New Rules Could Save Billions in Prescription Drug Costs

 
The federal government this week announced a rule change it says will save the federal-state Medicaid program $17.7 billion over the next five years. Called for in the 2010 federal health law, the new rules for prescription drug pricing are based in part on an innovation pioneered in Alabama.

Instead of paying for drugs based on drug company price lists, which are often inflated, Alabama decided a few years ago to start paying local pharmacies for prescriptions based on what they actually paid for the medicines. After getting permission in September 2010 from the U.S. Department of Health and Human Services, the state Medicaid program started collecting receipts from local pharmacies to create a new pricing benchmark.

The result was a 6 percent reduction in Alabama's Medicaid pharmacy bill — a savings of $30 million in the first year. Since then, Oregon, Idaho and California have followed suit. ( Stateline profiled the Alabama program last July.)

Now, the federal government is proposing to make it easier for all states to take the same approach, and it is offering some assistance with collecting the pricing data. In addition, the rule would increase the rebates pharmaceutical companies are currently required to pay states for the drugs they purchase, and it would extend those rebates to drugs purchased through Medicaid managed care programs.

Alabama's method sounds pretty straightforward. But collecting paper receipts for drug purchases from a rotating sample of local pharmacies is a big undertaking. Under the federal government's proposal, a national database of wholesale drug prices would be developed, although the details and timing on that have not been set.

According to Matt Salo, director of the National Association of Medicaid Directors, states looking to cut their pharmaceutical bills face huge challenges. "There's a rich history of individual pharmaceutical companies getting nailed in court for defrauding state governments in pricing." He says the proposed new rule is sorely needed.

States have made big strides in cutting prescription drug expenditures, which account for 10 percent of all Medicaid dollars, or about $40 billion nationally. For more than a decade, states have been pushing cheaper generic medicines for their Medicaid populations and many have restricted the number of prescriptions or refills that a beneficiary can get. Others have put limits on certain high-priced drugs that have been shown to be no more effective than cheaper ones. These strategies have curbed what was once the fastest growing expenditure in the Medicaid program.

States also got some relief in 2006, when the federal government added a drug benefit to Medicare. Elders on Medicaid, who previously accounted for about half of the program's drug costs, began getting their medications through Medicare.

But the current fiscal crisis has forced states to keep looking for savings. According to a survey by the Kaiser Family Foundation, every state took steps last year to cut pharmaceutical spending.
 
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