Prescription Drug Policy Snapshots

9/29/2022

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Published quarterly, these policy snapshots—which include state policy options, state examples, federal action and key resources—feature topics related to prescription drugs. 

  • State Policies Addressing the Price of Pharmaceuticals (September 2022)
  • Pharmacy Benefit Manager Reform (June 2022)
  • Improving Access and Affordability of Insulin and Diabetic Supplies (March 2022)

State Policies Addressing the Price of Pharmaceuticals

State Policies Addressing the Price of Pharmaceuticals | Download the PDF

Taking pharmaceuticals as prescribed are key to managing various health conditions. Depending on the prescribed medication, some are a cheaper treatment option than other health care services like emergency room visits or hospitalizations, especially if patients are able to take them as prescribed. Patients may not adhere to their medication regimen for many reasons including limited access to pharmacies and out-of-pocket costs—the latter prompting policy discussions around drug pricing.

Many factors contribute to the calculation of a drug’s price but one reason is that they are difficult to produce requiring significant investments of time and money. For a manufacturer to bring a new medicine to market it takes, on average, at least 10 years and between $113 million to $6 billion. Accordingly,  the likelihood of a drug being approved by the Food and Drug Administration once it enters clinical testing is less than 12%.

Drug manufacturers set a product’s initial list price, however prices ultimately paid by consumers and by health plans are less transparent. For millions of people with health insurance, their prescription drug benefit is managed by a pharmacy benefit manager, or PBM. PBMs negotiate rebates from manufacturers for placement on a health plan’s formulary. Not only are the methods that manufacturers use to establish drug prices protected by federal anti-trust laws, but the contractual terms between PBMs, health plans, pharmacies and manufacturers are confidential.

Prescription drug prices in the U.S. are two to four times higher compared to other countries like Australia, Canada and France. The price difference is due in large part to the centralized price negotiations and regulations those nations employ, unlike the free market system in the U.S.

States face certain challenges in addressing the high list prices of drugs. For instance, the complex patenting process significantly affects a drug’s price—an aspect of the drug supply chain where states have little to no authority. Another example, unlike commercial plans, states cannot negotiate prices paid in Medicaid because of coverage requirements outlined in the Medicaid Drug Rebate Program. Even with these considerations, state lawmakers are eager to find solutions to address these issues.

State Policy Options

  • Lawmakers are pursuing a variety of strategies to improve prescription drug affordability, including:
  • Require price and cost transparency.
  • Establish a prescription drug affordability board (PDAB).
  • Develop public-private partnerships to manufacture and distribute prescription drugs.
  • Set drug prices to international reference prices.
  • Create a state importation program.

Prescription Drug Products

Generics are made from small molecules and are chemically synthesized as identical equivalents to the reference product. This means generic manufacturers use the exact same process as the brand-name manufacturer, and the product has the same active ingredients, strength, dosage and route of administration as the reference product. Generics represent 90% of all prescribed drugs and account for 18% of retail spending.

Biologics are created from large complex molecules derived from living cells. Biologic medicines include insulin and vaccines. Biologics are often classified as specialty drugs.

Since the process of making a biologic drug cannot be replicated exactly, manufacturers may create a biosimilar, which is highly similar to the original biologic. Biosimilars typically launch with initial list prices 15% to 35% lower than relative list prices of the reference products.

Specialty drugs, defined by Medicare as drugs that cost $670 or more per monthly supply, are frequently prescribed for complex or chronic conditions such as cancer, rare diseases and rheumatoid arthritis. They typically require special storage and handling, are often distributed via specialty pharmacies and are usually administered in a physician’s office or other clinical setting. Some drugs such as cell and gene therapies can exceed $2 million per course of treatment. Three percent of prescribed drugs are specialty but account for over half of retail spending.

Policy Options State Examples

Require price and cost transparency. 

At least 13 states have transparency laws requiring data reporting from manufacturers, PBMs, health plans and/or other supply chain actors. Conditions for each program differ from state to state.

North Dakota requires manufacturers of drugs that had price increases greater than 40% over the previous five years, or more than 10% over the preceding year, to provide an explanation for those increases. Utah and Texas implemented similar laws.

Laws in Nevada first centered data collection on essential diabetes and asthma drugs. Legislation passed in 2021 broadened the scope to all drugs.
Establish a prescription drug affordability board (PDAB).
A PDAB is an independent agency tasked with identifying and evaluating high-cost drugs.

Seven states—including Colorado, Maine, Maryland, New Hampshire, Ohio, Oregon and Washington—passed legislation to create a PDAB.

Ohio established an affordability council which developed six policy recommendations.

Oregon will use information collected from the state’s drug price transparency program to help inform the board.

The board in Colorado has authority to establish upper payment limits for drugs determined to pose affordability challenges.
Develop public-private partnerships to manufacture and distribute prescription drugs. Legislation in California and Washington allows state agencies to enter into partnerships with any entity, such as other states or nonprofit organizations, to produce, distribute or purchase generic drugs and/or insulin.
Set drug prices to international reference prices.
Align payments for drugs with those paid in other countries

Maine is the first state to allow the state PDAB to leverage transparency program data and set drug prices to price levels in Canada. While proponents argue  this strategy may decrease prices, opponents contend it would stifle innovation of new medicines. Furthermore, this approach endorses the reference countries’ value assessments.

Create a state importation program (SIP).
Medicines approved in other countries are not always held to the same standards as those used in the U.S. State importation programs must demonstrate to the U.S. Department of Health and Human Services how federal safety and cost saving requirements will be met.

At least seven states—Colorado, Florida, Maine, New Hampshire, New Mexico, North Dakota, and Vermont—enacted legislation to establish a state importation program.

While most states only allow drugs to be imported from Canada, laws in Colorado and Florida allow drugs to be imported from
other countries.

Federal Action

Two historic drug pricing provisions were ushered in as part of the newly signed Inflation Reduction Act,

First, the federal government will now be allowed to negotiate prices for a certain set of older, high-priced brand-name or biologic drugs covered under Medicare Part B and D. Drugs selected for negotiation must not have a generic or biosimilar equivalent. Second, the law requires manufacturers to pay rebates to Medicare if prices increase faster than inflation. The impact of these provisions depends on several factors, one of which is the number of beneficiaries who use products selected for negotiation.

Though this law applies only to drugs covered under Medicare, states may use these prices to negotiate deals in state regulated plans such as state employee health plans, fully insured plans and plans sold on the individual market. They may also use the negotiated prices when considering establishing upper payment limits.

Additional Resources

Pharmacy Benefit Manager Reform

Pharmacy Benefit Manager Reform | Download the PDF

Pharmacy benefit managers, or PBMs, are third-party administrators of prescription drug benefits for 266 million people who have health insurance coverage through commercial health plans, self-insured employers, state employee health plans, Medicare Part D plans, Medicaid managed care and others. PBMs provide a wide array of services such as processing claims, performing drug utilization review, creating formularies, and negotiating contracts between health plans, manufacturers and pharmacies.

PBMs negotiate rebates from manufacturers, which are passed on to plan sponsors for favorable placement on a health plan’s formulary—a list of covered drugs. One way health plans and PBMs manage drug costs is by using tiered formularies that influence the products prescribed and purchased. Medications with higher consumer cost-sharing are placed on upper tiers, and drugs that cost a patient less out-of-pocket, often generics, are put on lower tiers. Although a drug may be on a lower cost-sharing tier, it may still have a high list price. List prices can have a significant impact on consumers who pay a percentage of the drug’s price—or coinsurance—and those with no prescription drug coverage.

Reimbursement between health plans and PBMs are typically designed using either a spread or pass-through pricing model. Spread pricing occurs when a PBM reimburses a pharmacy less than the cost charged to the plan sponsor—whereby the PBM retains the spread. State audits into PBM reimbursements have found spread pricing is often found with generics. For example, Ohio audited prices paid for generics in the state Medicaid program and found PBMs kept a spread of 31% totaling over $200 million dollars.

With a pass-through contract, the PBM passes through the full amount collected by the pharmacy to the plan sponsor. Since there is no spread, PBMs are paid an administrative fee instead.

Contractual terms are commonly proprietary and often unknown to consumers and payers, including employers and states. A lack of transparency in these arrangements makes it difficult for payers to assess how beneficial the negotiated prices are.

Agreements may also include provisions limiting a pharmacist’s ability to reveal alternative cost-sharing information to a consumer, such as if a consumer would pay less by purchasing a prescription without using the drug benefit through their insurance plan.

In recent years, PBMs have integrated with health plans and pharmacies and the three largest PBMs control approximately 80% of the market. PBMs have also become prominent providers of mail-order and specialty pharmacy services. Contracts may require certain providers, such as oncology and rheumatology practices, to receive drugs from PBM-owned specialty pharmacies instead of through the traditional method called buy-and-bill.

Buy-and-bill is a process that allows providers to purchase physician-administered medications, prepare them for specific patients, then bill the insurer or PBM for the drug once it’s administered. Instead of reimbursing providers using the buy-and-bill process, some insurers and PBMs are shifting to “white bagging”—when an insurer or PBM requires providers to receive drugs shipped from a specialty pharmacy.

PBMs maintain that drugs shipped directly from a specialty pharmacy are less costly. Provider groups say white bagging can delay care when a product is not readily available at the provider’s office. Providers further argue that white bagging leads to waste because when a patient’s treatment changes in dosage or strength, the prepackaged product cannot be used for another patient and must be discarded.

Some policymakers are pursuing a wide range of policy options aimed at reforming the PBM industry. All 50 states have at least one PBM related law or regulation.

State Policy Options

State legislators have taken the following actions, among others, related to PBM reform:

  • Emphasize state oversight and restructure state contracts.
    • Require registration and/or licensure with a state agency.
    • Encourage competition through a reverse auction process.
    • Require reporting of price and cost information to a state agency.
    • Eliminate spread pricing.
  • Enhance consumer protections and ensure provider payment.
    • Ban the use of gag clauses in pharmacy contracts.
    • Prohibit the use of “white bagging” policies.
Emphasize state oversight and restructure state contracts.
Policy Options State Examples

Require registration and/or licensure with a state agency. To help track which companies are doing business in the state, states may require PBMs to register or obtain licensure to conduct business, often through the state department of insurance or board of pharmacy.

At least 30 states require registration or licensure.

A first-in-the-nation law in New York establishes the Pharmacy Benefits Bureau which will oversee the PBM industry and manage licensing and reporting requirements.

To obtain licensure in Wisconsin, a PBM must demonstrate to the Commissioner of Insurance that it intends to act in good faith, also known as a fiduciary.

Encourage competition through a reverse auction process. A reverse auction is when PBMs compete to manage the state employee health plan prescription drug benefit. Bids are anonymously submitted through an online portal and the lowest offer is awarded the contract.

Colorado, Louisiana, Maryland, Minnesota and New Jersey have passed laws to conduct reverse auctions in their states.

 

New Jersey experienced a cost decrease of 25% in the first nine months after a contract was granted.

 

In Louisiana, the reverse auction process may extend to health plans offered through the Louisiana State University System, including any public four-year college or community college system, or to public school employees.

Require reporting of price and cost information to a state agency. Several states have implemented legislation requiring transparency across the supply chain, including PBMs.

At least 12 states—including Arkansas, Connecticut, Iowa and Utah—require reporting of aggregated rebates, administrative fees and other payments between PBMs and insurers, pharmacies and manufacturers.

 

Nevada centers data collection on essential diabetes and asthma drugs.

 

PBMs which do not comply with reporting requirements in North Dakota may be fined up to $10,000 per violation.

Eliminate spread pricing.

More than a dozen states bar the use of spread pricing models in PBM and health plan contracts.

 

Ohio prohibits Medicaid managed care organizations to contract with PBMs that use spread pricing and has moved to a single PBM contract.

 

Medicaid pharmacy benefits were removed—or “carved-out”— from managed care contracts in New York and benefit oversight was transferred to the state Medicaid agency.

Enhance consumer protections and ensure provider payment.

Ban the use of gag-clauses in pharmacy contracts.

The federal “Patient Right-to-Know Drug Prices” Act of 2018 bans the use of gag clauses; however, states may implement their own protections.

 

Over two-thirds of states have laws prohibiting the use of gag clauses in pharmacy contracts.

 

Michigan allows pharmacists to tell patients about lower cost options, as well as the availability of other appropriate therapies.

 

Virginia requires PBMs to provide patient cost and benefit information in real time and use a certain format.

Prohibit the use of “white-bagging” policies.

Providers in ArkansasLouisiana and Virginia cannot be denied payment for physician-administered drugs and related services covered by a patient’s health plan.

Federal Action

The impact of the PBM industry on prescription drug access and affordability has received Congressional interest from both chambers and parties. In 2019, the Senate Committee on Finance questioned PBM executives about the industry’s role and business practices. Over 18 months later, a forum held by the House Committee on Oversight and Reform evaluated how PBMs influence the prescription drug market. Most recently, the Federal Trade Commission unanimously voted in favor of launching an inquiry into the PBM industry which will investigate their impact on the access and affordability of prescription drugs.

Additional Resources

Improving Access and Affordability of Insulin and Diabetic Supplies

Improving Access and Affordability of Insulin and Diabetic Supplies | Download the PDF

Updated March 2022

Over 37 million Americans live with diabetes and an additional 1.4 million are diagnosed every year. Diabetes is a condition where the body does not produce or properly use insulin.

Insulin—a hormone secreted by the pancreas—is necessary to convert sugar, starches and other foods into energy. There are three common types of diabetes: type 1, type 2 and gestational.

When the body is unable to produce insulin, or it doesn’t make enough insulin, serious complications such as heart disease, vision loss and kidney disease can occur. For people living with type 1 diabetes, insulin prevents ketoacidosis which can result in coma or death.

Approximately 28% of people living with diabetes use insulin to manage their condition. Insulin was discovered in 1921 and the patent was sold two years later for a dollar. Since then, drug companies have developed a wide array of insulin products that vary by dosage, methods of delivery and other characteristics. New products received additional patents stretching over 90 years.

However, these recent advancements in insulin development have been accompanied by rising prices. According to the Commonwealth Fund, the price for insulin increased, on average, 15% to 17% per year since 2012. For patients with insurance, the prices of drugs often affect their out-of-pocket costs, typically in the form of health insurance copayments (a flat fee) or coinsurance (a percentage). Patients with no health insurance, or with less robust coverage, are responsible for paying the full or majority of the cost.

In addition to insulin, people living with diabetes require certain products to administer insulin as well as monitor their blood glucose levels. These include syringes, needles, continuous glucose monitors (CGMs), insulin pumps, test strips and lancets. Studies show over 56% of people with type 1 use both an insulin pump and a CGM and that these necessary technologies can add to their cost burden. Other research shows that testing supplies account for 27% of overall pharmacy costs for people living with diabetes.

Diabetes is best managed through insulin and related supplies, but many patients are unable to afford these products. In response, states are considering a wide range of policy options to address these issues.

State Policy Options

State legislators may consider the following options, among others, related to improving access and affordability of insulin and diabetic supplies:

  • Implement copayment limitations on insulin products.
  • Establish a patient assistance or emergency access program.
  • Require insurance coverage for equipment and supplies.
  • Increase transparency into insulin price and cost.
  • Encourage competition in the insulin market.

Policy Options

State Examples

Implement copayment limitations on insulin products. Copayment limitations may be implemented in state-regulated plans such as state employee plans, Medicaid and plans sold on the individual market. This option does not affect those enrolled in self-funded employer sponsored health plans, which cover over 65% of individuals who receive insurance through their employer. Furthermore, it does not help people without insurance.

At least 19 states implemented some type of monthly copayment cap for insulin. For example, Alabama capped monthly copayments for a 30-day supply of insulin at $100. Kentucky capped copayments to $30 for a 30-day supply.

Establish a patient assistance or emergency access program. People might need an emergency supply of insulin for many reasons. While some might need a one-time supply, others might need refills on a more regular basis.

Minnesota established a state run patient assistance program for eligible individuals funded by manufacturers. The law also established a program for anyone needing insulin to receive an emergency 30-day supply.

 

Indiana repealed a law requiring that a person must have a prescription to receive insulin.

Require coverage for equipment and supplies. In addition to insulin, people living with diabetes require certain supplies and equipment to manage their condition.

Delaware mandates coverage of insulin pumps at no cost to the consumer, including annual deductibles and cost-sharing amounts.

 

West Virginia requires coverage for diabetic equipment, including blood glucose monitors and other types of monitoring supplies, injection aids, infusion devices, syringes and orthotics.

Increase transparency into insulin price and cost. Several states have implemented legislation requiring transparency across the supply chain.

A 2019 law in Colorado allowed the attorney general’s office to study insulin prices in the state.

 

Since 2017, Nevada requires yearly reporting from manufacturers, pharmacy benefit managers and health plans on essential diabetes medications.

 

Utah requires health plans to annually report the 25 prescription drug products on which health insurers spent the most. In 2021, insulin was reported to be one such product.

Increase competition in the insulin market. States have considered several strategies to encourage competition in the prescription drug market broadly.

 

Approved in 2021, the first interchangeable biosimilar insulin is now available, meaning it can be substituted for its brand name equivalent.

All 50 states, Washington, D.C. and Puerto Rico have laws addressing the substitution of biosimilars. Just as state generic drug substitution laws vary from state to state, so do laws regarding biosimilar substitution. At least 10 states allow biosimilar substitution when the product is FDA-approved as interchangeable.

 

California is entering into partnerships with drugmakers to produce generic drugs and at least one form of insulin.

Federal Action

Leaders from both parties in Congress have expressed particular interest in the accessibility and affordability of insulin. The bipartisan Congressional Diabetes Caucus conducted the first study of the insulin market in 2017. The Caucus’s concluding report outlined 11 policy recommendations for Congressional and regulatory agencies to consider.

In 2019, the Senate Finance committee conducted a subsequent two-year inquiry. Although no specific policies were suggested, the committee reported it will continue to prioritize insulin access and affordability.

Additional Resources

 

Please note that NCSL takes no position on state legislation or laws mentioned in linked material, nor does NCSL endorse any third-party publications; resources are cited for informational purposes only.

This publication is supported by Arnold Ventures a national, private philanthropy based in Washington, D.C.