Generic Prescription Drugs and Brand-Name Discounts & Prescription Agreements and Volume Purchasing- Health Cost Containment

Resources Updated: 2/20/2018

Cost Containment header

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 || Colorado Supplement: Use of Generic and Brand Name Discounts - PDF File

#9 Prescription Drug Agreements and Volume Purchasing: Preferred Drug Lists, Rebates, Multi-state Purchasing and Effectiveness Review of MedicinePDF File
Colorado Supplement: Prescription Drug Agreements and Volume Purchasing - PDF File

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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.
Generic Drugs. 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

State/Private Sector Examples Strategy Description Target of Cost Containment Evidence of Effect on Costs
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

State/Private Sector Examples  Strategy Description Target of Cost Containment Evidence of Effect on Costs
Indiana, Iowa, New York, Texas, Utah, Vermont, Washington; all states


 
States use combinations of approaches to control the costs of prescription drugs including:
  • Preferred drug lists,
  • Extra manufacturer price rebates,
  • Multistate purchasing and negotiations, and
  • Scientific studies on comparative effectiveness.
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.


 
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).


 

Latest Reports (2017-2016):

  • PRESCRIPTION DRUG POLICY RESOURCE CENTER.

    For 2018 prescription drugs are in the spotlight again, as state lawmakers consider measures to affect cost and access. New from NCSL: Launched in February 2018, the Prescription Drug Policy Resource Center provides access to legislative activities, research and news. Easy-to-use topics include cost and pricing, benefits and coverage, specialty drugs, brands and generics, biologics, patient access and use, as well as safety and efficacy.

    More

     
  • 2018 Prescription Drug Legislation Database: Expanded  - NCSL sponsors this state legislation online database, tracking major policies affecting prescription drugs and biologic medicines. The new feature allows policymakers to view more than 3,500 filed bills and resolutions, covering Jan. 2015 through this week!.  This resource also highlights more than 650 signed laws and resolutions since it was launched, according to specific topics such  pharmaceutical patient access and affordability, specialty pharmaceuticals, compounding pharmacy regulation, Medicaid and health insurance coverage and reimbursement, and the right-to-try investigational drugs for the terminally ill. This first-in-the-nation state resource is available to all NCSL members and the public, who can search by state, bill status, and topicsand access including the full text of any bill, using simple check boxes. [Updated winter 2018]
  • Medicaid: State Managed Care Pharmacy Uniform Prior Authorization (P.A.) Requirements (2015-2016 State Data)
    Prior authorization (PA) is a technique for controlling costs that requires specific drugs or services to be pre-approved by an individual’s insurance company in order to be covered by the insurer. Uniform PA requirements are state prescribed requirements for adjudicating prior authorization requests (for a specified drug product subject to prior authorization). - Published by Kaiser State Health Facts 11/2016
  • Medicaid: State Managed Care Pharmacy Uniform Preferred Drug List (PDL) Requirements (2015-2016 State Data)
    A preferred drug list (PDL) is a list of medications that are covered without the need to obtain prior authorization. Uniform PDL requirements are state prescribed requirements for designating a specified drug product as either preferred or non-preferred.
  • Medicaid: State Managed Care Pharmacy Uniform Clinical Protocols (New 2015-2016 State Data)
    Uniform Clinical Protocols are state prescribed medical necessity criteria for a specified drug product.
  • Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System.”  A 130-page. Read the narrative report, 130 pages, PDF.| press release  by the U.S. Senate Special Committee on Aging - 2 pages; Dec. 23, 2016
  • 2016 Health Costs at NCSL Legislative Summit in Chicago. Prescripton drugs"Prescription Drugs and Costs" Aug. 9, 2016. Break-through products such as biologics and specialty drugs promise extended lives or first-ever cures for individuals. Yet some price tags in this $310 billion U.S. market have shocked those who foot the bill – including state governments, Medicaid, employers, health insurers and patients themselves. Session details Prescription-Session-Resources.pdf|

  • Download speaker and session resources: Prescription-Session-Resources | August 2016 PDF |

  • Introduction: Mapping and Tracking Prescription Drugs- by NCSL, August 2016 | PDF |
    Chuck Shih, Pew Charitable Trusts: Perspectives on Pharmaceutical Costs in the U.S.; slides 8-9-2016 | PDF |
    Pew- Specialty Drugs Report | 2016 PDF |
    Richard Ascroft of Takeda Pharmaceuticals, for PhRMA: Slides-NCSL Aug-9-2016 | PDF |
    PhRMA: Five Fact Flyers | PDF |
    Steve Fitton, former Michigan Medicaid director; principal at Health Management Associates: slides 8-9-2016
    GPhA: Generic Drugs Savings; provided by Brynna Clark | PDF |
    2015-16 Legislation Related to Cost_Transparency of Prescription Drugs, by NCSL | Nov update -PDF |To Stop Price Spikes on Prescription Drugs, a Widening Radar -Read Article from NY Times,12/25/2016. "The Price of One Vial (Acthar),-$38,000", the in-depth account of price gouging among prescription drug makers.was juicy, detailing how four pharmaceutical companies have taken advantage of our health care system to enrich themselves and their executives, harming patients and taxpayers. *NEW*

  • The High Cost of Prescription Drugs in the United States: Origins and Prospects for Reform - full article in JAMA; PDF- Aug. 23, 2016

Additional Resources (2014-15)

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.

  • Infographic: Prescription Drugs Are Fastest Growing Healthcare Cost - Posted by HIN, Feb 2014
  • State Medicaid Reimbursement Information. This CMS chart outlines the methods and co-payment amounts utilized by states.  Pharmacy payment requirements are outlined in Federal regulations at 42 CFR 447 Subpart F. See: Medicaid Prescription Reimbursement Information by State - Latest Quarter 2015

  • State Supplemental Drug Rebate Agreements. Many States have received CMS approval on their State Plan Amendments to enter into single-State and multi-State supplemental drug rebate pools that generate rebates that are at least as large as the rebates set forth in the national rebate agreement with drug manufacturers. This 50-state table shows the "States with Medicaid Pharmacy Supplemental Rebate Agreements (SRA)" [PDF] as of 2015, with their initial effective dates. 

    State pharmaceutical assistance programs (SPAP) Best Price. The Medicaid statute allows manufacturers participating in the Medicaid Drug Rebate Program to exclude prices to State pharmaceutical assistance programs (SPAPs) from their Medicaid Best Price calculations.  CMS has compiled a list of programs that meet the criteria to be considered SPAPs called Medicaid SPAP Best Price List. for 2014-15. Note that this list only includes States that submitted a description of their programs to CMS for review based on the established criteria in CMS' Manufacturer Release No. 68 [PDF]. Updated Apri 2015.

  • DRUG PRICING: PUBLIC HEALTH IMPLICATIONS - Webinar Presented in Collaboration with Reuters and in Association with Harvard Health Publications, 10/23/2015

    "A full course of treatment with the blockbuster Hepatitis C drug Sovaldi costs $84,000 in the United States. A year on the new injectable cholesterol drugs Repatha and Praluent tops $14,000. The price of new cancer drugs now averages $10,000 per month, according to one estimate. Straining under the pressure, doctors, patients, and insurers are raising alarms over skyrocketing prices. Earlier this year, the American Society of Clinical Oncology released a new “value framework” for drugs that considers health benefit and price to help guide doctor-patient conversations around treatment options. For their part, pharmaceutical companies and some economists argue that the high cost of drug development justifies the price. This Forum explored the factors driving the high cost of new drugs. What policy changes, from the drug approval process to patent law, could change the equation? Are some of these drugs worth the cost? And what can be done to make sure that patients can afford the medications that they need?"

    Background Articles - posted 10/2015
  • A Tale of Two Drugs - Technology Review
  • A New Way to Define Value in Drug Pricing - Harvard Business Review
  • ASCO Framework to Assess the Value of Cancer Treatment Options - Journal of Clinical Oncology
  • Transforming the Market for New Drugs - Institute for Clinical and Economic Review
  • Transatlantic divide: how U.S. pays three times more for drugs
     
  • " Good Deals on Pills?  It Is Anyone's Guess" - It isn't easy to be a smart shopper for prescriptions or any kind of healthcare. - N.Y. Times, Nov. 10. 2013.

  • "The Soaring Cost of a Single Breath: Competition is Supposed to Moderate Prescription Prices." N.Y. Times; written by Elisabeth Rosenthal and published on Oct. 13, 2013.
  • Medicaid Payment  for Outpatient Prescription Drugs.  [http://kff.org/medicaid/fact-sheet/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 [link update 5/14/2014]

  • Managing Medicaid Pharmacy Benefits: Current Issues and Options. [http://kff.org/medicaid/report/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, 9/1/2011 [link update 5/14/2014]
  • 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; online at: http://kff.org/medicaid/issue-brief/the-role-of-clinical-and-cost-information/ [link updated 8/26/2014]
  • "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.
  • "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.

About this NCSL project
NCSL’s Health Cost Containment and Efficiency Series describes 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.  Karmen Hanson and Ashley Noble have contributed to the research and product updates in 2014.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.