The Medicaid program comes with a significant price tag for states that continues to rise with every budget cycle, increasing from an average of 13 percent to 16 percent from state fiscal years (SFYs) 2012 to 2016. In fact, Medicaid spending grew faster than all other state programs in SFYs 2016 and 2017.

Medicaid expenditures are projected to further increase as the program’s enrollment grows in states newly expanding Medicaid. Faced with these mounting fiscal pressures, states are exploring new ways to manage Medicaid spending by targeting rising prescription drug costs.

State Approaches to Managing Medicaid Drug Costs

Concerns about rising drug prices and high-cost drugs have prompted state efforts to control Medicaid drug spending. Under federal regulation, state Medicaid drug benefits must cover nearly every medication approved by the U.S. Food and Drug Administration. States use several traditional policy levers to manage these costs, including:

  • preferred drug lists;
  • prescribing limits;
  • utilization management (prior authorization or step therapy);
  • generic substitution; and
  • supplemental rebates.

Despite these efforts, drug costs continue to drive increases in state Medicaid spending. Moreover, some states have exhausted the extent of their power to restrict use of certain high-cost drugs in Medicaid. As a result, states are turning to innovative policy alternatives to tackle rising drug costs, such as:

  • drug spending caps;
  • pharmacy benefit manager transparency;
  • alternative payment models;
  • value-based purchasing;
  • common preferred drug lists;
  • payment reform for physician-administered drugs;
  • anti–price gouging;
  • importation;
  • all-payer rate setting; and
  • price transparency reporting.

Common Preferred Drug List

Most states direct providers to prescribe specific, or “preferred,” drugs over others for Medicaid patients to save costs using a preferred drug list (PDL). A PDL is a list of drugs deemed most medically appropriate and cost-effective that do not require prior authorization. Specifically, state committees of pharmacists and providers consider the comparative effectiveness of drugs in a therapeutic class, any supplemental rebates offered for the drug, and overall potential for cost-savings to Medicaid. Using these criteria, PDL drugs tend to cost the state less. States began using PDLs in the early 2000s to drive use of preferred drugs in Medicaid fee-for-service (FFS) models. Today, most state Medicaid programs and contracted Medicaid managed care organizations (MCOs) use PDLs, and many states require MCOs to use a common PDL to further manage costs within the managed care population.

Currently, there is no uniform definition of a PDL across states. However, some states recently have put a spin on this traditional lever to try to maximize savings by creating a single PDL to use across health care entities within the state, including Medicaid.

For example, Delaware seeks to increase its drug purchasing power by developing a common PDL for certain drug classes, for use across state agencies, including Medicaid, the Statewide Benefits Office, and the Department of Correction, as well as major hospitals. The state aims to lower net costs per patient for all drug classes on the PDL by 1 percent in the first year and 5 percent in the second year. The state now is identifying the drug classes that are likely to generate the most savings to include on the PDL. Meanwhile, Washington state on Jan. 1 implemented a common PDL exclusively for Medicaid FFS and MCOs, as directed by its 2017–2019 state operating budget. Through common PDLs like these, states aim to maximize federal and supplemental rebates in each drug class.

Drug Spending Growth Cap

High-cost drugs continue to drive Medicaid spending, even after rebates. Under federal regulation, states can charge nominal cost sharing for high-dollar drugs or limit their use, such as through PDLs, prior authorization, or step therapy. New York is spearheading a more direct approach to manage high-cost drugs through a Medicaid spending growth cap, which limits state drug spending and requests additional rebates from manufacturers of drugs the state identifies as cost-drivers. While the state already has a spending cap in place to monitor annual Medicaid program growth overall, the new cap targets drugs projected to drive the state’s Medicaid spending and their manufacturers specifically.

New York’s Medicaid drug spending growth cap was established by its SFY 2017 budget and is in effect for SFYs 2018 and 2019. If projected drug spending exceeds the cap, the state identifies drugs expected to be major contributors to spending for review by the state’s Drug Utilization Review Board (DURB), which sets and requests additional “target” rebates from the drugs’ manufacturers. Interestingly, if a manufacturer does not agree to the DURB’s requested additional rebate, then the state can impose use restrictions on all of the manufacturer’s drugs, not only those under review. The state expects to save $119 million in SFY 2018, or about 11 percent of its projected drug spending. However, after factoring in rebates, the state’s drug spending actually amounts to just 1 percent of its total projected Medicaid costs in SFY 2018. Other states may consider this approach if New York can produce meaningful savings.

Importation of Drugs from Canada

Proposals to import prescription drugs from countries like Canada have become hotly debated in the public battle against drug costs. Some state and federal stakeholders have touted the idea as a way to lower drug costs for everyone, arguing that manufacturers willingly charge less for the same drugs in other countries. Since 2003, federal law has allowed the U.S. secretary of health and human services (HHS) to permit states to import prescription drugs from Canada, but this permission has not been granted to any states. HHS Secretary Alex Azar has publicly opposed importation, arguing that it would not significantly lower drug costs and that the U.S. could not guarantee the safety of imported drugs. Still, nine state legislatures introduced drug importation bills in 2018, including Colorado, Louisiana, Missouri, New York, Oklahoma, Utah, Vermont, West Virginia, and Wyoming.

Earlier this year, Vermont became the first and only state to enact a law to import drugs from Canada. Specifically, the law creates an importation program for the state to purchase high-cost drugs from authorized wholesalers and make them available to Vermonters through local pharmacies. However, program implementation is subject to approval by the federal government. Vermont’s Agency for Human Services must next propose a detailed implementation strategy to its state legislature by Jan. 1, 2019, and then to HHS by July 1, 2019. The state will have to demonstrate how the program would yield substantial savings without risking adverse consequences to public health.

All-Payer Rate Setting for Drugs

Some states are considering an all-payer rate-setting system for prescription drugs that would set a single price for all purchasers for certain high-priced drugs. An all-payer rate-setting model establishes a state drug cost review commission and sets payment or reimbursement rate limits for how much drug purchasers, such as state Medicaid programs, pay for drugs. Under this model, the commission would examine the cost of a drug to the overall health system (i.e., hospitals, distributors, pharmacies, insurers, and patients), weighing various economic factors.

Earlier this year, Maryland, the only state operating an all-payer hospital rate system, introduced an all-payer rate-setting bill targeting prescription drugs. The bill required brand and generic manufacturers to report select information to the state’s drug cost review commission if their launch prices or price increases exceed certain thresholds. The commission would use the information to determine if the drugs create affordability challenges within the state (e.g., for hospitals or patients). If found to do so, the commission would set a statewide reimbursement rate in an attempt to make the drugs affordable. The bill passed one chamber before the legislative session ended in April, but it is likely to be reintroduced in 2019.

Association Resources

What does state action on Medicaid drug costs mean for essential hospitals? As the Medicaid program varies state-to-state, specific initiatives could affect essential hospitals in different ways. Join us on a Dec. 5 webinar for a deep-dive into federal and state Medicaid drug policy initiatives and the impact on essential hospitals. In addition, please see our companion post exploring federal efforts to slow the rising cost of drugs in the Medicaid program.