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Executive Summary

Maine, Oklahoma and West Virginia are considering prior authorization systems for their Medicaid drug programs, according to a tracking of state activities compiled by the Pharmaceutical Manufacturers Association. Thirty-seven states already have some sort of prior authorization program in place. The West Virginia legislature has proposed cutting $20 mil. from its drug program as part of major cuts which would affect all segments of the state's Medicaid budget. Under the legislation being considered, prior authorization would be considered for the drug program and provider taxes would be assessed on all providers. In Oklahoma, bills that would remove the state's prohibition against prior authorization are moving through the legislature, PMA reports. Meanwhile, in Maine, the Department of Human Services and members of the state legislature are looking to make structural changes in the Medicaid drug program and have mentioned prior authorization as a possibility. Five other states -- California, Florida, Iowa, Mississippi and Virginia -- are in the process of getting their prior authorization programs off the ground. Arizona and Wisconsin are both considering expanding their current programs. In the face of the prior authorization activity, PMA is seeking the repeal of the provisions of OBRA '90 which allow states to require physicians to obtain approval for prescribing a drug before Medicaid will provide reimbursement. At an April 1 hearing of Rep. Waxman's House Energy & Commerce/Health Subcommittee, PMA Executive VP Robert Allnutt argued that drug utilization review systems are sufficient to "accomplish the legitimate objectives of prior authorization without restricting patients' access to medicines." The prior authorization programs instituted by a number of states, Allnutt objected, had "established de facto restrictive formularies." Allnutt cited a 1991 letter to all state governors from HHS Secretary Louis Sullivan expressing his concern that the implementation of the drug rebate legislation of OBRA '90 "might be implemented in a way that could inappropriately restrict access to prescription drugs." In particular, Sullivan noted, he had heard speculation that prior authorization, "while permitted by the statute, might be misused unfairly to deny access to medically necessary drugs for Medicaid beneficiaries." Sullivan added, "I do not believe it was the Congress's intent that this should happen." Allnutt also pointed out that Sen. Pryor (D-Ark.), one of the principal sponsors of the Medicaid provisions of OBRA '90, had issued a press release indicating his support for Sullivan's letter and emphasizing that the secretary's letter was "totally consistent with Congressional intent." Waxman convened the April 1 hearing to discuss the Clinton Administration's proposals to reduce federal Medicaid outlays by $7.8 bil. over the next five years, as called for in this year's budget resolution. The administration is arguing in favor of removing the prohibition on restrictive state formularies which OBRA '90 established as part of the arrangement which also set up Medicaid drug rebates. Potential savings from repealing the formulary prohibition are estimated at $70 mil. through FY 1997. Opening Alabama's drug formulary in the wake of OBRA '90 led to a 62% increase in the state's Medicaid prescription drug spending over two years, Iowa Department of Human Services Division of Medical Services Administrator Donald Herman testified before the subcommittee. Alabama's formulary was opened on May 1, 1991, and for FY 1990, the last full year of formulary utilization, prescription drug expenditures were $60 mil., Herman reported. Drug expenditures rose by 21% to $73 mil. in FY 1991, and rose another 33% to $97 mil. in FY 1992. Projections for FY 1993 drug expenditures are $126 mil., a 30% increase over 1992, Herman said. Herman cited the Alabama figures in support of allowing states the option of a drug formulary. He emphasized that "Medicaid agencies need as many options as possible to manage their drug programs in a cost effective manner." Herman's own state, Iowa, did not have a formulary in place before the OBRA '90 restrictions took effect. The state's Medicaid program will spend $990 mil. on behalf of 225,000 people in the fiscal year ending June 30. Eight percent of those expenditures, or $80 mil., will be for prescription drugs, Herman said, and the state will receive $10 mil. back in rebates. Iowa's total spending on Medicaid will be 15% higher than in FY 1992. Herman pointed out that when the cost per unit is calculated, "the greatest increase [is] occurring in prescription drugs," with a rate of 13% Allnutt contended that restrictive drug formularies do not produce cost savings for the health care system as a whole. Instead, he said, they simply shift costs to other services. When applied to Medicaid, Allnutt argued, "state formularies discriminate against our poorest citizens." Subcommittee member Rep. Towns (D-N.Y.) asked the panel whether formularies might "further exacerbate a two-tiered medical system as it pertains to access to the best possible drug therapy." National Medical Association President Richard Butcher, MD, said that he felt "it would," and that a Medicaid formulary would mean "that you do have to make some compromises in your medical judgment." Butcher added, "Despite what everyone is saying, all drugs are not the same." The National Medical Association describes itself as "the largest and oldest African American health professional organization," with over 16,000 members. Allnutt concurred, noting that "the fact that two drugs are in the same therapeutic category, while it means that they are targeted at the same state,...does not mean that patients can take them interchangeably or can just be limited to a single product." As an example of categories where there are many products which may work for one patient and not another, he cited nonsteroidal anti-inflammatory drugs and cardiovascular products. Generic Pharmaceutical Industry Association President Dee Fensterer came out "strongly support[ing] a national open formulary for multisource drug products." She maintained that unrestricted formularies for multisource drugs "not only increase competition for specific drug entities, but also for all drugs within entire therapeutic classes." GPIA wants a national system, Fensterer testified, for fear that states acting alone "will result in 50 different programs designed to address short-term budget crises rather than long-term solutions to cost-effective pharmaceutical treatments." As an example of what could happen if states act alone in this way, Fensterer pointed to the California Medicaid program. She explained to the subcommittee that last year MediCal "imposed on generic manufacturers a 5.5% rebate over and above the 10% rebate required under [OBRA '90]." Fensterer also objected to the program California has initiated to review drugs within therapeutic categories and "delist" from Medicaid coverage selected drug entities. She noted that while the program has focused on single-source rather than multisource products, "the state has considered negotiating a special price on one drug entity within a therapeutic class and then removing from Medicaid reimbursement all other drug entities, brand or generic, even those with unique indications." Such a program would have the most negative effect on the most competitively priced products, Fensterer said, which rely heavily on volume sales.

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