Reducing Medicaid Drug Costs

Model policy saves states money and provides lower prices to the uninsured

Spiraling prescription drug costs have hit states hard in two ways: drug costs are busting state Medicaid budgets and burdening other state health coverage programs, and uninsured residents – especially seniors – are unable to afford the medicines they need.

States are beginning to respond, creating new programs to purchase drugs at lower prices. The opportunity to lower prices exists because drug manufacturers sell identical pharmaceuticals to different purchasers at widely varying prices (see inset for illustration).

Inequities in prescription drug prices If the retail cost for a particular dosage and quantity of a brand name prescription drug is $100, on average: · An uninsured resident pays $100 for that prescription · Medicaid and large HMOs pay $65 · Federally-qualified health centers pay $54 (called the "340B" price) · The federal government (largely, the U.S. Departments of Defense and Veterans Affairs) pays $46 or less.

"Uninsured Americans pay the highest drug prices in the world," explains CPA Policy Director Bernie Horn. "State Medicaid programs pay a lower price designated by federal law. But in both cases, states can and should substantially lower drug prices by negotiating directly with the drug companies."

Lowering Medicaid Drug Prices

Federal law permits states to negotiate supplemental Medicaid rebates from drug companies above and beyond the federally-designated rebates. For example, by negotiating a price reduction from the federally-designated Medicaid price to the "340B" price (a reduction from $65 to $54 in the illustration), states would save 17% of the cost. California has negotiated supplemental drug rebates for more than a decade. In 2001, Florida became the second state to enact legislation for supplemental Medicaid rebates, which is projected to save the state $200 million per year.

Lowering Prices for the Uninsured

Uninsured residents pay extremely high prices for prescription drugs. In many cases, these excessive prices have the effect of denying residents access to medically necessary care, threatening their health and safety. States can provide uninsured residents with substantial price relief. Under federal law, a state pharmaceutical assistance program can pay less for drugs than the federally-designated Medicaid price. By setting up a program similar to the Maine law enacted in 2000, states can negotiate drug pricing for the uninsured similar to or lower than the 340B price. In the illustration, a $100 price currently paid by the uninsured would be lowered to $54, a savings of 46%.

CPA’s Model Legislation

CPA has developed a policy model called the Fair Market Drug Pricing Act, which combines the approach of the California-Florida laws with the approach of Maine – to lower prices for both the state Medicaid program and for uninsured residents.

The policy model uses a free market approach to reduce pharmaceutical prices. States engage in voluntary negotiations with drug companies. If the companies don’t want to participate, they don’t have to negotiate.

Specifically, the Fair Market Drug Pricing Act:

· Directs the state Secretary of Health (or similar cabinet Secretary) to negotiate voluntary drug discounts or rebates from prescription drug manufacturers and labelers.

· Gives the Secretary the leverage to negotiate with drug companies much the same way HMOs and health insurance companies negotiate – allowing the Secretary to place products of any drug company that refuses to offer a substantial discount at least as favorable as the 340B price on the state Medicaid "prior authorization" list.

· Directs the Secretary to set up and administer the Rx Card program, passing negotiated discounts to the people who need them – uninsured seniors on Medicare and residents under 300% of the poverty level.

·Empowers the Secretary to combine drug pricing for Medicaid, the Rx Card program, and any other state health programs, to maximize the Secretary’s market clout.

Most important in today’s budget environment, the Fair Market Drug Pricing Act doesn’t cost taxpayers a dime. On the contrary, depending on the size of the state’s Medicaid budget, this policy will save the state tens or hundreds of millions of dollars per year.

The negotiation by the federal government to lower the cost of the anti-anthrax drug Cipro to 94 cents per pill, while federally-qualified hospitals and clinics receive an even lower price of 43 cents (the "340B" rate), reveals the long held practice of manufacturers selling the exact same drugs to different purchasers at widely varying prices. If the government wasn’t negotiating lower prices, an uninsured resident would pay $4-5 per pill for Cipro.