HD78 - Pharmaceutical Costs in the Virginia Medical Assistance Program Pursuant to HJR 403
Executive Summary: AUTHORITY AND STUDY OBJECTIVES House Joint Resolution No. 403 established a joint subcommittee to study rising pharmaceutical costs in the Virginia Medical Assistance Program. The committee was charged with the responsibility of identifying and developing cost-containment measures to effectively manage these escalating expenditures. The resolution states that cost-control measures must be not only fiscally prudent but also equitable to Medicaid recipients, pharmacy providers, and pharmaceutical manufacturers. The committee's study necessarily focused on the complex pricing structures and opposing interests of the retail and manufacturing sectors of the pharmaceutical industry, as well as the purposes, goals, and procedures of the Virginia Medicaid program, inflationary influences in the pharmaceutical industry, and state and federal government directives regarding cost-containment measures. PHARMACEUTICAL COSTS IN THE VIRGINIA MEDICAL ASSISTANCE PROGRAM Background In 1965, Congress enacted Medicaid, originally designed as a federal and state cooperative venture to reimburse health care providers for medical services rendered to specific categories of needy persons. Under the Medicaid program, the federal government is authorized to appropriate matching funds to those states which have submitted and received approval for their medical assistance plans. While state participation in the program is voluntary, each participating state must offer certain required medical services. Federal law permits the states to provide coverage for other optional services, such as dental care and prescription drugs. Federal funding of the approved state program is calculated according to a statutory per capita formula. The Virginia Medicaid Program and Pharmacy Participation In Virginia, the state Medicaid plan is developed and amended by the Board of Medical Assistance Services, and administered by the Director of the Department of Medical Assistance Services (DMAS). The Director and the Board are assisted by the state Advisory Board on Medicare and Medicaid in developing the plan and method of program administration. Pharmacies choosing to participate in the Virginia Medicaid program must comply with a number of licensing and service requirements and must accept as full payment the reimbursement established by DMAS as the reasonable cost or maximum allowable charge. The present participation rate by Virginia pharmacies is over 90 percent. Prescription drugs are one of the most widely covered of state Medicaid optional services, accounting for approximately seven percent of the Medicaid budget, or $67 million. Coverage is provided for most prescribed legend drugs and for certain over-the-counter drugs. Reimbursement of prescription drugs is based on the ingredient cost and the pharmacy dispensing fee. While the dispensing fee in Virginia is set at $3.40, the ingredient cost is less easily determined. The drug ingredient cost is based on the lowest of several different cost determinations, which include "upper limits" set by the federal government, "maximum allowable costs" established by DMAS, estimated acquisition costs, and the pharmacy's "usually and customary charge." Escalating Costs and State Government Response Pharmacy expenditures in the Virginia Medicaid program increased by 71 percent between 1984 and 1988, although the number of Medicaid recipients remained relatively stable. Increased reimbursements to pharmacy providers have been attributed to a number of factors, including the escalating costs of sole-source drugs, increased home health care, and greater use of specialty drugs. The Commonwealth has been repeatedly challenged to reduce these spiraling costs without lowering the quality of care. In the last decade, the General Assembly has created a number of study committees to review indigent health care issues and has charged DMAS to implement cost-containment measures and a drug utilization review program. Perhaps the most significant legislative action appeared in the 1988 Appropriations Act, which directed DMAS to implement cost-containment initiatives to reduce pharmacy expenditures by $5.5 million by fiscal year 1990. With the cooperation of the pharmaceutical industry, DMAS was to consider drug reimbursement methods which better reflect the pharmacy's actual acquisition cost. The agency cited the costs of sole-source drugs as a major contributor to increasing pharmaceutical expenditures and developed several options targeting this source, with recommendations for implementation. DEVELOPING EQUITABLE COST-CONTAINMENT MEASURES The development of equitable and effective cost-containment measures requires consideration of industry pricing issues, state budgetary concerns, agency recommendations, and broader changes affecting the overall health-care environment. Soaring healthcare costs and increasing health insurance premiums, together with shifting payment sources, have been cited as major influences within the health-care environment. The impact of these changes on the provision of pharmacy services must be weighed; the burdens imposed by these changes may be unevenly distributed among retail pharmacies, drug manufacturers, consumers, and the Commonwealth. Rising Drug Prices And Industry Pricing Practices Prescription drug prices are a major factor in the escalation of Medicaid pharmaceutical expenditures. Studies indicate that prescription drug prices more than tripled the rate of inflation from 1981 to 1988. While the dramatic increase in prescription drug prices has been attributed to a number of factors, sole-source drug patent protection is commonly cited as a continuing inflationary influence. Although clinical trials and Food and Drug Administration (FDA) approval may consume seven to ten years of a new product's potential 17-year patent protection, manufacturers nonetheless may maintain a fair amount of market control through these products. While the Committee received a great deal of information regarding industry profit margins and other financial data, the actual pricing of prescription drugs remains somewhat of a mystery. Pharmaceutical manufacturers, citing antitrust concerns, have traditionally declined to discuss their pricing structures, but cite increased investments in research and development as the largest single factor in their costs. There are indications, however, that manufacturers are relying on price increases, rather than on "breakthrough" products, to generate revenues. Data compiled for the United States Senate Special Committee on Aging indicate that most of the "new" products introduced between 1981 and 1988 were classified by the FDA as level "C" drugs, offering little or no contribution to existing therapies. Interestingly, some of these "me-too" drugs were priced higher than the original innovator product. In contrast to the pharmaceutical manufacturer is the retail pharmacy, which may have little control over the prices of prescription drugs. Increased product costs, heavy competition, and restricted third party payments have placed many pharmacies in a "cost-price squeeze." Losses resulting from delayed or reduced third party payments and other administrative costs were traditionally passed on to the private pay consumer, now a shrinking portion of the pharmacy payment base. Retail pharmacy gross profit margins have also declined steadily, although the average prescription price has increased. Pharmacies participating in the Medicaid program may carry additional burdens because they are paid less for Medicaid prescriptions, which typically cost more to dispense. Agency Reimbursement Practices The alarming increase in drug product costs suggests that how the Commonwealth computes reimbursement must be carefully scrutinized. Although federally mandated pharmacy reimbursement standards are broad, testimony before the Committee indicated that many states, including the Commonwealth, may be basing drug reimbursements on a published average wholesale price (AWP) which may not be representative of the amount a pharmacy actually pays for a product. Because pharmacies may earn discounts on the AWP based on timely payments and good business practices, computing drug reimbursements based on the AWP, rather than upon consideration of the product's actual acquisition cost, may result in unnecessary Medicaid expenditures. COST-CONTAINMENT OPTIONS Having received testimony from DMAS, the pharmaceutical industry, the medical community, and other professionals, the Committee weighed a number of cost-containment options and considered the impact of each option on the pharmaceutical industry, recipients, and the Commonwealth. Full funding for the pharmacy component of the Medicaid program was supported by manufacturer representatives to ensure the continuation of the "most cost effective Medicaid service." Under such a proposal, an open drug formulary would permit Medicaid patients to receive the most appropriate medication as determined by a physician. Expenditures for pharmaceutical products would likely increase, while ideally reducing expenditures in other components of the Medicaid program. Also considered was the use of a restrictive formulary to reduce expenditures for products which have less expensive therapeutic alternatives. Inclusion in the formulary would be based on consideration of efficacy, safety, and cost, with exceptions made for nonformulary products upon prior authorization or in emergency situations. Manufacturer rebates and discounts were reviewed as well; establishing a contractual relationship with drug manufacturers would directly address the high costs of pharmaceutical products and would allow the Commonwealth to obtain pricing arrangements similar to those already offered to health maintenance organizations, hospitals, and other large-volume purchasers. Agency regulations could outline requirements for rebate terms and computation. Adjustment of the current reimbursement formula to reflect inflation and the actual acquisition costs of specific products would conform with recent federal directives. Savings to the Commonwealth would likely result as the revised formula would more closely reflect the discounts pharmacies may receive on certain products. Monitoring the use of prescription drugs in the Commonwealth through a Medicaid drug utilization review program is another cost-containment measure considered by the Committee. This option ideally would ensure necessary and appropriate care while curbing aberrant use and prescribing practices. RECOMMENDATIONS The development of cost-containment measures involves careful review of diverse interests: the recipient's interest in quality care, the industry's concern over equitable sharing of financial burdens, and the Commonwealth's commitment to maintaining fiscal integrity as well as fairness in its Medicaid program. After reviewing these interests and conferring with appropriate state agencies, representatives of the medical community and the pharmaceutical industry, and other professionals, the Committee concluded that the most effective and equitable measures would directly address the pricing of prescription drugs and the calculation of reimbursement. The Committee developed the following recommendations: • That a Virginia Medicaid drug formulary be established and that the Board of Medical Assistance Services promulgate regulations establishing an advisory committee to review product applications and to make recommendations to the Board regarding inclusion in the Formulary. • That the Director of the Department of Medical Assistance Services be authorized to negotiate and enter into agreements directly with pharmaceutical manufacturers to obtain rebates for a negotiated percentage of the total product cost to the Department of a specific product to be included in the Virginia Medicaid Formulary and that those products for which a rebate is successfully negotiated or renewed be included automatically in the Virginia Medicaid Formulary. • That upon failure to negotiate or renew a rebate agreement for a specific product, the pharmaceutical manufacturer be required to disclose to the Department information regarding its most favorable pricing arrangements made available to non-state government purchasers of the specific product and that the Director shall establish a rebate for such product regardless of whether the product is included in the Virginia Medicaid Formulary, based on such price information. • That the Department of Medical Assistance Services develop and implement a drug utilization review program. • That the Department of Medical Assistance Services amend its state plan to change the reimbursement formula to better reflect the pharmacy's actual acquisition cost of drug products and the cost to dispense such products, consistent with federal law and regulation. |
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