Fiscal Fitness: How States Cope

Pharmaceutical assistance programs walk a high wire while looking for ways to save money

Even using generic substitution and discounted prices, state pharmaceutical assistance program (SPAP) drug expenditures have escalated, according to a report funded by New York City-based The Commonwealth Fund and carried out by the Rutgers Center for State Health Policy.

Study authors Kimberly Fox, Thomas Trail, Susan Reinhard, and Stephen Crystal say further study is needed to assess the effects of other strategies such as prior authorization on pharmaceutical use and outcomes for poor and near-poor consumers. They also caution that problems related to coordination of benefits are likely to become even more challenging to states with the enactment of the Medicare drug benefit.

"Many states will seek to continue to provide pharmacy coverage that is less limited than the federally defined plan," the researchers write. "Prior difficulties in coordinating SPAP benefits with other coverage suggest that a great deal of work will be required to achieve effective coordination between SPAPs and the new private pharmacy plans."

The researchers base their findings on results of a survey of all direct-benefit programs in place during the year 2000. The findings were collected through qualitative case studies of programs in Maine, Massachusetts, Minnesota, Nevada, New Jersey, Pennsylvania, South Carolina, and Vermont, and through reviews of the literature and program documents.

In the last few years, the report says, SPAPs have faced the same double-digit increases in pharmaceutical expenditures as many Medicaid and private prescription drug insurance programs. Direct-benefit SPAPs pay directly for some or all prescription drug costs for eligible low-income elderly and disabled persons. There is considerable variation among states in terms of who is eligible, what drugs are covered, and consumer cost-sharing, but costs have grown steadily in all states. In response, SPAPs have implemented initiatives to control use of prescription drugs and lower prices negotiated with manufacturers and pharmacies.

For programs in place as of December 2000, total prescription claim costs rose by some 17.7% between 1999 and 2000, lower than increases in Medicaid prescription drug costs and overall retail prescription drug spending. While all states experienced increases in prescription costs from 1999 to 2000, Maine, Minnesota, and Vermont all expanded some element of their programs during the period and, as a result, experienced the greatest increases. In states that did not expand benefits, increases in total prescription claim costs were driven mainly by higher costs per claim and per enrollee. The average cost per enrollee and per claim in SPAPs increased at a much greater rate (16.5% and 11.1% respectively, in reporting states) than total enrollment (5.4%) or average claims per enrollee (4.7%). And in Maryland, Michigan, New Jersey, and Pennsylvania, enrollment actually declined during the period. The researchers say this suggests that the price per claim and the type and cost of specific drugs purchased were contributing significantly to program costs.

Wide variation in claims costs

SPAPs paid on average $41 per drug claim and $1,345 per enrollee per year during 2000. State costs per claim varied considerably across states, influenced by the generosity of the benefits offered and program enrollee health characteristics. The number of claims per enrollee also varied considerably by state, ranging from approximately nine scripts filled per enrollee in Delaware and Rhode Island to 40 in Pennsylvania. The researchers say some of the differences can be attributed to benefit design features, but others are more difficult to interpret and may be related to variations in supply limits set by state programs.

State pharmacy programs have confronted a difficult balancing challenge in continuing to cover vulnerable elderly and disabled citizens while limiting state financial exposure. They have considered a variety of strategies for controlling program utilization and costs. Options available to states fall into four categories — benefit limitations, barriers to deter purchase of expensive drugs or to change purchasing or prescribing behavior, price negotiations for higher rebates or lower prices at the pharmacy level, and cost-recovery systems to maximize program revenues and recoup costs from third-party payers.

States often combine strategies and use them to varying degrees, the survey found, especially since there often is political pressure not to implement some of them because of negative impacts on consumers, pharmacies, or manufacturers:

• Utilization controls reduce costs by influencing which drugs are purchased and in what quantities. In the eight case study states, control strategies included mandatory generic substitution, prior authorization, formularies, tiered copays, and supply limits. One advantage of utilization controls — in contrast to changes in benefit design — is that they often can be implemented as administrative actions and don’t require statutory amendments.

• Price negotiation strategies are accomplished through manufacturer rebates and price discounts with pharmacies, recognizing that the cost of a prescription reflects the manufacturer’s price and any rebates, wholesaler markups, and pharmacy markups and dispensing fees.

• Pooled purchasing and federal waivers are innovative approaches being pursued by some states. The researchers say the few pooled purchasing initiatives under discussion during the study period primarily involved Medicaid programs and some state employee benefits programs. State pharmacy programs have not generally been included. But Maine, Vermont, and New Hampshire agreed to join efforts in the bulk purchase of drugs for their Medicaid and state pharmacy programs through a single pharmacy benefit manager. Another option to limit state expenditures was to seek federal matching funds by expanding Medicaid eligibility to low-income aged and disabled for a drug-only benefit. As of February 2003, five states have received waiver approval to extend a drug-only benefit to some portion of their population — Florida, Illinois, Maryland, South Carolina, and Wisconsin. Ten other states had filed applications with the Department of Health and Human Services and still others had passed laws or were engaged in discussions about establishing such a program.

• Recovery of third-party payments from other insurers and Medicare is another tool less frequently used by SPAPs to lower program costs. Of 16 states surveyed, only four reported recoveries from third-party payers for their state pharmacy program.

With state officials recognizing they will have difficulty maintaining growth rates of 17% to 20% in SPAPs, they are implementing stricter cost-control strategies. Of the measures used by states, generic substitution and manufacturer rebates are estimated to result in the greatest impact on per-prescription expenditures. Although states don’t specifically track cost savings from generic substitution, some program officials said that strategy yielded the most savings of the various cost-control initiatives, as generic drugs account for neatly half of the claims paid in many programs and the average cost of a generic is approximately half that of a multisource brand name drug.

Manufacturer rebates are an average of 15% of state pharmacy costs and as much as 36% in one state. In addition to the rebate formula used by the program, the return rate is influenced by factors such as the mix of brand-name drugs used by participants, use of generic drugs, the pharmacy reimbursement rate, and the amount of cost sharing required by the program. States also save a significant amount through pharmacy discounts, even though pharmacy-level prices and dispensing fees generally are higher than those negotiated in the private sector.

The researchers say that given the budget pressures in many states, it is likely that SPAP cost-containment efforts will become more stringent over time. Further study is needed, they say, to assess the impact of cost-containment interventions such as prior authorization for expensive drugs on consumer health outcomes.

What seems clear is that strong political pressure by state-level interest groups limits states’ ability to impose stringent cost-containment policies. Many measures proposed by state officials to reduce program costs have met with strong resistance from consumers, pharmacists, or manufacturers and have generally been rejected or significantly scaled back.

Efforts to increase cost sharing through differential copayments for brand name and generic drugs have been controversial because of beneficiaries’ low incomes. Pharmacists generally favor measures that increase use of generic drugs because generics often provide larger margins at the pharmacy level. But state efforts to reduce pharmacy discounts further, such as basic generic discounts on maximum allowable cost pricing rather than a percentage of average wholesale price, are strongly contested by pharmacists, as are efforts to shift program administration to pharmacy benefit managers. Manufacturers oppose anything that looks to them like price controls, including efforts to further improve rebates through supplemental rebate strategies.

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