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2015 Medicaid Drug Price Controls: The Past is Prologue?


As the case decades ago, the “drug line” continues to be a major, if not the primary, concern of Medicaid administrators across the nation.

Reading the various reports of the Rx industry jousting with state Medicaid programs that are struggling with the costs of the new Hep C, hypertension, MS, cancer, and other “specialty drugs”, I can’t help but think about that old adage: The Past is Prologue…

Why apply this thought to state efforts to control 2015 Rx costs in Medicaid? Because since at least the early ‘80’s, Medicaid agencies have attempted to get their collective arms around what has become the slipperiest of all Medicaid cost centers: “the drug line”… And, by and large, they have failed miserably. Today, the “drug line” continues to be a major, if not the primary, concern of Medicaid administrators across the nation.

Consider this historical note from 1988 -- Then U.S. Sen. David Pryor (D - AR) stated that the price for Medicaid outlays on Rx’s…had gone up 228% between 1980 and 1988…and that between 1984 and 1988, Medicaid Rx spending in ten selected states more than doubled.

Sen. Pryor, a man well known to the Rx industry during that period, also went on to offer these somewhat critical views on the 1980’s Medicaid approach to controlling the costs of prescription drugs:

“The most common state cost-cutting measures were to reduce pharmacy reimbursement, raise the coinsurance that must be paid by the poorest poor who qualify for Medicaid, limit the number of reimbursable prescriptions, and construct formularies or limited lists of approved drugs. Overall, twice as many states restricted prescription drug benefits as liberalized them in the 1980s.”

Fast forward to today’s dramatically changed Rx drug environment (Including Obamacare Medicaid expansion, Medicare Part D, CHIP, etc.) and what is surprising is that most of the 1980’s cost control mechanisms that Sen. Pryor seemingly criticized -- are still very much with us. Certainly they have evolved, but on a conceptual level, 2015 Medicaid Rx cost containment approaches are still very similar to those created 35 years ago.

1. Preferred Drug Lists - Sen. Pryor’s mention of the “formularies” of the ‘80’s -- are still alive and well, but have morphed into preferred drug lists, or PDLs.  These mechanisms continue to be essentially designed to limit the number of drugs that appear on a state’s list of reimbursable Rx’s. However, today these lists are driven by the “drug rebates”, a concept that Sen. Pryor stridently advocated for in the ‘80’s and ‘90’s. Basically, the idea was…and is…that the greater the “rebate”, i.e., “discount”, provided to a state’s Medicaid plan for a particular Rx, the higher the likelihood that the product will be available in that state’s Medicaid program. 

In 2015, the Medicaid Rx rebate and PDL are thoroughly ingrained features of every state Medicaid program in the nation, with 600 Rx manufacturers providing “rebates” to the states for the privilege of selling their drugs to Medicaid. Essentially, if you don’t rebate today, you don’t sell your Rx to Medicaid patients…And as Medicaid’s “drug line” is the fastest growing segment of Rx sales in the nation, not having your Rx’s available under Medicaid is really not an option.

2. Generic Substitution - Back when Sen. Pryor listed the ways that Medicaid could save on Rx costs, the issue of generic substitution was a raging issue in most of the states in the country. Today, every state has a generic drug law, and according to the FDA, about 80% of all prescriptions are filled with generics.  

Further, the big push for “generics” is not over. Today it’s the battle over allowing the use of “biosimilars”, or generics for the new biotech products. The potentially substitutable biotech Rxs, think Sovaldi/Harvoni, etc., are the same expensive products that are disrupting 2015 Medicaid drug budgets all over the nation.

To combat these high biotech costs, 15 states now allow some form of “biosimilar substitution”, and the FDA went ahead and formally approved the first biosimilar earlier this year. This development could eventually lead to broad, lower cost substitutions for the “expensive” biotech “specialty drugs” at the level currently being experienced with standard generic Rx products. 

3. Cost Sharing - Back in Sen. Pryor’s era, the concept of “coinsurance” for Medicaid drugs was Pryor’s definition of what we today call “cost sharing”. “Copays” or “premium fees” that Medicaid patients are asked to pay “out of pocket” in this era are now used to steer Obamacare Medicaid patients into the low cost “bronze” and “silver” healthcare options. These programs, which do include basic drug access, charge modest monthly premium levels. However, when a Medicaid patient uses the option for an Rx drug, it can be jolting. The “cost sharing” portion for a 2015 Medicaid generic Rx in a “bronze” plan may be up to 42% higher today than it was in 2013.

4. Limiting Access - During the late ‘80’s, as Sen. Pryor observes in his statement, Medicaid programs began to implement various impediments to access Rx drugs.  The most restrictive approaches in the ‘80’s and ‘90’s limited Medicaid patients to between three to six scripts per month.  If they needed more Rx’s than that, too bad.

The agencies also set up most scripts to be refilled on a monthly basis. Only the most basic chronic Rx products, think diabetes, hypertension, etc., were allowed to run on six month scripts.  There were many reasons for this approach, but primarily the Medicaid agencies apparently felt the requirement for month-to-month general refills would retard patient refill activity, and it probably did.

Today, “limiting access” continues to be a big priority for Medicaid drug directors. For example, with the arrival of Sovaldi, listed at $84,000 for twelve weeks of therapy, over half the Medicaid programs in the country have actively set up substantial impediments to accessing the product.

5. Managed Care - I’d suggest Sen. Pryor’s term, “reducing pharmacy benefit” was a first step in the Rx managed care cascade which first took hold in California and Minnesota in the ‘80’s and developed rapidly from there.

Today, of course, “managed care” in its many iterations is the backbone of Medicaid Rx care.  Since the 1997 Balanced Budget Act, managed care has been an increasingly important tool in the Medicaid cost containment arsenal. In 2015, according to Medicaid.gov, over 70% of Medicaid services, including prescription drugs, are delivered by various managed care entities.

But is All the Past, Prologue…?

There’s little doubt that five major 1980’s-legacy Medicaid Rx cost control “solutions” laid out by Sen. Pryor in his 1990 comment are still very much the backbone of Medicaid Rx cost containment…and I would argue that the ‘80’s past will continue to provide our 2015 prologue in Medicaid Rx cost containment for years to come.

However, the States do continue to look for new ways to further restrict access to Medicaid prescription drug services.  Here are a couple of newer ideas:

“Disclosure of Development Costs” - The concept of “disclosing the costs of development for new Rx’s” is being advanced in several states. Apparently the sponsoring legislators believe that if they are able to understand what a drug “actually costs to develop”, it will be easy to figure out what a fair Medicaid price for the drug should be. 

Aside from the legislators’ questionable market theory re: the pricing of finished Rx goods, and the clear implication that, in fact, Medicaid should be determining the price of Rx’s used in its drug program, you do have to give these legislators points for creative thinking. My one question, however, is what are “Rx development costs” in 2015?

“Bonding” to pay for “Specialty Drugs” - Another concept that’s being advanced by the Rand Corporation calls for a payer (state Medicaid) -- to issue bonds to pay for expensive drugs. Similar to a state issuing bonds to build a new bridge, a state Medicaid program would offer bonding terms that would be negotiated between Medicaid and the Rx manufacturer. In the case of high cost products like Sovaldi, Medicaid’s terms likely would include some sort of “performance standards” or “cost effectiveness” clause (Example: Sovaldi will cure Hep C in 12 weeks). If those results are not met, it would reduce the obligation of the Medicaid to pay back all or a portion of the borrowed funds.

There’s a lot to think about here. Rand maintains that “bonding” would spread out payments for the “high priced specialty drugs” over several years and might be attractive to Medicaid agencies struggle with burgeoning “drug lines”. Insurers, on the other hand, are saying this does not restrain the industry’s pricing of a product one bit.


So, no matter if it’s a long standing 1980’s cost containment idea, or some new “restriction on access” theory, it’s always been about the state Medicaid agencies limiting access and trying to keep the lid on annual Medicaid Rx drug expenditures. Will the old 1980’s concepts be enough to restrain 2015 Medicaid Rx “drug lines”? Or will new theories have to supplement these old approaches?

We’ll soon find out as the combination of the surging Obamacare Medicaid Expansion, rapidly arriving “specialty drugs”, and the general urgencies of all state budgets pretty much guarantee a colossal fiscal collision. I am guessing the result will not be a good one for anyone involved, and particularly not for the American Rx industry.

Tom Norton is principal at NHD Smart Communications. He can be reached at tnorton@nhdcomm.com.

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