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Introduction to State Health Policy: A Seminar for New State Legislators

Slide Presentation by Jonathan Blum, M.P.P.

On April 3, 2005, Jonathan Blum made a presentation in a seminar entitled Introduction to State Health Policy.

This is the text version of Mr. Blum's slide presentation. Select to access the PowerPoint® Slides (2.2 MB).

Prescription Drugs in Medicaid: Past Trends and Future Challenges

Jonathan Blum, M.P.P.
Medicaid Practice
The Health Strategies Consultancy
The Intersection of Business Strategy and Public Policy

Title slide shows a curving highway bridge.

Slide 1


  1. Why are prescription drug issues so frequently in the news?
  2. What are the current trends in State prescription drug policies and their implications?
  3. What will State lawmakers face in 2005 and beyond?

Slide 2

1. Why are prescription drugs in the news?

Slide 3

Samples of Recent Headlines

The Wall Street Journal: Prices Increase on Popular Drugs; Majority of Top-selling Medicines Cost More Since Election; a 5 percent Rise for Lipitor ®; January 25, 2005.
USA Today: Popular Demand for Cheaper Prescription Drugs Pressures Lawmakers; December 1, 2004.
The New York Times: States Trying New Tactics to Reduce Spending on Drugs; November 21, 2004.
The Washington Post: Merck Withdraws Arthritis Medication; Vioxx Cites Users' Health Risks; October 1, 2004.

Slide 4

Prescription Drugs Are a Major Health Policy Concern to the Public

A bar graph is labeled Top Survey Responses to Question about Most Important Health Problem for the Government to Address. The y-axis lists health problems and the x-axis shows percentages of responses. Cost of Health Care gets 21 percent. Cost of Prescription Drugs and Medicine, in a different color from the other bars, gets 19 percent. Universal Coverage slash Uninsured gets 14 percent. Cost of Insurance gets 13 percent. Senior Citizens' Issues gets 8 percent.

A box below says, "46 percent of all respondents identified health care costs as a top policy priority and 19 percent specifically identified the cost of prescription drugs."

Source: Kaiser Health Poll Report, November-December Edition. Available at

Slide 5

Current Spending on Prescription Drugs

A pie graph is labeled Spending on Prescription Drugs, by Payer, 2003. The term Private gets 76 percent of the pie; Federal, 14 percent; and State, 10 percent. Below the chart is written; Total Spending equals 179.2 billion dollars.

Source: National Health Expenditures. Available at

Slide 6

Current Medicaid Spending on Prescription Drugs

At the upper left is written, "While prescription drugs make up only ten percent of the Medicaid budget..." Underneath is a pie graph titled Medicaid Expenditures by Service, 2003.

  • The term Inpatient gets 13.6 percent of the pie.
  • Physician, Lab or X-ray, 3.7 percent.
  • Outpatient Clinic, 6.7 percent.
  • Prescription Drugs, 10.1 percent.
  • Managed Care, 15.6 percent.
  • Home Health and Personal Care, 13.0 percent.
  • Nursing Facilities, 16.9 percent.
  • Other, 20.3 percent.

At the upper right is written, "...Growth in prescription spending has outpaced other segments."

Underneath is a bar graph labeled Growth of Fee-for-Service Medicaid Spending, by Service, 2000 to 2002. The y-axis lists services and the x-axis represents percent average annual growth.

  • Managed Care gets 16.2 percent.
  • HCBS Waivers gets 15.6 percent.
  • Nursing Facilities gets 9.5 percent.
  • Prescribed Drugs, in a different color from the other bars, gets 18.8 percent.
  • Outpatient Hospital, Clinic gets 13.7 percent.
  • Physician, Lab, X-ray gets 12.6 percent.
  • Inpatient Hospital gets 11.2 percent.
  • All Medical Services gets 12.9 percent.

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

Slide 7

Prescription Drug Spending, 1987 versus 2003

At the left is a pie graph labeled 1987 Total Health Spending.

  • The term Hospital Care gets 47 percent of the pie.
  • Professional Services, 31 percent.
  • Nursing Home Care, 9 percent.
  • Prescription Drugs, 6 percent.
  • Other Spending, 6 percent.

At the right is a pie graph labeled 2003 Total Health Spending.

  • The term Hospital Care gets 36 percent of the pie.
  • Professional Services, 38 percent.
  • Nursing Home Care, 10 percent.
  • Prescription Drugs, 12 percent.
  • Other Spending, 4 percent.

Source: National Health Expenditures. CMS Web site. Available at

Slide 8

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.

Slide 9

Who Accounts for the Spending?

A special bar graph is labeled Medicaid Enrollees and Drug Spending by Group, 2000. There are two bars of equal height. The two bars are divided into segments, indication percentages, with lines between the bars connecting the borders of corresponding segments.

  • On the bar labeled Enrollees, Total equals 44.2 million, the term Children gets 49.3 percent; Adults, 24.0 percent; Disabled, 15.4 percent; and Aged, 11.2 percent.
  • On the bar labeled Drug Spending, Total equals 20 billion dollars, the term Children gets 7.8 percent; Adults, 7.0 percent; Disabled, 52.7 percent; and Aged, 32.1 percent.

Slide 10

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.

Slide 11

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

Slide 12

1. Preferred Drug Lists

  • 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.

      * 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.

  • 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.

Slide 13

PDLs Have Become the Predominant Medicaid Drug Cost Containment Strategy

On a map of the United States, the States are color coded for their PDLs. Alabama, Alaska, California, the District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, Ohio, Oklahoma, Oregon, South Carolina, Texas, Vermont, Washington, Wisconsin, and West Virginia are marked PDL with Supplemental Rebates. Mississippi, Nevada, Tennessee, Virginia, and Wyoming are marked PDL without Supplemental Rebates. Arkansas, Connecticut, Delaware, Iowa, Montana, New Mexico, and North Carolina are marked Planned PDL. The rest of the States are unmarked.

Source: Health Strategies Consultancy LLC. October 2004.

Slide 14

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.

Slide 15

2. Multi-State Purchasing Pools

  • 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 Alaska, Michigan, New Hampshire, Nevada, and Vermont.
    • In September, Hawaii and Minnesota 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.
    • Louisiana, Maryland, and West Virginia are considering forming a buying pool that will be administered by Provider Synergies.

Slide 16

3. Importation from Canada and Europe

  • 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 Vermont waiver request to begin a pilot program.

Slide 17

States Have Started Importing Drugs from Canada and Beyond

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

  • Illinois, Wisconsin, and Michigan have signed a contract with Can-RX to import drugs from Canada, the United Kingdom, and Ireland for State residents.
  • Minnesota, New Hampshire, Rhode Island, and Wisconsin 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.

Slide 18

4. Cost Sharing, Prior Authorization, and Quantity Limits

  • Beneficiary Cost-sharing
    • Medicaid may require beneficiaries to pay "nominal" copayments, 1 to 3 dollars, 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 or year.

Slide 19

5. Bulk Purchasing

  • Some States are pursuing drug savings by purchasing in bulk for many of their State programs.
  • West Virginia recently established the West Virginia Pharmaceutical Cost Management Council.
    • Responsible for purchasing prescription drugs for the State employee slash retiree plan, Medicaid, SCHIP, and the Department of Corrections.
  • Other States pursuing in-State pools are Georgia, Texas, and Washington.

Slide 20

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.

A table titled Recent Decreases in Prescription Reimbursement has columns for States, Formulae for March and September 2004, and Dispensing Fees for March and September 2004.

  • California has the formula AWP 5 percent in March and AWP 10 percent in September, with a dispensing fee of 4 dollars and 5 cents in both months.
  • Maine has AWP 13 percent in March and AWP 15 percent in September, with a 3 dollar 35 cent dispensing fee in both months.
  • Maryland has AWP 10 percent or WAC plus 10 percent in March and AWP 12 percent or WAC plus 8 percent in September, with a 4 dollar 69 cent dispensing fee in both months.
  • New Hampshire has AWP 12 percent in March and AWP 16 percent in September, with a 2 dollar 50 cent dispensing fee in March and a 1 dollar 75 cent dispensing fee in September.
  • New Jersey has AWP 10 percent in March and AWP 12.5 percent in September, with a 3 dollar 73 cent dispensing fee in both months.
  • New Mexico has AWP 12.5 percent in March and AWP 14 percent in September, with a 3 dollar 65 cent dispensing fee in both months.

Slide 21

7. Pharmaceutical Benefit Managers Regulation

  • Pharmaceutical benefit managers, PBMs, provide administrative services and process prescription 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 to 2004, 32 States proposed legislation that would regulate PBMs.
  • Six States and DC have enacted PBM laws.

Slide 22

What Are the Savings Associated with these Cost-Containment Policies?

  • Ongoing savings reports fuel interest in PDLs.
    • Michigan announced its PDL saved the state 3 million dollars per month in first year.
    • Illinois and Washington demonstrated market share shifts of drugs after PDL was implemented—80 percent or more 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 dollars 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 prescription drug importation will result in "negligible" savings in drug spending.
    • Canadian health officials are threatening to ban drug exports to the U.S.


  • 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 U.S. Drug Spending? 29 April 2004. Available at

Slide 23

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 prescription 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 Georgia Medicaid prior authorization program for proton pump inhibitors, PPIs, shows positive outcomes.
  • The State saved 23 million dollars 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 1.5 billion dollars annually.


  • Soumerai S. Unintended Outcomes of Medicaid Drug Cost-Containment Policies on the Chronically Mentally Ill. Journal of Clinical Psychiatry 2003: 64 Supplement 17:19 to 22.
  • Delate T, 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, February 2005. Available at

Slide 24

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.

Slide 25

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

Slide 26

Subsidy Levels under MMA Depend on Poverty Levels

A table has four columns: Premium, Deductible, Copays, and Coverage Gap. For the row titled Up to 100 percent FPL and a dual, there is no premium, no deductible, a one-over-three-dollar copay, and no coverage gap. For the row titled Up to 135 percent FPL, there is no premium, no deductible, a two-over-five-dollar copay, and no coverage gap. For the row titled 135 to 150 percent FPL, there is a sliding scale premium, a 50 dollar deductible, a 15 percent of drug cost copay, and no coverage gap.

  • Duals, including QMBs, SLMBs, and QIs, automatically eligible for subsidies available to those less than 135 percent 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 percent, circa 14 million, of total Medicare population will be eligible for the subsidies.

In box: 100 percent of FPL in 2004 is 9,310 dollars for one-person household and 12,490 dollars for two-person household; 135 percent of FPL is 12,569 dollars and 16,852 dollars, respectively; 150 percent of FPL is 13,965 dollars and 18,735 dollars, respectively.

Partial duals are beneficiaries eligible for Part D and Medicare Savings Programs (for example QMBs, SLMBs, QIs). These beneficiaries receive assistance from Medicaid for Medicare cost sharing, but do not receive comprehensive Medicaid coverage.

Slide 27

Medicare Prescription Drug Benefit and the Impact on States

  • Management of dual eligibles' drugs will shift to Medicare.
  • Still pay a portion of duals' drug costs through a phased-down State contribution, or "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.

Slide 28

Clawback Formula

  • States are still required to pay portion of duals' drug costs through MOE formula.
  • Clawback formula retains State's responsibility from 75 percent in 2006 to 75 percent 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.

Formula: number of duals times duals' drug per capita costs, weighted, in 2003 times 1 over 12 times SMAP times drug inflation times factor.

Slide 29

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, for example, 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, for example, mental health.
    • Disease management.

Slide 30

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.

Slide 31

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.
    • Thirteen 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, for example, medical devices, surgeries, et cetera.

Slide 32

Participating States in Oregon's Drug Effectiveness Review

On a map of the United States, the States marked "Drug Effectiveness Review Project Participants" are Alaska, Arkansas, California, Idaho, Kansas, Minnesota, Missouri, Montana, North Carolina, Oregon, Washington, Wisconsin, and Wyoming.

Slide 33

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.

Slide 34

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.

Slide 35

Administration's Policy Goals for Medicaid

  • Sixty billion dollars 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, for example, block grant, may provide more freedom to limit prescription drug benefits.

Slide 36

Bottom Line: Prescription drug policy will only become more complicated in 2005 and current strategies may no longer be as effective.

Copyright The Health Strategies Consultancy

Slide 37


Copyright The Health Strategies Consultancy

Slide 38

Terms of Clawback Formula

A table has two columns: Term and Definition.

  • Term: Number of Dual Eligibles. Definition: Beneficiaries in the State enrolled in Part D and receiving comprehensive Medicaid coverage; includes medically needy, excludes Pharmacy Plus 1115 waiver benefits.
  • Term: Duals' Drug per Capita Costs. Definition: Drug per capita costs in 2003, Managed Care and FFS, which account for supplemental rebates.
  • Term: SMAP. Definition: State share of Medicaid costs, 100 percent minus FMAP.
  • Term: Drug Inflation. Definition: In 2006, is cumulative increase in national prescription drug spending from 2003 to 2006; starting in 2007, is the annual increase in Part D per capita spending.
  • Term: Factor. Definition: Reduces State contribution to 90 percent in 2006, decreasing each year by one and two thirds percent until 75 percent in 2015 and thereafter.

Slide 39

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

Current as of October 2005

Internet Citation:

Prescription Drugs in Medicaid: Past Trends and Future Challenges. Text version of a slide presentation at Introduction to State Health Policy: A seminar for New State Legislators. Agency for Healthcare Research and Quality, Rockville, MD.

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