Pricing Pressures

March 1, 2002
Philip Lebowitz

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-03-01-2002,

During the 2000 US election, prescription costs-especially for seniors-was a hot issue that both parties offered to resolve. Intervening events have since distracted the federal government from domestic healthcare issues, leaving states to take the initiative in lowering drug expenditures. Two states' programs led the way, drawing legal challenges from the pharmaceutical industry. Recent opinions by US courts of appeals in those cases reached conflicting results; but viewed together, they provide guidance for the types of state plans that will be sustained. Meanwhile, other programs are making their way through state legislatures around the country.

During the 2000 US election, prescription costs-especially for seniors-was a hot issue that both parties offered to resolve. Intervening events have since distracted the federal government from domestic healthcare issues, leaving states to take the initiative in lowering drug expenditures. Two states' programs led the way, drawing legal challenges from the pharmaceutical industry. Recent opinions by US courts of appeals in those cases reached conflicting results; but viewed together, they provide guidance for the types of state plans that will be sustained. Meanwhile, other programs are making their way through state legislatures around the country.

The heart of the problem is the lack of a prescription drug reimbursement program as part of the system. Medicaid, which supports the healthcare needs of individuals below certain low-income thresholds, does provide prescription coverage for its beneficiaries. Medicaid is a state-federal cooperative program, and the structure for reimbursement varies from state to state. In all instances, however, pharma companies must sign a rebate agreement for their products to be eligible for Medicaid reimbursement. Through a complex formula, manufacturers agree to rebate the difference between the state's cost for the product and the lowest price paid by other purchasers, thereby insuring that Medicaid's cost is competitive.

For the vast majority of elderly citizens, Medicare-not Medicaid-is the source of their health benefits. Under that program, outpatient prescription drug expenditures are not reimbursed and can cost individuals several thousand dollars per year. Some states have explored ways to subsidize medicine costs for seniors, most frequently through funds from states' settlement with tobacco companies, which generated millions of "found" dollars for state governments. Those efforts, although well intentioned, are short-term fixes, because they lack a sustainable economic basis. Other states have attempted to extract the cost savings from pharmacies or drug makers. This article describes those efforts, the industry's reaction to them, and the courts' decisions.

In early 2000, Vermont enacted the Pharmacy Discount Program (PDP), which extended Medicaid drug benefits to almost 70,000 citizens that were not otherwise eligible for Vermont's Medicaid program. The statute directed pharmacies to charge new beneficiaries the same price for prescriptions that the state paid pharmacies under its Medicaid program-minus the average drug rebate Vermont receives from pharma companies, initially set at 17.5 percent. Under the PDP, the new beneficiaries would pay 82.5 percent of the prescription cost, and the rest would be funded by the company "as a condition for participating in Medicaid."

Vermont would bill pharma companies on a quarterly basis and collect the total rebate amount, passing the money along to the appropriate retail pharmacy. The Administrator of the Health Care Financing Administration-now called Centers for Medicare and Medicaid (CMS)-approved the program in November 2000.

The Pharmaceutical Research and Manufacturers of America (PhRMA) quickly brought suit under the federal Administrative Procedure Act. The association sought an injunction against US Department of Health and Human Services Secretary Tommy Thompson and CMS' acting administrator (collectively, "the department") for wrongfully approving Vermont's project. HHS does have the authority to approve pilot programs, but they must "assist in promoting the objectives of Medicaid." The lawsuit, Pharm. Research and Mfrs. of Am. v. Thompson, was defended by Vermont's Agency of Human Services Secretary.

Based only on the issue of whether the department exceeded its authority in approving Vermont's PDP, the district court denied the injunction. It was not concerned with the justifications for Vermont's program or its ability to serve the pharmaceutical needs of the intended beneficiaries.

PhRMA appealed the decision, focusing on the department's lack of authority to approve the program and arguing that the PDP contravened two provisions of the federal Medicaid statute. First, PhRMA claimed that the program's required reimbursements from pharma companies were beyond Medicaid's scope, which only permits reimbursement of "payment[s] … made under the State [Medicaid] plan."

PhRMA claimed that Congress' use of the word "payment" requires Vermont to actually expend funds for Medicaid beneficiaries rather than merely act as a conduit for money received from manufacturers and passed along to pharmacies. The department countered that "payment means payment"-even though pharma companies fully reimburse the state for what it pays the pharmacists-and that Vermont made "payments" when it reimbursed pharmacies for 17.5 percent of the prescription drug price.

The court of appeals found that Congress had intended for manufacturer rebates to repay the state for Medicaid payments, such as drug reimbursements, and that "payment" means only payouts made with federal or state funds appropriated for Medicaid expenses. The court ruled that Vermont's broader reading of "payment" to include manufacturer-funded supplements to pharmacies for discounts on non-Medicare purchases thwarts Congress' intent to reduce the cost of the Medicaid program through manufacturer rebates to the state. Because the PDP orders pharma companies to finance Vermont's reimbursement payments through rebates and the rebates do not create savings for the Medicaid program, Vermont's payments to pharmacies are not "payments" under the federal Medicaid statute 1396r- 8(b)(1) (A). The court therefore ruled that HHS could not properly approve Vermont's PDP.

Thus, Vermont's principal difficulty was its attempt to include PDP beneficiaries under the Medicaid umbrella. The PhRMA litigation pushed that strategy to the point where it could not be sustained because the new PDP beneficiaries were, by definition, not Medicaid eligible.

In May 2000, Maine established the Act to Establish Fairer Pricing for Prescription Drugs with the intention of reducing prescription drug prices for state residents who met criteria established by Maine's Department of Human Services (DHS). The act created the Maine Rx Program and mandated that the state, acting as a pharmacy benefit manager, negotiate rebate agreements with pharma companies through the "publicly supported pharmaceutical assistance program." The voluntary agreements require manufacturers to submit rebate payments to the state every quarter or according to some other established schedule. The act also specifies that the DHS commissioner must use his or her best efforts to negotiate a price better than or equal to the rebate amount calculated under the Medicaid program.

Under the Maine Rx Program, participating retail pharmacies must discount the price of drugs sold to card-bearing residents. DHS then reimburses the pharmacies for the discounts with money collected directly from pharma companies through Maine's Rx Dedicated Fund.

To "induce" companies to join the program, the act says that DHS may release to both healthcare providers and the public the names of manufacturers who do not sign rebate agreements. More significant, nonparticipating companies' products are subject to "prior authorization" requirements, preventing them from being dispensed to Medicaid recipients without the DHS commissioners' approval.

PhRMA challenged the Maine Rx Program as well, seeking injunctive relief against Maine's DHS commissioner and attorney general. Contesting the constitutionality of the act, the association argued that: (1) the Maine Rx Program is preempted by the federal Medicaid statute under the supremacy clause, and (2) the act violates the commerce clause of the US constitution.

PhRMA's preemption challenge was three-pronged. It argued that the program's prior authorization requirement implicitly violates the federal Medicaid statute lacks a legitimate "Medicaid purpose" harms Medicaid recipients by precluding their access to first-choice medications.

Authorization. The court noted that states' "historic police powers," including passing laws regarding the health and welfare of its citizens, should not be superceded by federal acts without a clear expression of intent by Congress, especially when a coordinated effort exists between the state and federal governments. The court ruled that the program's prior authorization requirement does not conflict with the primary purposes of the federal Medicaid statute, because the federal statute's structure and purpose explicitly allows each state to administer "medical services" in a way that best serves the interests of the recipients. The court also said the Medicaid statute limits the use of prior authorization requirements in only two ways: states must respond to prior authorization requests within 24 hours, and, in emergency circumstances, supply a covered outpatient prescription for at least 72 hours. Based on a facial examination of the Maine Rx Program, the court held that the act satisfies those two requirements.

Purpose. Next, PhRMA argued that the program's prior authorization requirement lacks a "Medicaid purpose" or "benefit" that would legitimately allow Maine to interfere with the delivery of quality medical services. Noting that its analysis did not cover Maine's motivations for imposing a prior authorization requirement, the court nevertheless found that the act serves a "Medicaid purpose" for two reasons: first, like Medicaid, the Maine Rx Program seeks to provide medical services to individuals whose financial and personal resources fail to meet those costs, even if some recipients of the Rx program fail to qualify for Medicaid; and second, the increased availability of prescription drugs to uninsured individuals may actually reduce Medicaid expenses.

Access. Last, PhRMA argued that the program's prior authorization requirement can harm Medicaid recipients by impeding access to their doctors' first-choice medications, which conflicts with the Medicaid statute's best interests goal. The court, emphasizing the plaintiff's burden in asserting a facial challenge, found that, although nonparticipating manufacturers are subject to prior authorization, the final determination for specific medicines is based on clinical criteria used by medical professionals.

Despite the court's express concern that second-choice products may be prescribed over first-choice and that the quality of medical care for Medicaid recipients may be adversely affected by prior authorization, it ruled that the record simply did not demonstrate that the act conflicts with Medicaid's requirement that state plans provide healthcare that is in the recipient's best interests. The court therefore held that the federal Medicaid statute did not preempt the act. It also held that the statute did not impermissibly burden interstate commerce.

Structurally, the Vermont and Maine prescription programs are similar. Each state's health department negotiates rebate agreements with pharma companies and administers the respective programs. Vermont's and Maine's programs instruct retail pharmacies to discount qualifying residents' prescriptions, and subsequently, the state reimburses the pharmacies for the discounts. Both programs benefit non-Medicaid residents, although Maine's provision does not explicitly state its eligibility requirements.

The programs also both encourage pharma companies to participate in rebate agreements if they sell medicines through the states' Medicaid programs. A significant difference, however, is Vermont's attempt to create a program by extending Medicaid benefits to new categories of beneficiaries and the corresponding need to obtain approval of HHS to do so. The Maine program, although relying on the Medicaid prior authorization feature as leverage, does not need or seek approval for changes to its Medicaid program. PhRMA has petitioned the US Supreme Court to review the decision upholding the Maine Rx Program. If the court of appeals' decision is affirmed by the Supreme Court, other states will likely model programs on Maine's approach.

Some states have approached the cost issue even more directly. California and Florida have attempted to provide relief for Medicare beneficiaries by placing direct limits on the prices pharmacies can charge such beneficiaries, even though those purchases are not reimbursed by a federal program. Again, the leverage for extracting industry adherence to the new price constraints is the threat of exclusion from the Medicaid program where there is federal-state reimbursement of prescriptions. Whether pharmacies simply absorb the discounts or use them to extract better prices from manufacturers is left to the marketplace.

Another Florida law governing inclusion in the Medicaid formulary seeks supplemental rebates for drugs to "guarantee" that a product will be considered for the formulary. Ultimately, the decision is based on clinical results, official recommendations, and the drug's price compared with competing products-taking into account manufacturers' rebates. As an alternative, manufacturers may ensure inclusion of their products in Florida's formulary by paying for disease management or education programs and guaranteeing the state a minimum savings derived from those programs. (See "A Pound of Prevention, page 76.")

Even with those broader criteria for formulary admittance, PhRMA has challenged that scheme as well, on the basis that federal law does not permit the supplemental rebate requirements without specific authorization, which Florida has not obtained. On December 28, 2001, a US District Judge for the Northern District of Florida held that the Florida law did not violate Medicaid regulations regarding exclusion of products from formularies because, under that law, physicians can still obtain authorization to prescribe them. PhRMA will appeal that determination.

On 7 January 2002, an injunction issued by a state court judge blocked a Michigan statute that would have initially limited inclusion of the state's Medicaid formulary to certain pre-selected "best-in-class" drugs in particular categories. The program would have permitted pharma companies whose products were not selected for the formulary to gain inclusion by lowering the price of their product to match the lowest-price best-in-class drug. In rejecting the program, the judge ruled that the state did not have the statutory authority to require drug companies to offer discounts and that the method of implementing the law violated the Michigan state constitution by placing too much authority in the legislature. The Mental Health Association of Michigan joined with PhRMA in opposing the law, out of concern that it could deprive mental illness patients of access to certain beneficial medications.

Another effort underway is the formation of multi-state coalitions that increase purchasing power for prescription medicines. That approach requires the cooperating states to hire a pharmacy benefit manager to further control costs, negotiate rebates, and manage the prescription use. States joining or actively pursuing such arrangements include Maine, New Hampshire, Vermont, West Virginia, Arkansas, South Carolina, Louisiana, Missouri, Mississippi, and Maryland. New York and Pennsylvania have also discussed a pooling initiative.

Although discount programs are in effect in several states, they have attracted new attention since the Bush administration's attempt to authorize "Medicare-endorsed" discount cards at the federal level. Such programs are like buyers' clubs, in which a card signifies membership in a group that can achieve discounts from sellers through sheer volume. Such programs are usually run by pharmacy benefit managers. Washington, New Hampshire, and West Virginia have all attempted to implement card programs that impose minimal costs on the government and generally seek to extract discounts from retail pharmacies.

It's not surprising that pharmacists generally oppose such programs. The Medicare Rx Discount Card Program proposed by President Bush was challenged by the National Association of Chain Drug Stores and the National Community Pharmacists Association, which secured a preliminary injunction against the program on the grounds that HHS and CMS acted without legal authority when they imposed the program without adhering to the rule-making process required by the Administrative Procedures Act. HHS said it will propose a new policy and publish it for comment. The department is likely to take pharmacists' concerns into consideration and to make some effort to shift at least part of beneficiaries' cost-savings to the pharmaceutical industry.

In a recent development, individual manufacturers have begun to offer discount cards to lower income senior citizens for use in purchasing that company's products only. Pfizer's program would reach low income Medicare beneficiaries with no other prescription drug coverage. The program would limit the participant's costs for purchase of Pfizer products to $15 per month. Other companies, such as GlaxoSmithKline and Novartis, offer similar drug discount card programs under which eligible Medicare beneficiaries receive percentage discounts on the company's products.

In the absence of a comprehensive prescription drug benefit under the Medicare program, state and administrators and legislators are likely to continue to propose programs designed to ease senior citizens' cost burden for medicines, spawning substantial disagreements over how and where to do so. Thus far, two state efforts that exercised the threat of excluding or limiting a product's participation in the Medicaid program have survived legal challenges and have shifted costs to pharma companies and pharmacies. Additional variations and corresponding challenges, however, are likely to continue for several more years.

Although technical legal defenses like those successfully asserted by PhRMA in Vermont and Michigan may forestall the imposition of the more burdensome plans proposed by states-particularly those linked directly to Medicaid benefits-the cat-and-mouse approach to public policy development is likely to continue until the underlying issue of senior citizen prescription drug costs is addressed. Examining the state's total health costs for patients who do not receive adequate medication is likely to be more fruitful in encouraging a true cost-benefit analysis of prescription medications than deterring states from simply demanding discounts. If the Pfizer and Bristol-Myers Squibb disease management and education programs in Florida are successful in reducing state healthcare costs without significantly reducing company revenues, those types of programs could point the way to a win-win solution to a difficult problem.

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