One of Michigan's official state slogans is "Great Lakes and Great Times," but for its Medicaid program the lake is drying up and the times are anything but great.
During the past three years, the state has seen the cost of prescription drugs more than double. In 1999 Michigan spent $264.9 million providing drugs to its fee-for-service Medicaid population, roughly 350,000 people. This year officials expect to spend $530.2 million filling prescriptions for those beneficiaries. For hospitals and other healthcare providers, skyrocketing drug spending represents a potential threat to Medicaid services that become too expensive for states to afford alongside a drug benefit.
Beneficiaries, in turn, face the prospect of fewer benefits--including loss of drug coverage altogether. Pharmaceutical spending has become one of today's cost-spiral boogeymen, not only in governmental programs but also in hospital billing, taking part of the blame for rapidly increasing insurance premiums and above-average healthcare inflation.
From 1997 to 2000, at least 47 states increased their prescription-drug spending by 50% or more, according to the Henry J. Kaiser Family Foundation, a Washington-based healthcare research and philanthropic organization. During that same time period, Medicaid spending for outpatient prescribed drugs--including only those drugs paid for directly by Medicaid, and not through managed-care plans--increased roughly 90% in Nevada, New York, North Carolina, Vermont and Washington state.
"We cannot sustain these growth patterns," says Geralyn Lasher, director of communications at the Lansing-based Michigan Department of Community Health. Lasher is one of many healthcare officials who have gone hunting for dollars amid widespread state budget shortfalls. Only by slashing prescription-drug spending, she and others say, can states continue to provide a drug benefit to their low-income populations.
Individual states are not required to provide such benefits, and even though all 50 states do, they might not have that ability for long.
"We're not saying the pharmaceutical industry has not produced many positive benefits for our citizens, but if states aren't allowed to move forward with (cost-control initiatives), you'll see more dramatic restrictions on pharmaceuticals or states opting out of providing coverage," Lasher says. "States are simply saying this kind of uncontrolled spending can no longer take place."
As a Medicare prescription-drug benefit continues to languish in Congress, states are increasingly deciding they can't afford to wait for help. With their budgets strained by the economic downturn, governors and legislatures across the country have been forced to trim fat from Medicaid budgets that they argue are already dangerously lean.
Oregon, known for its creative approaches to covering low-income populations, is among the states now implementing new restrictions to control pharmaceutical costs by minimizing the use of unnecessary drugs. After long debate, the state passed its law last July. It mandates the development of a state-sanctioned formulary by midyear.
In the mid-1990s, Oregon launched a Medicaid expansion program through which funds freed up by not covering ill-advised medical procedures--critics called it healthcare rationing--are used to expand basic health services to more of the state's poor.
"Because the federal government has not added a prescription-drug benefit to Medicare, individual states have to take action to help their residents," says Hawaii Democratic state Rep. Roy Takumi. Hawaii also is considering bills aimed at restricting drug spending.
Tough times indeed prompt tough choices, and a rapidly growing number of states has passed or is considering bold legislation to control drug costs. Such efforts have been met with a fiery response from the pharmaceutical industry, which argues that access to medicine can suffer when states implement price-control laws and other cost-containment mechanisms, such as requiring physicians to secure authorization before prescribing certain drugs to Medicaid beneficiaries.
Proponents of these laws, meanwhile, say the U.S. pharmaceutical industry is the most profitable in the world and can well afford to cooperate with states on price and cost-control measures. They also say that with tight budgets and no federal help limiting drug costs, states have no choice but to enact measures that minimize the cost of providing prescription drugs.
One state's prescription
Maine was among the first to enact a program designed to rein in pharmaceutical spending.
"I proved that you could do it in a state, that you could have the political will to take on the extremely powerful pharmaceutical industry," says Chellie Pingree, former majority leader of the Maine Senate and now a Democratic candidate for the U.S. Senate.
In 2000, Pingree sponsored a first-of-its-kind law that enables Maine to act as a pharmacy benefit manager for 325,000 residents without prescription-drug coverage. Her law established the Maine Rx program, which also authorizes state-imposed prescription-drug prices if negotiations with pharmaceutical companies do not bring about voluntary rebate agreements.
That law has been tied up in the courts since it was passed as a result of legal wrangling the pharmaceutical industry sparked with its aggressive fight to ban the law on constitutional grounds. The Pharmaceutical Research and Manufacturers of America, the drug industry's trade group, contends that Maine's price-control law violates the Commerce Clause of the Constitution, which prohibits states from regulating transactions outside their borders.
"We fully understand the goal of state legislators to ensure affordable prescription medicines for their citizens, but this law is not the right solution," according to a PhRMA news release.
In May 2001, a U.S. appeals court in Boston upheld Maine Rx, which prompted PhRMA to appeal the case to the U.S. Supreme Court last July.
In October 2001 the Supreme Court punted the case to Solicitor General Theodore Olson, who has been reviewing it since to determine if it merits the high court's time. "We are still fighting, and we're still in the game with reasonable prospects," says Jeff Trewhitt, a PhRMA spokesman.
PhRMA is also fighting a year-old state law known as Healthy Maine, which allows individuals with incomes of up to 300% of the poverty level to access drugs at the prices Medicaid pays. As that law also moves through the courts, Healthy Maine provides drug discounts to some 100,000 people in the state, Pingree says.
Earlier this month, U.S. District Judge Ricardo Urbina in Washington rejected PhRMA's request for an injunction that would have halted Healthy Maine while PhRMA appeals Urbina's February ruling in favor of the program.
"When I came across the Healthy Maine program and the Maine Rx program, these programs caught my attention because they offered a real way of defraying prescription- drug costs," Takumi says. Hawaii's Legislature is considering two bills modeled after the programs in Maine.
Follow the leader
Maine's foray into the pharmaceutical cost-control arena has prompted other states to follow with laws or proposals of their own. So far in 2002, according to the Denver-based National Conference of State Legislatures, at least 10 states have introduced legislation calling for supplemental rebate provisions, which ask the drug companies to offer discounts beyond those they already provide to Medicaid programs. Some proposed laws contain provisions enabling drug companies to avoid prior authorization requirements for their drugs if they offer the additional rebates.
Of the states that introduced such legislation this year, Minnesota, New Mexico and West Virginia have enacted laws. At least six states are implementing supplemental drugmaker rebate programs, according to the NCSL.
Meanwhile, 37 states are considering some 180 bills to regulate prescription-drug costs and related transactions, the NCSL estimates. Proposed legislation includes approaches such as manufacturer rebates, various forms of price controls and interagency and interstate bulk-purchasing coalitions.
In January, for instance, legislators from eight Northeastern states met in Pittsburgh to discuss ways to combine their bargaining power to incrementally negotiate lower prescription prices on behalf of their residents. At that meeting lawmakers unanimously approved a resolution to create a committee that will study preferred drug lists for heart disease and cancer medications.
In Michigan, Republican Gov. John Engler last year issued an executive order creating the Michigan Pharmaceutical Best Practices Initiative, an attempt to more tightly control the prior-authorization process for drugs prescribed to Medicaid patients.
Under that program, physicians must secure authorization before prescribing medications not included on the state's preferred drug list--called a formulary--which a panel of physicians, pharmacists and others has developed by selecting "best-in-class" drugs in 40 therapeutic categories. Officials expect limits on prescribing to save the state $42 million this year alone.
Michigan's program and a similar one in Florida face challenges from the pharmaceutical industry. "What we think is illegal under federal Medicaid law is to use prior authorization with cost and price as the rationale," PhRMA's Trewhitt says.
Last November, PhRMA filed suit in Ingham County Circuit Court in Lansing to protest Michigan's program. The court subsequently issued an injunction prohibiting the program from moving forward, but an appeals court lifted the injunction in January. The appellate court is still slated to hear arguments for reinstating the injunction, but no hearing date had been set as of the middle of this month, according to the Michigan Department of Community Health.
With a green light from the courts, Michigan started implementing its program in February--and with good early results, officials say. In March 2001, for instance, Pfizer's popular but expensive allergy medication Zyrtec enjoyed a 21% market share within Michigan's Medicaid program. One year later, Zyrtec's share of that market dropped to just 3.3%, Lasher says. "We're definitely seeing movement to the preferred drugs."
Such results are exactly what riles the drug companies, which argue that states' preferred drugs are often older, less effective and more likely to cause side effects that the newer drugs have eliminated. Michigan's program allows physicians to review other physicians if a patient contends an outdated or inappropriate medication has been prescribed. So far, Lasher says, no one has requested such a review.
Drug manufacturers are most concerned about laws that regulate or control prescription-drug prices. Maine Rx, for instance, contains a provision authorizing the state to impose mandatory price controls if it is unable to win significant price concessions from manufacturers by January 2003.
Where states see such laws as a battle in the war on costs, the pharmaceutical industry sees them as a threat to critical but expensive research and development. "If suddenly we find a rapidly increasing percentage of the marketplace being price-controlled, we do believe there would be a reduction in innovation," Trewhitt says.
Of that argument, Pingree says, drug companies "spend more money today on retail advertising on TV than on (research and development), and most people--and doctors--would be happy to see that end."
Television advertising does prompt patients to request medications that are not always medically advised, say state health officials who have examined ways to curtail use of prescriptions among Medicaid beneficiaries. They believe restricting formularies, hardly a new practice in the healthcare industry, is one effective way to avoid spending Medicaid dollars on unnecessary drug therapies.
States implementing formulary restrictions are doing so methodically and with substantial advice from physicians and clinical committees, says Joan Henneberry, director of health policy at the National Governors Association. "States are really taking a careful and scientific approach to this," she says.
State budgets aren't the only beneficiaries of these initiatives. "Every time the Legislature does something that lowers the price of medications, even for a limited population, every little bit helps," says Miles Theeman, executive vice president and chief operating officer of Affiliated Healthcare Systems, a for-profit subsidiary of five-hospital Eastern Maine Healthcare in Bangor. "All of these initiatives put together help create a groundswell of support."
Through Affiliated Healthcare Systems, Theeman runs a program that helps Maine residents fill prescriptions at Canadian pharmacies, which offer much lower prices than their American counterparts, he says. The AHS fills 40 to 50 prescriptions per week, Theeman says.
Fighting it out in Florida
Another of PhRMA's battlegrounds is Florida, where legislators last year passed a law stipulating that companies wanting to see their drugs on a preferred drug list for Medicaid beneficiaries must offer a discount of at least 25% of each drug's average manufacturer price, or other incentives, such as funding community medical programs.
Under the law, physicians prescribing for a Medicaid patient a drug not included on the list must first discuss alternatives with ACS/Consultec, a company hired by the state Agency for Health Care Administration for prior approval. Doctors, however, still have "ultimate authority" for which medications they prescribe, says George Kitchens, bureau chief of the Medicaid pharmacy services division of the AHCA.
Florida's healthcare agency has compiled a preferred drug list that includes more than 1,300 approved drugs. Last September Republican Gov. Jeb Bush appointed a panel of five physicians, five pharmacists and a university professor to review and recommend changes to the list on a regular basis.
Last summer Florida cut a deal with Princeton, N.J.-based Bristol-Myers Squibb Co. guaranteeing the state will save at least $16.3 million in Medicaid costs by July 2003. Bristol-Myers Squibb is the second company, along with New York-based Pfizer, to avert prior-authorization requirements for their drugs by helping the state control healthcare costs.
Under their agreements with the state, the two drug giants are funding disease-management initiatives to prevent emergency room visits, ensure patients are taking proper medications and help black and Hispanic patients who suffer from breast, cervical or lung cancer, HIV/AIDS and depression.
A Pfizer official declined comment and referred calls to PhRMA. Bristol-Myers Squibb did not return calls from Modern Healthcare.
Last August, PhRMA filed suit against Florida in U.S. District Court in Tallahassee, contending the state's cost-control law violates federal rules governing Medicaid programs. Late last year the court ruled that Florida's program is legal, prompting the drug industry to file an appeal in the 11th Circuit Court of Appeals in Atlanta, which has agreed to hear the case but had not yet set a hearing date.
An unfair target?
As the states defend their right to implement cost-control programs that are unpopular among drug companies, some say Medicaid officials have not done enough to cut duplication and waste from Medicaid programs and are too quick to pare pharmaceutical benefits.
"Most state Medicaid programs have tight budgets," says PhRMA's Trewhitt. "Too often the tendency is to gravitate to pharmaceutical benefits." Instead, he argues, states should hire administrative troubleshooting experts to identify waste and duplication in the system before reducing or eliminating drug benefits.
State officials contacted by Modern Healthcare object to the notion that they have not done enough to make Medicaid more efficient before slashing benefits.
"We are spending one-fifth of our Medicaid budget on drugs," Lasher says. "For the drug companies to suggest that's not where we're spending is ludicrous."
The governors' association views the situation similarly. "States have been very aggressive in their fraud-and-abuse efforts for a long time," says the NGA's Henneberry. "Pharmacy benefits stand out because (states) have tightened their belt and eliminated waste elsewhere in the system."
Another potential problem consists of what PhRMA refers to as a "patchwork quilt" of laws to control prescription-drug spending. Varying approaches among different states, the group says, can create confusion as well as administrative logjams, jeopardizing access to effective treatments.
A recent study by the Center for Studying Health System Change in Washington bolsters that argument, finding that in states with multiple cost-control programs, Medicaid beneficiaries have more difficulty accessing prescription drugs.
In states with no cost-containment laws, or just one, about 15% of Medicaid patients reported having a problem affording drugs. In states with two or three containment measures, 25% of Medicaid patients said affordability was a problem. And in states with four or more such measures, 33% of patients said they couldn't get a drug at least once in the past year because it was too expensive, according to the center.
Maine's Pingree says her state prevents such problems by issuing a single benefit card that informs the pharmacy which programs and benefits apply to each individual. "It's not confusing for people," she says.
"State budgets can be very fragile, and for a state like Maine to spend the millions it does on prescription drugs is very difficult," Pingree writes in testimony she prepared for Congress earlier this month. "The pressures of paying the ever-rising cost of prescription drugs stresses the entire system."
Pingree was not able to share her story with the House Ways and Means Committee because the panel canceled her testimony the day before she was scheduled to appear, she says.
Even if Congress isn't ready to hear how state efforts could be used as a model for federal action, some believe states will force the issue. "If enough states enact legislation to lower the cost of prescription drugs, a strong message will be sent to Congress, and hopefully there will be a federal solution," Hawaii's Takumi says.