacted in June 2001 and recently overcame a Supreme Court challenge from the Pharmaceutical Research and Manufacturers of America (PhRMA). Healthy Maine allows uninsured low- and middle-income people to purchase prescription drugs at the same price paid by Medicaid. Implementation of the program required a federal Section 1115 waiver in January 2001 to enact Healthy Maine.
Uninsured people with income below 300% of the federal poverty level who are not otherwise eligible for Medicaid can pay a $25 annual enrollment fee to receive discounts on drugs. At the pharmacy, the beneficiary is charged the price Medicaid pays for the drug less 14%. Then the state reimburses the pharmacy for the full manufacturer's rebate amount of 18%, which allows an extra 4% over the consumer discount for a pharmacy dispensing fee. The state collects the actual rebate from drug manufacturers quarterly and puts it into a "revolving fund" to pay for future pharmacy payments. The annual enrollment fee covers the administrative costs of the program. Maine's program is similar to a Vermont waiver struck down in the D.C. Circuit Court of Appeals in June 2001, in part, because the state was demanding Medicaid rebates from manufacturers without making state payments into the program. In an effort to avoid the same situation, Maine pays pharmacists an additional 2%-approximately $1 per prescription-in state-only funds.
Preferred Drug Lists
State Medicaid programs are required to cover most outpatient prescription drugs and, since manufacturers are guaranteed under federal law to have their pharmaceutical products covered by Medicaid if they offer rebates, states have limited authority to adopt formularies. A formulary may require prior authorization for drugs with no "significant, clinically meaningful advantage" but can exclude very few categories of drugs. (Excludable categories include fertility, cosmetic, weight control, smoking cessation, and other drugs.) Some states are testing the ability to develop formularies as a cost-saving mechanism.
Facing an estimated $1.5 billion Medicaid deficit in FY 2002, Florida sought a policy that would reap immediate cost savings and control ballooning pharmacy costs. In September 2001, Florida amended its state Medicaid plan to require manufacturers to pay a "supplemental" rebate in addition to the standard Medicaid rebate to be considered for inclusion on a preferred drug list (PDL). An independent contractor negotiates manufacturer rebates and, based on those negotiations, recommends to a review committee the inclusion of a drug on the PDL. The state Pharmaceutical and Therapeutics Committee, with 11 governor-appointed members, reviews the efficacy, cost-effectiveness, and safety of drugs in each therapeutic category. Any drug not selected for inclusion on the PDL is subject to prior authorization. The state believes that the PDL is less restrictive than formularies in commercial plans and claims the PDL can decrease costs without harming patient health.
Rather than providing additional drug discounts, some pharmaceutical manufacturers have had products included on the PDL after proposing alternative cost-saving programs. For example, Pfizer reached a two-year deal with Florida to provide disease management services in up to ten hospitals for Medicaid patients with congestive heart failure, diabetes, asthma and hypertension. The agreement, expected to save the state up to $30 million over two years, also includes health literacy education and training and expanded drug donations to community health centers.
The potential of Florida's PDL strategy as a vehicle for cost containment is unknown. For example, if an expensive drug is on the PDL while a less expensive substitute is not, the more expensive drug will be prescribed more often. In the end, the costs associated with higher utilization of a more expensive drug may outweigh the financial gain from the supplemental rebate.
The formulary created in Michigan in November 2001 advances Florida's approach by using the same PDL for people in all state-sponsored programs, as well as Medicaid beneficiaries. A panel of state-appointed pharmacists and physician evaluated drugs based on clinical effectiveness, safety, outcomes and cost and chose at least two "best-in-class" drugs in 40 therapeutic categories. Any drug not chosen as best-in-class is subject to prior authorization unless the manufacturer offers additional rebates to lower the drug's cost to the best-in-class price. Michigan does not allow pharmaceutical manufacturers to provide disease management or health promotion services in lieu of price reductions as in Florida. Some pharmaceutical manufacturers-such as Pfizer, Merck, Eli Lilly, and Johnson & Johnson-have refused to offer price concessions beyond the standard federal rebate. PhRMA filed a lawsuit in state court to challenge the new law, but the program-which took effect in February 2002-will continue while the case is pending. Michigan hopes the program will save the state at least $42 million this year.
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