States Struggle to Control Prescription Prices

Desperate to hold down health care costs, states are experimenting with innovative tactics to rein in prescription drug prices for state workers and for poor people on Medicaid, the country’s largest medical program that devours more than 20 percent of state spending.

Although states are trying a variety of techniques to control drug spending, which has more than tripled in the United States since 1990, the most dominant involve: importing less-expensive medicine from abroad, buying drugs in bulk, and regulating pharmacy benefit managers, the for-profit companies that negotiate drug discounts for states.

“Each of these issues has a life of its own,” said Richard Cauchi, a health care analyst at the National Conference of State Legislatures (NCSL). “States that are spending their money on prescription drugs are looking for savings in multiple places, so they may be simultaneously seeking out bulk purchasing and importation. They don’t see them as either/or, but as a combination of tools.”

Lessening the budget burden of prescription drugs is of such importance that lawmakers in 42 of the 44 states with legislative sessions in 2004 introduced more than 320 measures relating to pharmaceuticals, according to recent data compiled by NCSL.

States spent an estimated $30 billion in 2003 on prescription drugs through Medicaid, which is funded jointly by states and the federal government. States also buy drugs for state workers and prisoners, though expenditures for those populations are much smaller than for Medicaid.

The riskiest approach is being taken by Minnesota, New Hampshire, North Dakota and Wisconsin, where governors are directly defying federal officials and have launched Web sites to help residents buy less-expensive medicine from Canada.

The U.S. Food and Drug Administration maintains that importation is unsafe and illegal and has threatened states with lawsuits, though no punitive action yet has been taken.

However, in the first sign that the federal government is feeling pressure from importation supporters, U.S. Health and Human Services Secretary Tommy Thompson was quoted May 4 as saying that legalizing the practice was inevitable. “I think it’s coming,” he said. Making reference to a bipartisan group of U.S. senators pushing for importation, Thompson said: “I think Congress is going to pass it,” according to The Boston Globe.

Several other state leaders have expressed interest in re-importing drugs but are wary of violating federal law. Iowa Gov. Tom Vilsack and Illinois Gov. Rod Blagojevich, both Democrats, have started online petitions and commissioned studies into potential cost savings to the state. Rhode Island Secretary of State Matthew Brown linked his Web site to Wisconsin’s importation Web site.

In addition, 22 state legislatures debated more than 40 importation bills in 2004. Only a few, however, proved successful. West Virginia Gov. Bob Wise (D), for example, signed a bill April 7 that requires the state to study purchasing medicine from Canada.

Similarly, Vermont lawmakers passed a non-binding resolution urging Gov. Jim Douglas (R) to establish a drug re-importation program for the state. Douglas, who is up for re-election in November, has said he supports importation, but is awaiting federal approval before moving ahead.

Some opponents of importation amplify the federal government’s safety warnings. “If certain states are actively promoting importation, there are some serious questions about whether or not they’ll become liable if something goes wrong. Certainly trial lawyers are going to go after the deepest pockets, whether it’s drug companies or state governments,” said Jim Frogue, director of the health task force at the American Legislative Exchange Council, which opposes importation. ALEC’s task force is made up of legislators and private-sector members, including some representatives of the pharmaceutical industry.

Another cost-containment plan grabbing headlines and lawmakers’ interest was the landmark federal approval April 22 of a multi-state purchasing pool that will allow five states Alaska, Michigan, Nevada, New Hampshire and Vermont to use their combined Medicaid populations as leverage to negotiate lower prices from drug manufacturers.

Soon after the federal thumbs up, Hawaii, Maryland and Minnesota announced they also would seek to join the pool, which is administered for all states by First Health Services Corp., a for-profit pharmacy benefit administrator in Virginia.

Michigan, which pioneered the initiative with Vermont and operated the pool in 2003 prior to federal approval, estimates the arrangement saved the state $8 million in 2003 and will save more in coming years. Minnesota officials estimate a potential annual savings of $11 million when the state joins the pool.

Federal officials touted their approval of the pool as evidence of their willingness to help states get the best drug prices possible. The federal government often is criticized by advocacy groups as being too cozy with the pharmaceutical industry, which opposes the bulk-buying pool.

“This new approach builds on our efforts to help states use the best private-sector purchasing tools to lower costs, while assuring appropriate standards for proper access to medicines and quality care,” Mark McClellan, who heads the federal agency that oversees Medicaid, said in a press release.

Overall, states view the federal approval as a major victory in the battle for lower cost drugs, but some proponents of bulk purchasing are embracing the news cautiously.

“The concept of multi-state negotiations is a sound one, but there’s not one way to do it. I hope there will be some competition to this one vendor,” said Cheryl Rivers, a former state legislator who founded the National Legislative Association on Prescription Drug Prices and is running for lieutenant governor in Vermont as a Democrat. “Anytime there’s one for-profit vendor doing something, it makes me a little nervous. But that’s not to say states shouldn’t sign up for this deal. It could be the best thing since sliced bread.”

Some supporters of bulk purchasing say it could prove an even more important tool for states in 2006, when a new federal Medicare law will take full effect and provide a prescription drug benefit for Americans 65 and older. At that time, low-income, elderly residents will shift out of the state Medicaid population and into the federal Medicare program, although they are technically eligible for both.

“States are going to lose a lot of the leverage that they have right now because you’re basically taking the largest consumers of prescription drugs in Medicaid and taking them out of the bargaining power that states have,” said Dee Mahan, deputy director of health policy at FamiliesUSA, a Washington, D.C.-based non-profit that promotes affordable health care.

States also are mulling ways to act as watchdogs over pharmacy benefit managers, the private-sector businesses that negotiate drug prices for them. For example, South Dakota Gov. Mike Rounds (R) signed a law March 9 that requires “transparency” in pharmacy benefit business practices, such as disclosure of negotiated rebates, according to Mark Johnston, the governor’s press secretary.

In a similar move, Maine approved a law requiring drug manufacturers doing business in the state to certify and report drug prices to the state Department of Human Services.

Approximately 30 other states over the past two years have considered ways to hold pharmacy benefit managers more accountable. “There’s a great deal more interest in that area, but it’s more of a cautious or step-by-step approach,” NCSL’s Cauchi said.