1. The Health Strategies Consultancy The Intersection of Business Strategy and Public Policy Prescription Drugs in Medicaid: Past Trends and Future Challenges Jonathan Blum, M.P.P. Director Medicaid Practice

2. Blum # 2 Overview I.Why are prescription drug issues so frequently in the news? II.What are the current trends in State prescription drug policies and their implications? III.What will State lawmakers face in 2005 and beyond?

3. Blum # 3 I. Why are prescription drugs in the news?

4. Blum # 4 Samples of Recent Headlines States Trying New Tactics to Reduce Spending on Drugs (Nov 21, 2004) Merck Withdraws Arthritis Medication; Vioxx Maker Cites Users' Health Risks (Oct 1, 2004) Prices Increase on Popular Drugs  Majority of Top-Selling Medicines Cost More Since Election; a 5% Rise for Lipitor (Jan 25, 2005) Public Demand for Cheaper Rx Drugs Pressures Lawmakers (Dec 1, 2004)

5. Blum # 5 Prescription Drugs Are a Major Health Policy Concern to the Public Top Survey Responses to Question about Most Important Health Problem for the Government to Address 46% of all respondents identified health care costs as a top policy priority and 19% specifically identified the cost of prescription drugs SOURCE: Kaiser Health Poll Report. November/December Edition. Available at www.kff.org/healthpollreport/Dec_2004/care/hcp_dec04_2.cfm

6. Blum # 6 Current Spending on Prescription Drugs Total Spending = $179.2B SOURCE: National Health Expenditures. Available at www.cms.hhs.gov/statistics/nhe/historical/t3.asp

7. Blum # 7 Current Medicaid Spending on Prescription Drugs …Growth in Rx spending has outpaced other segments. Source: Urban Institute estimates based on data from Form CMS-64. While Rx drugs make up only 10% of the Medicaid budget…

8. Blum # 8 Prescription Drug Spending 1987 vs. 2003 2003 Total Health Spending Source: National Health Expenditures. CMS website. Available at ttp://www.cms.hhs.gov/statistics/nhe/default.asp. 1987 Total Health Spending

9. Blum # 9 What Are the Factors Fueling Spending Growth Higher Utilization  Increase in the size of the elderly population  New products available  Marketing practices increase demand  Greater consumer awareness and empowerment Increasing Prices  New products to market are more expensive than those they replace  Research and development  Advertising  Inflation  Manufacturer profits

10. Blum # 10 Who Accounts for the Spending Total = 44.2MTotal = $20B

11. Blum # 11 State Programs That Purchase Prescription Drugs Medicaid and SCHIP State Pharmaceutical Assistance Programs (SPAPs) State employee and retiree health plans Prisons and correctional facilities State mental institutions Other specialty government programs

12. Blum # 12 II. What are the current trends in State prescription drug policies and their implications?

13. Blum # 13 A Preferred Drug List (PDL) creates incentives for beneficiaries to use the drugs that are the least expensive for the payer  Similar to a formulary* ― drugs are placed in tiers that encourage a shift in market share toward preferred drugs and away from non-preferred drugs Many States use PDLs to encourage physicians to prescribe some drugs over others in the Medicaid program  Some States enforce their PDLs with prior authorization (PA) meaning that physicians must receive approval from the State Medicaid agency for their patient to receive a nonpreferred drug 1. Preferred Drug Lists * A formulary is a list of preferred drugs that is developed by a health insurance program. The program often uses financial incentives to encourage physicians to prescribe and patients to request the preferred drugs.

14. Blum # 14 PDLs Have Become the Predominant Medicaid Drug Cost Containment Strategy CA AK AZ NV OR MT MN NE SD ND ID WY OK KS CO UT TX NM SC FL GA AL MS LA AR MO IA VA NC TN IN KY IL MI WI PA NY WV VT ME RI CT HI DE MD NJ MA NH WA OH D.C. PDL without supplemental rebates PDL with supplemental rebates Planned PDL SOURCE: Health Strategies Consultancy LLC. October, 2004

15. Blum # 15 What Are Supplemental Rebates? In addition to federally mandated rebates, some States choose to pursue supplemental rebates  Federal law requires pharmaceutical companies to enter into agreements with State Medicaid programs to receive rebates as a condition of coverage of a drug Supplemental rebates are additional payments by the manufacturers negotiated directly with individual States Manufactures offer supplemental rebates in exchange for having their products receive preferred status on the State’s PDL or avoiding prior authorization

16. Blum # 16 Some State Medicaid programs are beginning to combine their purchasing power to negotiate bigger supplemental rebates on prescription drug prices In April 2004, CMS approved the bulk purchasing plan of AK, MI, NH, NV, and VT  In September, HI and MN were added to the pool  The pool is administered by First Health Services CMS has also issued guidance recommending that other States do not join the First Health pool but instead seek new vendors to operate a multi-State pool  LA, MD, and WV are considering forming a buying pool that will be administered by Provider Synergies 2. Multi-State Purchasing Pools

17. Blum # 17 Currently, importation is illegal, but the Medicare Modernization Act (MMA) allows importation with an HHS approved waiver  To date, HHS has not approved any waiver applications  28 States and DC have taken legislative action, most to support importation (5 passed, but 21 failed to pass) The FDA States that importation is not safe and that it cannot ensure the quality of drugs from other countries  States are pressuring the Federal Government to lift the ban on importation  20 States signed a letter to the Secretary of HHS asking him to allow States to import drugs directly from Canada  Vermont sued HHS and FDA for permission to import drugs after they denied a VT waiver request to begin a pilot program 3. Importation from Canada and Europe

18. Blum # 18 States Have Started Importing Drugs from Canada and Beyond Despite Federal opposition, State and local governments have begun helping residents to import prescription drugs  IL, WI, and MI have signed a contract with CanRx to import drugs from Canada, the United Kingdom, and Ireland for State residents  MN, NH, RI, and WI operate State-sponsored Web sites or offer Web links that connect residents with Canadian pharmacies  Many local governments have begun importation programs to provide cheaper drugs to their employees and retirees

19. Blum # 19 Beneficiary Cost-sharing  Medicaid may require beneficiaries to pay “nominal” copayments ($1-$3) to encourage more efficient drug utilization Fail First Program or Prior Authorization  Also known as “step therapy,” this cost containment strategy requires a physician to prove that an alternate therapy is ineffective prior to covering the more expensive drug  Prior authorization requires a physician to gain approval from the State to prescribe a nonpreferred drug to a Medicaid beneficiary Quantity Limits  Impose a dollar limit, dispense amount limit, or limit on number of prescriptions per month/year 4. Cost Sharing, Prior Authorization, and Quantity Limits

20. Blum # 20 5. Bulk Purchasing Some States are pursuing drug savings by purchasing in bulk for many of their State programs West Virginia recently established the WV Pharmaceutical Cost Management Council  Responsible for purchasing prescription drugs for the State employee/retiree plan, Medicaid, SCHIP, and the Department of Corrections Other States pursuing in-State pools are GA, TX, and WA

21. Blum # 21 6. Reduced Pharmacy Fees States use different reimbursement formulas to pay pharmacies for their ingredient cost of drugs  Pharmacies also receive dispensing fees to cover the costs of storage and dispensing of a prescription  States may decrease their pharmacy reimbursement rate or dispensing fees to contain prescription drug costs Recent Decreases in Rx Reimbursement: StateFormulaDispensing Fee Mar 2004Sept 2004Mar 2004Sept 2004 CAAWP-5%AWP-10%$4.05 MEAWP-13%AWP-15%$3.35 MDAWP-10% or WAC+10%AWP-12% or WAC+8%$4.69 NHAWP-12%AWP-16%$2.50$1.75 NJAWP-10%AWP-12.5%$3.73 NMAWP-12.5%AWP-14%$3.65

22. Blum # 22 7. PBM Regulation Pharmaceutical benefit managers (PBMs) provide administrative services and process Rx drug claims for health insurers’ prescription drug plans Some States are moving to regulate PBMs through legal provisions such as:  Establishing a legal "fiduciary duty" to any covered entity or customer  Transparent business practices  Pass through of payments and disclosure of rebates from manufacturers During 2001-04, 32 States have proposed legislation that would regulate PBMs 6 States and DC have enacted PBM laws

23. Blum # 23 What the Savings Associated with these Cost-Containment Policies? Ongoing savings reports fuel interest in PDLs  MI announced its PDL saved the state $3 million per month in first year  IL and WA demonstrated market share shifts of drugs after PDL was implemented (80+ percent in some classes) While multi-State purchasing pools have been slow to form, the First Health pool expects high savings  The first five states included predicted $14 million in first year savings Potential savings from importation are uncertain  Statewide programs have experienced low participation rates, but some local programs have reported significant savings  CBO and other health policy experts estimate that Rx drug importation will result in “negligible” savings in drug spending  Canadian health officials are threatening to ban drug exports to the US SOURCE: Cathy Bernasek et al. Michigan’s Medicaid Prescription Drug Benefit. Kaiser Commission on Medicaid and the Uninsured. Jan 2003; Medicaid Pharmaceutical Cost-Containment Approaches in Four Case Study States. The Health Strategies Consultancy LLC. November 2002. (Unpublished paper prepared for CMS); Julie Appleby. States Now Allowed to Band Together to Lower Drug Costs. USA Today. 23 April 2004; CBO. Would Prescription Drug Importation Reduce US Drug Spending. 29 April 2004. Available at http://www.cbo.gov/showdoc.cfm?index=5406&sequence=0.

24. Blum # 24 What is the Impact of these Cost Containment Policies? To date, few studies have examined the impact of drug cost containment efforts on beneficiaries’ health care outcomes  Beneficiary advocates and some disease groups argue that limiting access to Rx drugs will hurt beneficiaries health outcomes  States argue that beneficiaries can be shifted to therapeutically equivalent drugs without hurting patients’ health Existing research shows mixed results  A recently released study of the GA Medicaid prior authorization program for proton pump inhibitors (PPIs) shows positive outcomes  The state saved $23M by switching patients to lower-cost therapies  Researchers found that patients who did not receive the PPI were no more likely to have greater total medical expenditures  Prior authorization had the effect of altering physicians’ standard of care  Findings from Texas show that cuts made to mental health services in the state’s Medicaid and SCHIP programs resulted in increases in emergency room visits and imprisonment of the mentally ill  This is expected to cost the state $1.5B annually SOURCE: S. Soumerai. Unintended Outcomes of Medicaid Drug Cost-Containment Policies on the Chronically Mentally Ill. Journal of Clinical Psychiatry. 2003: 64 Suppl 17:19-22; Thomas Delate, et al. Clinical and Financial Outcomes Associated with a Proton Pump Inhibitor Prior- Authorization Program in a Medicaid Population. The American Journal of Managed Care, January 2005; Mental Health Association in Texas. Turning the Corner, Feb 2005. Available at http://www.mhatexas.org/TurningtheCorner.pdf.

25. Blum # 25 How do Manufacturers Respond to These Cost-Containment Policies? Manufacturers generally oppose these cost containment policies and fight for greater drug access for beneficiaries  Want many drugs included on the PDL  Oppose prior authorization and fail first requirements  Encourage States to avoid multi-State purchasing pools and negotiate rebates individually  Some manufacturers have stopped supplying Canadian pharmacies and wholesalers that sell drugs to the U.S.

26. Blum # 26 III. What will state lawmakers face in 2005 and beyond?

27. Blum # 27 Subsidy Levels under MMA Depend on Poverty Levels Duals, including QMBs, SLMBs, and QIs, automatically eligible for subsidies available to those <135% FPL regardless of income and assets Assets test applied to all other low-income beneficiaries Duals in nursing homes pay no cost sharing About 36% (~14 million) of total Medicare population will be eligible for the subsidies PremiumDeductibleCopays Coverage Gap Up to 100% FPL and a dual None $1 / $3None Up to 135% FPLNone $2 / $5None 135 - 150% FPL Sliding Scale$50 15% of drug costNone *100% of FPL in 2004 is $9,310 for one-person household and $12,490 for two-person household; 135% of FPL is $12,569 and $16,852, respectively; 150% of FPL is $13,965 and $18,735, respectively. **Partial Duals are beneficiaries eligible for Part D and Medicare Savings Programs (e.g., QMBs, SLMBs, QIs). These beneficiaries receive assistance from Medicaid for Medicare cost sharing, but do not receive comprehensive Medicaid coverage.

28. Blum # 28 Management of dual eligibles’ drugs will shift to Medicare Still pay a portion of duals’ drug costs through a phased-down State contribution (“clawback”) Opportunity to shift SPAP enrollees to Medicare Determine eligibility for subsidies and enroll beneficiaries  Social Security Administration also has this responsibility Pressure to provide wrap-around benefits  Medicare private plans will operate a formulary; some drugs often prescribed to duals may not be covered Medicare Prescription Drug Benefit and the Impact on States

29. Blum # 29 “Clawback Formula” States are still required to pay portion of duals’ drug costs through MOE formula “Clawback” formula retains State’s responsibility from 75% in 2006 to 75% in 2015  Based on 2003 spending amounts and in most years increased over time by growth in Part D  States continue to pay but have no influence (# of duals)  (Duals’ drug per capita costs [weighted] in 2003)  (1/12)  (SMAP)  (Drug Inflation)  (factor)

30. Blum # 30 States May Seek New PDL Strategies to Offset Potential Revenue Loss Shift in duals will negatively affect States’ leverage for negotiating discounts with manufacturers  Duals constitute over half of fee-for-service drug spending for most States Multi-State purchasing pools moving forward to increase beneficiary volume  IntraState government purchasing pools as well (i.e., merging Medicaid with other State programs) States may also look for savings through:  Carving out drug costs for beneficiaries in managed care so they are subject to the PDL  Placing new restrictions on previously exempted classes (e.g., mental health)  Disease management

31. Blum # 31 Trends in Pharmaceutical Development ― What are the Next Innovations? The next frontier of pharmaceutical development will include many very expensive therapies, including:  Oncology treatments  Gene therapy and genetic screening  Cardiology technologies  Obesity drugs States will face increasing pressure to cover new, more expensive drugs in their Medicaid programs

32. Blum # 32 Greater Push for Evidence-based Medicine Oregon has spearheaded an initiative to evaluate the comparative effectiveness of pharmaceuticals within the same class  Broad dissemination of research  Where no conclusive research, Oregon researchers conclude drugs are comparably effective  13 States and AARP have joined effort  Many States are using these reports to develop PDLs May indicate a greater trend to using evidence- based medicine principles when deciding to pay for other health care services (e.g., medical devices, surgeries, etc.)

33. Blum # 33 Participating States in Oregon’s Drug Effectiveness Review NC RI CT DE MA NH TN PA NY VT ME MD NJ SC FL GA AL MS VA KY MI WV MT MN NE SD ND WY OK KS TX LA AR MO IA INIL WI CA AK AZ NV OR ID CO UT NM HI WA OH D.C. Drug Effectiveness Review Project Participants

34. Blum # 34 Areas of Consideration for Evidence Based Medicine Sufficient clinical evidence is lacking; industry is and Congress seems to be resistant to fund comparative research Requires that states have clinical expertise to evaluate evidence-based recommendations Some analysts believe that health care costs may increase if all beneficiaries follow recommended treatment guidelines Industry and some disease groups staunchly oppose

35. Blum # 35 Unlikely Federal Action on Importation The final report of the HHS Task Force on Importation, released in December, did not support legalizing importation  Report found that personal importation could not be conducted in a safe and effective way  It also suggested that legalized commercial importation would only produce minor financial savings Task Force suggested that importation could have risk such as:  Hurting research and development efforts  Compromising intellectual property rights  Increasing liability for consumers, manufacturers, distributors, and pharmacies

36. Blum # 36 Administration’s Policy Goals for Medicaid $60 billion in Federal Medicaid outlays  Federal payments to States would be dramatically reduced Reduce Federal funding for optional populations and benefits  Prescription drugs are an “optional” Medicaid benefit Greater State flexibility (e.g., block grant) may provide more freedom to limit prescription drug benefits

37. ©The Health Strategies Consultancy Bottom Line: Prescription drug policy will only become more complicated in 2005, and current strategies may no longer be as effective

38. ©The Health Strategies Consultancy Appendix

39. Blum # 39 Terms of “Clawback” Formula TermDefinition Number of Dual Eligibles Beneficiaries in the State enrolled in Part D and receiving comprehensive Medicaid coverage; includes medically needy, excludes Pharmacy Plus 1115 waiver beneficiaries Duals’ Drug per Capita Costs Drug per capita costs in 2003 (Managed care and FFS), which account for supplemental rebates SMAPState share of Medicaid costs (100% - FMAP) Drug InflationIn 2006, is cumulative increase in national prescription drug spending from 2003-6; starting in 2007, is the annual increase in Part D per capita spending FactorReduces State contribution to 90% in 2006, decreasing each year by 1 2/3% until 75% in 2015 and thereafter

40. Blum # 40 Glossary of Terms AWPAverage Wholesale Price CMSCenters for Medicare and Medicaid Services FDAFood and Drug Administration HCBSHome and Community-Based Services MOEMaintenance of Effort PBMPharmaceutical Benefit Managers PDLPreferred Drug List QI Qualifying Individual QMBQualified Medicare Beneficiary SLMB Specified Low-income Medicare Beneficiary SMAPState’s Share of Medicaid Costs SPAPsState Pharmaceutical Assistance Programs