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Executive Summary

Federal drug cost containment efforts can be expected to move to state Medicaid programs now that the catastrophic outpatient drug benefit has been killed, Pharmaceutical Manufacturers Association VP-State Government Affairs Woodrow Allen told a Scott-Levin Associates marketing symposium Nov. 10. As payors of 50-70% of Medicaid costs, Allen said, the federal government has "a real interest in what the [Medicaid] reimbursement policy is, even though it's up to the state to determine that. . . . They are going to grab that Medicaid handle now that Medicare is gone." He cautioned pharmaceutical manufacturers not to "feel any great sigh of relief that cost controls" will disappear along with catastrophic care. Allen emphasized that "it is important for [industry] to examine alternatives for controlling costs [and] see what we can do to be part of the solution and not just part of the problem." In a discussion of Medicaid drug cost trends that are prompting cost containment policies at the state level, Allen said that from 1984 to 1988, average annual prescription drug costs per Medicaid recipient has increased 43% to $ 215. During the same period, he noted, the average Medicaid price per prescription has risen 36% to $ 14.98. Furthermore, he pointed out that for the first time this year, prescription drug costs (7%) as a percentage of total Medicaid spending have exceeded physician expenditures (6%), putting drug costs behind only nursing homes and hospitals. "Absent some alternative coming from our industry," Allen continued, "I think it's quite likely that a major state is going to put into effect a rebate or discount, or [some kind of] onerous cost control mechanism within the next couple of years." Allen predicted that the "timing of that will be just right for when Congress revisits the Medicare issue, which is probably not likely next year [but] probably the year after." In Georgia, the state assembly passed a provision last January authorizing the state's Department of Medical Assistance to solicit bids from drug manufacturers. A provision in the law permits the state Medicaid department to delete a drug from the formulary if a manufacturer chooses not to bid. This past summer, Georgia issued a request for proposal and received only six responses, including two refusals to bid; two bids that were "unusable" because they were too high; and two acceptable bids. A formulary advisory committee, appointed by the department's Commissioner Aaron Johnson, will decide which of the remaining brandname and generic multi-source drugs will be deleted from the formulary. The committee includes physicians, pharmacologists, and pharmacists. The department said that the poor response rate from industry was due, in part, to a "hole" in the legislated drug manufacturer bidding program. Reportedly, some suppliers interpreted the term "manufacturer" in the law as not applying to distributors. Consequently, the Georgia Medicaid department intends to push for a new law in the January 1990 session that will encompass all drug suppliers. California's state legislature has had less success than Georgia's in its efforts to reduce Medicaid drug costs. A bill authorizing MediCal to remove a drug from the formulary unless companies agreed to negotiate prices was defeated last spring ("The Pink Sheet" Aug. 14, T&G-11). Instead, MediCal has initiated a drug discount program in which they hope to negotiate prices with single-source manufacturers trying to get their drugs on the formulary ("The Pink Sheet" Oct. 9, T&G-7). Since June, MediCal has denied all petitions for drugs to be added to the formulary and is urging those companies to enter into discount contracts. However, no companies have as yet agreed to enter into such a contract. Currently, 14 petitions are currently on hold, representing a cost of $ 12.4 mil. to MediCal, according to a MediCal source. Among the drugs are Rorer's Azmacort (triamcinolone acetonide), Boehringer Ingelheim's Atrovent (ipratropium bromide); Warner-Lambert's Lopid (gemfibrozil); and Schering's Vanceril (beclomethasone diproprionate). The type of contract with single-source providers that MediCal is considering involves receiving a manufacturer rebate after the drug transaction takes place. As planned, manufacturers would rebate income from the sale exceeding a previously set percentage MediCal would agree to pay. MediCal says that since the manufacturer does not return the money until after the drug is dispensed, industry would not have to change its prices on a national basis as a result of the arrangement. Kansas' Medicaid bidding program has been unsuccessful in attracting bids from manufacturers of single-source products. At the July 18 price hearing before the Senate Special Committee on Aging, Sen. Pryor (D-Ark.) raised the issue of whether the brandname industry's refusal to participate in the Kansas bidding program constituted a violation of antitrust law ("The Pink Sheet" July 24, p. 5). With the defeat of catastrophic care, Allen remarked that Pryor's staffers are now turning their cost cutting efforts to the states. "Dave Schulke on Pryor's staff," Allen said, "is going to state Medicaid programs and telling them that based on Pryor's hearings . . . they should be doing rebates or competitive bidding or formularies." In addition, when Congress revisits the Medicare issue, Allen predicted, "they're going to be looking much more next time at what states have done than they did last time." In an analysis of Medicaid's share of the prescription drug market, Allen said that "Medicaid accounts currently for about 18% of prescriptions." Citing a prediction by Purdue University pharmacy economics professor Stephen Schondelmeyer, Allen said that by 1994 Medicaid will cover 23% of all prescriptions. However, Allen noted that these percentages underestimate the true impact Medicaid has on the market place and on third party payors. "Clearly what Medicaid does drives other private payors. If you are not on the California formulary, you know Blue Cross and the others are going to be looking at that in their guidelines," as well as managed health care groups, Allen said. Medicaid's "effect on the market place is way beyond 18% of prescriptions, and a few years from now 23% of prescriptions. So clearly these policies have a tremendous impact on the marketplace beyond just the Medicaid market," Allen remarked. Allen commented on the recent trend in the states towards developing structural changes in Medicare financing and delivery. For example, he noted that some states are conducting pilot projects on capitation, prospective payment, and managed care arrangements "where the state makes a contract out to private people on a capitated, at-risk basis." Although contracted plans would "have [their] ups and downs," Allen said, one advantage is that a diversified market will be created: "instead of having one bureaucrat or one formulary committee that decides whether you are on or off the formulary,. . . you've got hundreds of marketplaces."

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