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Executive Summary

Sixty-percent of California Medicaid's outpatient prescription drug spending growth from 1984-1989 can be attributed to increased utilization rather than product price increases, according to a study released by Pharmaceutical Manufacturers Association April 19. Conducted by the research and consulting firm SysteMetrics, the study notes that prescription drug expenditures for the program, known as Medi-Cal, have risen by a yearly average of 15% since 1984, to $516.4 mil. in 1989. Of the more than two-fold increase over the five years, 39% stems from increases in the number of enrollees filling prescriptions, 22% from increased volume of prescriptions per patient, and 39% from price increases per prescription, the researchers calculate. The number of Medi-Cal recipients using prescription drugs has increased about 5% each year, roughly double the increase in total Medi-Cal enrollment, SysteMetrics found. The total number of prescriptions filled has risen more quickly -- an average of 10% a year. While the overall make-up of the Medi-Cal population has changed little, there has been an increase in the proportion of disabled enrollees, who tend to be heavier users of drug services, the report says. Cost per prescription increased an average of 7.7% yearly. Medi-Cal has been a central program in the debate on Medicaid drug spending, due both to the size of the program and the variety of cost control measures considered and used by the state. Having used a restrictive formulary and a prior authorization program throughout the 1980s, state officials now are planning to add a program to obtain discounts from drug firms in return for volume purchases. Partly in response to that effort, PMA is opening a western regional office in Sacramento ("The Pink Sheet" April 16, T&G-6). Merck's "best price" discount proposal unveiled April 19 also responds to the types of presures exemplified by the Medi-Cal program (see related story, p. 3). The report notes that the growth in drug spending has occurred "despite the introduction of numerous cost-containment strategies. The California Department of Health Services cannot account for this increase by a corresponding increase in either the number of prescriptions or the number of users of medications," the report continues. Consequently, the report states, "some policymakers argue that the increase must be primarily due to prices increases for brandname drugs by pharmaceutical manufacturers." However, this argument is "not supported by a systematic study," the report maintains. SysteMetric's calculations are based on its analysis of Medi-Cal's databases. The data contained in the report suggest that an increasing focus on multiple source and generic drugs helped to hold down drug inflation. Between 1984 and 1989, the number of prescriptions written for multiple source drugs increased by a cumulative 76%, while expenditures doubled. For single source products, the number of prescriptions written rose by 30% - but spending tripled. When total expenditures are broken down in terms of drug components, multi-source ingredient costs accounted for 29% of spending in 1989, down from 31% in 1984, even with the increase in volume. Single source ingredient costs for accounted 25.5% (up from 20% in 1984) and pharmacy dispensing fees for 23% (down from 29% in 1984), with the remainder due to pharmacy markups, supplies purchased through pharmacies and ingredient costs for unknown or nonformulary drugs approved for specific patients (see box, p. 8). The report emphasizes: "Single-source ingredient costs account for only one-quarter of drug program expenditures. Major portions of the expenditures go toward the purchase of multi-source medications and pharmacy professional fees and profit on sales." PMA has not been shying away from the pharmacy profit issue and has been stressing that portion of program costs in discussions with Capitol Hill staff. In an April 13 letter to Sen. Pryor's staff, PMA points out that pharmacy expenditures were about 38% of the Medi-Cal drug program costs. The SysteMetrics report suggests that the somewhat larger proportion of costs going to single source products can be attributed to technological improvements. The larger proportion is "most likely due to the replacement of older therapies with preferred new ones." For example, "the group of products that became available on the formulary in 1985 account for $54 mil. of 1989 expenditures (19%). Single-source products that were added in 1985 account for over $42 mil. (15% of expenditures)," the report states. On the other hand, the report adds, "only two-thirds of the 155 unique chemical entities that comprise the leading pharmaceutical products used nationwide are available on the Medi-Cal formulary." The increase in prescription drug spending may also reflect a larger trend to outpatient care, the researchers say. Over the five years studied, the numbers of users of inpatient services declined by 0.75% annually, compared to the 5% increase in pharmacy users and a 2% increase in outpatient care users. Expenditures rose by 1.79% annually for inpatient hospital care, 6% for hospital outpatient care, 8% for outpatient clinics and 17% for home health care. "The ability to treat patients in the outpatient setting with modern medical technologies may have contributed to the relatively slow growth of inpatient expenditures and the relatively modest overall growth of Medi-Cal expenditures (yearly average of 6.09%), over the study period," the report comments. "Although it is apparent that other changes occurred in the program, most notably the institution of selective hospital contracting, the increase in outpatient drug program expenditures may be seen as an appropriate trade-off for fewer inpatient dollars and slower growth overall growth in program expenditures."

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