The Health Strategies Consultancy The Intersection of Business

Strategy and Public Policy

Prescription Drugs in Medicaid: Past Trends and Future Challenges

Jonathan Blum, M.P.P. Director Medicaid Practice

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Overview

I. Why are prescription drug issues so frequently in the news?

II. What are the current trends in State prescription drug policies and their implications?

III. What will State lawmakers face in 2005 and beyond?

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I. Why are prescription drugs in the news?

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Samples of Recent Headlines

States Trying New Tactics to Reduce Spending on Drugs (Nov 21, 2004)

Merck Withdraws Arthritis Medication; Vioxx Maker Cites Users' Health Risks (Oct 1, 2004)

Prices Increase on Popular DrugsMajority of Top-Selling Medicines Cost More Since Election; a 5% Rise for Lipitor (Jan 25, 2005)

Public Demand for Cheaper Rx Drugs Pressures Lawmakers (Dec 1, 2004)

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Prescription Drugs Are a Major Health Policy Concern to the Public

Top Survey Responses to Question about Most Important Health Problem for the Government to Address

46% of all respondents identified health care costs as a top policy priority and 19% specifically identified the cost of prescription drugs

SOURCE: Kaiser Health Poll Report. November/December Edition. Available at www.kff.org/healthpollreport/Dec_2004/care/hcp_dec04_2.cfm

8%

13%

14%

19%

21%

Senior Citizen'sIssues

Cost of insurance

UniversalCoverage/Uninsured

Cost of Prescriptiondrugs/medicines

Cost of Health Care

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Current Spending on Prescription Drugs

Spending on Prescription Drugs, by Payer, 2003

Private76%

Federal14%

State10%

Total Spending = $179.2B

SOURCE: National Health Expenditures. Available at www.cms.hhs.gov/statistics/nhe/historical/t3.asp

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Current Medicaid Spending on Prescription Drugs

Growth of Fee-for-Service Medicaid Spending, by Service, 2000-2002

12.9%

11.2%

12.6%

13.7%

18.8%

9.5%

15.6%

16.2%

0.0% 5.0% 10.0% 15.0% 20.0%

All Medical Services

Inpatient Hospital

Physician, Lab, X-ray

Outpatient Hospital, Clinic

Prescribed Drugs

Nursing Facilities

HCBS Waivers

Managed Care

Average Annual Growth

…Growth in Rx spending has outpaced other segments.

Source: Urban Institute estimates based on data from Form CMS-64.

While Rx drugs make up only 10% of the Medicaid budget…

Medicaid Expenditures by Service, 2003

P hysician/ Lab/X-ray

3.7%Other20.3%

Home Health and P ersonal

Care13.0%

Managed Care15.6%

P rescription Drugs10.1%

Outpatient/ Clinic6.7%

Nursing Facilities

16.9%

Inpatient13.6%

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Prescription Drug Spending 1987 vs. 2003

2003 Total Health Spending

Source: National Health Expenditures. CMS website. Available at ttp://www.cms.hhs.gov/statistics/nhe/default.asp.

1987 Total Health Spending

Prescription Drugs, 12%

Professional Services,

38%

Nursing Home Care,

10%

Other Spending,

4%

Hospital Care, 36%

Other Spending,

6%

Hospital Care, 47%

Professional Services,

31%

Nursing Home Care,

9%

Prescription Drugs, 6%

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What Are the Factors Fueling Spending Growth

• Higher Utilization Increase in the size of

the elderly population New products

available Marketing practices

increase demand Greater consumer

awareness and empowerment

• Increasing Prices New products to

market are more expensive than those they replace

Research and development

Advertising Inflation Manufacturer profits

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Who Accounts for the Spending

Medicaid Enrollees and Drug Spending by Group, 2000

Aged, 32.1%Disabled,

15.4%

Disabled, 52.7%

Adults, 24.0%

Adults, 7.0%

Children, 49.3%

Children, 7.8%

Aged, 11.2%

Enrollees Drug SpendingTotal = 44.2M Total = $20B

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State Programs That Purchase Prescription Drugs

• Medicaid and SCHIP

• State Pharmaceutical Assistance Programs (SPAPs)

• State employee and retiree health plans

• Prisons and correctional facilities

• State mental institutions

• Other specialty government programs

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II. What are the current trends in State prescription drug policies

and their implications?

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• A Preferred Drug List (PDL) creates incentives for beneficiaries to use the drugs that are the least expensive for the payer Similar to a formulary*―drugs are placed in tiers that

encourage a shift in market share toward preferred drugs and away from non-preferred drugs

• Many States use PDLs to encourage physicians to prescribe some drugs over others in the Medicaid program Some States enforce their PDLs with prior authorization (PA)

meaning that physicians must receive approval from the State Medicaid agency for their patient to receive a nonpreferred drug

1. Preferred Drug Lists

* A formulary is a list of preferred drugs that is developed by a health insurance program. The program often uses financial incentives to encourage physicians to prescribe and patients to request the preferred drugs.

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PDLs Have Become the Predominant Medicaid Drug Cost Containment Strategy

CA

AK

AZ

NV

OR

MT

MN

NE

SD

ND

ID

WY

OK

KSCOUT

TX

NMSC

FL

GAALMS

LA

AR

MO

IA

VA

NCTN

IN

KY

IL

MIWI

PA

NY

WV

VT

ME

RICT

HI

DE

MD

NJ

MANH

WA

OH

D.C.

PDL without supplemental rebates

PDL with supplemental rebates

Planned PDL

SOURCE: Health Strategies Consultancy LLC. October, 2004

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What Are Supplemental Rebates?

• In addition to federally mandated rebates, some States choose to pursue supplemental rebates Federal law requires pharmaceutical companies to enter into

agreements with State Medicaid programs to receive rebates as a condition of coverage of a drug

• Supplemental rebates are additional payments by the manufacturers negotiated directly with individual States

• Manufactures offer supplemental rebates in exchange for having their products receive preferred status on the State’s PDL or avoiding prior authorization

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• Some State Medicaid programs are beginning to combine their purchasing power to negotiate bigger supplemental rebates on prescription drug prices

• In April 2004, CMS approved the bulk purchasing plan of AK, MI, NH, NV, and VT In September, HI and MN were added to the pool The pool is administered by First Health Services

• CMS has also issued guidance recommending that other States do not join the First Health pool but instead seek new vendors to operate a multi-State pool

LA, MD, and WV are considering forming a buying pool that will be administered by Provider Synergies

2. Multi-State Purchasing Pools

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• Currently, importation is illegal, but the Medicare Modernization Act (MMA) allows importation with an HHS approved waiver To date, HHS has not approved any waiver applications 28 States and DC have taken legislative action, most to support

importation (5 passed, but 21 failed to pass)

• The FDA States that importation is not safe and that it cannot ensure the quality of drugs from other countries States are pressuring the Federal Government to lift the ban on

importation 20 States signed a letter to the Secretary of HHS asking him to allow

States to import drugs directly from Canada Vermont sued HHS and FDA for permission to import drugs after they

denied a VT waiver request to begin a pilot program

3. Importation from Canada and Europe

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States Have Started Importing Drugs from Canada and Beyond

Despite Federal opposition, State and local governments have begun helping residents to import prescription drugs

IL, WI, and MI have signed a contract with CanRx to import drugs from Canada, the United Kingdom, and Ireland for State residents

MN, NH, RI, and WI operate State-sponsored Web sites or offer Web links that connect residents with Canadian pharmacies

Many local governments have begun importation programs to provide cheaper drugs to their employees and retirees

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• Beneficiary Cost-sharing Medicaid may require beneficiaries to pay “nominal”

copayments ($1-$3) to encourage more efficient drug utilization

• Fail First Program or Prior Authorization Also known as “step therapy,” this cost containment strategy

requires a physician to prove that an alternate therapy is ineffective prior to covering the more expensive drug

Prior authorization requires a physician to gain approval from the State to prescribe a nonpreferred drug to a Medicaid beneficiary

• Quantity Limits Impose a dollar limit, dispense amount limit, or limit on number

of prescriptions per month/year

4. Cost Sharing, Prior Authorization, and Quantity Limits

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5. Bulk Purchasing

• Some States are pursuing drug savings by purchasing in bulk for many of their State programs

• West Virginia recently established the WV Pharmaceutical Cost Management Council

Responsible for purchasing prescription drugs for the State employee/retiree plan, Medicaid, SCHIP, and the Department of Corrections

• Other States pursuing in-State pools are GA, TX, and WA

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6. Reduced Pharmacy Fees

• States use different reimbursement formulas to pay pharmacies for their ingredient cost of drugs Pharmacies also receive dispensing fees to cover the costs of

storage and dispensing of a prescription States may decrease their pharmacy reimbursement rate or

dispensing fees to contain prescription drug costs

• Recent Decreases in Rx Reimbursement:State Formula Dispensing Fee

Mar 2004 Sept 2004 Mar 2004 Sept 2004

CA AWP-5% AWP-10% $4.05 $4.05

ME AWP-13% AWP-15% $3.35 $3.35

MD AWP-10% or WAC+10% AWP-12% or WAC+8% $4.69 $4.69

NH AWP-12% AWP-16% $2.50 $1.75

NJ AWP-10% AWP-12.5% $3.73 $3.73

NM AWP-12.5% AWP-14% $3.65 $3.65

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7. PBM Regulation

• Pharmaceutical benefit managers (PBMs) provide administrative services and process Rx drug claims for health insurers’ prescription drug plans

• Some States are moving to regulate PBMs through legal provisions such as: Establishing a legal "fiduciary duty" to any covered entity or customer Transparent business practices Pass through of payments and disclosure of rebates from

manufacturers

• During 2001-04, 32 States have proposed legislation that would regulate PBMs

• 6 States and DC have enacted PBM laws

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What the Savings Associated with these Cost-Containment Policies?

• Ongoing savings reports fuel interest in PDLs MI announced its PDL saved the state $3 million per month in first year IL and WA demonstrated market share shifts of drugs after PDL was

implemented (80+ percent in some classes)

• While multi-State purchasing pools have been slow to form, the First Health pool expects high savings The first five states included predicted $14 million in first year savings

• Potential savings from importation are uncertain Statewide programs have experienced low participation rates, but

some local programs have reported significant savings CBO and other health policy experts estimate that Rx drug importation

will result in “negligible” savings in drug spending Canadian health officials are threatening to ban drug exports to the US

SOURCE: Cathy Bernasek et al. Michigan’s Medicaid Prescription Drug Benefit. Kaiser Commission on Medicaid and the Uninsured. Jan 2003; Medicaid Pharmaceutical Cost-Containment Approaches in Four Case Study States. The Health Strategies Consultancy LLC. November 2002. (Unpublished paper prepared for CMS); Julie Appleby. States Now Allowed to Band Together to Lower Drug Costs. USA Today. 23 April 2004; CBO. Would Prescription Drug Importation Reduce US Drug Spending. 29 April 2004. Available at http://www.cbo.gov/showdoc.cfm?index=5406&sequence=0.

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What is the Impact of these Cost Containment Policies?

• To date, few studies have examined the impact of drug cost containment efforts on beneficiaries’ health care outcomes Beneficiary advocates and some disease groups argue that limiting

access to Rx drugs will hurt beneficiaries health outcomes States argue that beneficiaries can be shifted to therapeutically

equivalent drugs without hurting patients’ health

• Existing research shows mixed results A recently released study of the GA Medicaid prior authorization

program for proton pump inhibitors (PPIs) shows positive outcomes The state saved $23M by switching patients to lower-cost therapies Researchers found that patients who did not receive the PPI were no more

likely to have greater total medical expenditures Prior authorization had the effect of altering physicians’ standard of care

Findings from Texas show that cuts made to mental health services in the state’s Medicaid and SCHIP programs resulted in increases in emergency room visits and imprisonment of the mentally ill

This is expected to cost the state $1.5B annually

SOURCE: S. Soumerai. Unintended Outcomes of Medicaid Drug Cost-Containment Policies on the Chronically Mentally Ill. Journal of Clinical Psychiatry. 2003: 64 Suppl 17:19-22; Thomas Delate, et al. Clinical and Financial Outcomes Associated with a Proton Pump Inhibitor Prior-Authorization Program in a Medicaid Population. The American Journal of Managed Care, January 2005; Mental Health Association in Texas. Turning the Corner, Feb 2005. Available at http://www.mhatexas.org/TurningtheCorner.pdf.

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How do Manufacturers Respond to These Cost-Containment Policies?

Manufacturers generally oppose these cost containment policies and fight for greater drug access for beneficiaries

Want many drugs included on the PDL

Oppose prior authorization and fail first requirements

Encourage States to avoid multi-State purchasing pools and negotiate rebates individually

Some manufacturers have stopped supplying Canadian pharmacies and wholesalers that sell drugs to the U.S.

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III. What will state lawmakers face in 2005 and beyond?

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Subsidy Levels under MMA Depend on Poverty Levels

• Duals, including QMBs, SLMBs, and QIs, automatically eligible for subsidies available to those <135% FPL regardless of income and assets

• Assets test applied to all other low-income beneficiaries• Duals in nursing homes pay no cost sharing• About 36% (~14 million) of total Medicare population will be eligible for the subsidies

Premium Deductible CopaysCoverage

Gap

Up to 100% FPLand a dual

None None $1 / $3 None

Up to 135% FPL None None $2 / $5 None

 

135 - 150% FPLSliding Scale $50

15% of drug cost None

*100% of FPL in 2004 is $9,310 for one-person household and $12,490 for two-person household; 135% of FPL is $12,569 and $16,852, respectively; 150% of FPL is $13,965 and $18,735, respectively.**Partial Duals are beneficiaries eligible for Part D and Medicare Savings Programs (e.g., QMBs, SLMBs, QIs). These beneficiaries receive assistance from Medicaid for Medicare cost sharing, but do not receive comprehensive Medicaid coverage.

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• Management of dual eligibles’ drugs will shift to Medicare

• Still pay a portion of duals’ drug costs through a phased-down State contribution (“clawback”)

• Opportunity to shift SPAP enrollees to Medicare

• Determine eligibility for subsidies and enroll beneficiaries

Social Security Administration also has this responsibility

• Pressure to provide wrap-around benefits

Medicare private plans will operate a formulary; some drugs often prescribed to duals may not be covered

Medicare Prescription Drug Benefit and the Impact on States

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“Clawback Formula”

• States are still required to pay portion of duals’ drug costs through MOE formula

• “Clawback” formula retains State’s responsibility from 75% in 2006 to 75% in 2015

Based on 2003 spending amounts and in most years increased over time by growth in Part D

States continue to pay but have no influence

(# of duals) (Duals’ drug per capita costs [weighted] in 2003) (1/12) (SMAP) (Drug

Inflation) (factor)

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States May Seek New PDL Strategies to Offset Potential Revenue Loss

• Shift in duals will negatively affect States’ leverage for negotiating discounts with manufacturers Duals constitute over half of fee-for-service drug spending for most

States

• Multi-State purchasing pools moving forward to increase beneficiary volume IntraState government purchasing pools as well (i.e., merging

Medicaid with other State programs)

• States may also look for savings through: Carving out drug costs for beneficiaries in managed care so they are

subject to the PDL

Placing new restrictions on previously exempted classes (e.g., mental health)

Disease management

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Trends in Pharmaceutical Development― What are the Next Innovations?

• The next frontier of pharmaceutical development will include many very expensive therapies, including: Oncology treatments Gene therapy and genetic screening Cardiology technologies Obesity drugs

• States will face increasing pressure to cover new, more expensive drugs in their Medicaid programs

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Greater Push for Evidence-based Medicine

• Oregon has spearheaded an initiative to evaluate the comparative effectiveness of pharmaceuticals within the same class Broad dissemination of research Where no conclusive research, Oregon researchers

conclude drugs are comparably effective 13 States and AARP have joined effort Many States are using these reports to develop PDLs

• May indicate a greater trend to using evidence-based medicine principles when deciding to pay for other health care services (e.g., medical devices, surgeries, etc.)

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Participating States in Oregon’s Drug Effectiveness Review

NC

RICT

DE

MA

NH

TN

PA

NY

VT

ME

MD

NJ

SC

FL

GAALMS

VA

KY

MI

WV

MT

MN

NE

SD

ND

WY

OK

KS

TX LA

AR

MO

IA

INIL

WI

CA

AK

AZ

NV

ORID

COUT

NM

HI

WA

OH

D.C.

Drug Effectiveness Review Project Participants

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Areas of Consideration for Evidence Based Medicine

• Sufficient clinical evidence is lacking; industry is and Congress seems to be resistant to fund comparative research

• Requires that states have clinical expertise to evaluate evidence-based recommendations

• Some analysts believe that health care costs may increase if all beneficiaries follow recommended treatment guidelines

• Industry and some disease groups staunchly oppose

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Unlikely Federal Action on Importation

• The final report of the HHS Task Force on Importation, released in December, did not support legalizing importation Report found that personal importation could not be conducted

in a safe and effective way It also suggested that legalized commercial importation would

only produce minor financial savings

• Task Force suggested that importation could have risk such as: Hurting research and development efforts Compromising intellectual property rights Increasing liability for consumers, manufacturers, distributors,

and pharmacies

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Administration’s Policy Goals for Medicaid

• $60 billion in Federal Medicaid outlays Federal payments to States would be dramatically

reduced

• Reduce Federal funding for optional populations and benefits Prescription drugs are an “optional” Medicaid

benefit

• Greater State flexibility (e.g., block grant) may provide more freedom to limit prescription drug benefits

©The Health Strategies Consultancy

Bottom Line: Prescription drug policy will only become more

complicated in 2005, and current strategies may no longer be as

effective

©The Health Strategies Consultancy

Appendix

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Terms of “Clawback” Formula

Term Definition

Number of

Dual Eligibles

Beneficiaries in the State enrolled in Part D and receiving comprehensive Medicaid coverage; includes medically needy, excludes Pharmacy Plus 1115 waiver beneficiaries

Duals’ Drug per Capita Costs

Drug per capita costs in 2003 (Managed care and FFS), which account for supplemental rebates

SMAP State share of Medicaid costs (100% - FMAP)

Drug Inflation In 2006, is cumulative increase in national prescription drug spending from 2003-6; starting in 2007, is the annual increase in Part D per capita spending

Factor Reduces State contribution to 90% in 2006, decreasing each year by 1 2/3% until 75% in 2015 and thereafter

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Glossary of Terms

AWP Average Wholesale Price

CMS Centers for Medicare and Medicaid Services

FDA Food and Drug Administration

HCBS Home and Community-Based Services

MOE Maintenance of Effort

PBM Pharmaceutical Benefit Managers

PDL Preferred Drug List

QI Qualifying Individual

QMB Qualified Medicare Beneficiary

SLMB Specified Low-income Medicare Beneficiary

SMAP State’s Share of Medicaid Costs

SPAPs State Pharmaceutical Assistance Programs