Medicaid Rebates on Front Burner

Published August 1, 2002

On July 23, the U.S. Senate voted down both Democrat- and Republican-backed bills that would have added a comprehensive prescription drug benefit to Medicare, most likely postponing any action on the long-debated program until 2003. But at the state level, efforts to give consumers a break on high prescription drug prices continue, producing strident election-year rhetoric, litigation, and warnings from the medical community.

Stabenow Medicaid Amendment

On July 19, the Senate voted 56-43 to approve an amendment to a bill on drug patent reform that would give states wider legal authority to demand supplemental rebates from prescription drug companies. The Stabenow Medicaid Amendment would allow other states to follow the lead of Maine, which in 2000 adopted a program requiring drug companies to negotiate price discounts for low-income residents who do not qualify for Medicaid in exchange for having their products included in a state-authored list of pre-approved drugs.

In June, the U.S. Supreme Court agreed to hear a legal challenge to Maine’s program filed by the Pharmaceutical Research and Manufacturers of America (PhRMA), which had appealed the case to the Supreme Court following rejection of its suit by the 1st Circuit Court of Appeals. The Court is not expected to hear the case before October.

Other state efforts to impose supplemental rebates on drug companies are also facing litigation. According to Sen. Debbie Stabenow (D-Michigan), author of the amendment, “It is my hope that my Rx Flexibility for States Act will get these programs out of court and provide lower prices for those who need them most. In the face of soaring prescription drug prices, states should be able to do all they can to pass on Medicaid rebates to their residents.”

According to PhRMA President Alan F. Holmer, “the Senate vote for the Stabenow Amendment is a setback for patients. We strongly oppose the amendment because it could restrict access to medicines for millions of Medicaid patients. Senator Stabenow’s measure would put state bureaucrats, not doctors, in charge of medical decisions for Medicaid patients and would force Medicaid patients to the back of the line when it comes to state-of-the-art medicines.”

Rebates and Formularies

Federal law already requires that drug manufacturers charge state Medicaid programs the lowest price of any domestic, non-federal purchaser of prescription medicines, including wholesalers and HMOs, in return for the privilege of having their drugs included in a federal list, or formulary, of drugs approved for Medicaid reimbursement.

Under the Medicaid Drug Rebate Program, created in 1990, manufacturers of brand-name drugs sign national rebate agreements with the federal government paying either a rebate equal to 15.1 percent of the average manufacturer’s price (AMP) or the difference between the AMP and the best price, whichever is greater. An 11 percent rebate is paid for generic drugs.

Drug companies agree to sign the rebate agreements because being excluded from the formulary means doctors must get special permission from state authorities (called “prior authorization”) before prescribing the drug. Many doctors switch patients to second-choice drugs to ensure reimbursement by Medicaid and avoid the delays and paperwork of the approval process.

Some 500 drug manufacturers have signed federal rebate agreements, and 1,827 brand-name prescription drugs are included in the federal formulary. According to industry sources, the pharmaceutical industry paid $16 billion in Medicaid rebates between 1991 and 1999, and $3.3 billion in 1999. States received about $1.4 billion in rebate payments in 1999.

The debate over supplemental rebates arose when California, Florida, and Michigan sought to extract further concessions from brand-name drug manufacturers by requiring rebates in addition to those required by the federal agreements, and for persons other than those eligible for Medicaid. The name-brand drug industry has argued that a drug cannot be removed from a state’s Medicaid formulary unless it lacks “a significant, clinically meaningful therapeutic advantage” over other drugs in the formulary, and unless an explicit waiver has been issued by the Secretary of the U.S. Department of Health and Human Services.

According to Merrill Matthews, a visiting scholar at the Institute for Policy Innovation, “Senator Stabenow’s amendment would authorize every state to require drug manufacturers to provide their lowest prices not only to the Medicaid program but also to everyone else. This would create a regime of price controls throughout the nation by mandating, in effect, that all drugs be sold only at the lowest price at which a company sells to any purchaser within the U.S.”

Impact on Consumers

Many physicians and health policy experts warn that using restrictive formularies to control spending on prescription drugs is poor public policy. Formularies are often made obsolete by the release of new drugs, denying Medicaid patients access to the latest and best drugs. Access to drugs by the poor is, in effect, being held hostage in order to negotiate price concessions from drug companies.

Requiring prior approval is often time consuming and expensive even under the current regime, posing a risk to the health and safety of patients. “Anytime you go to a prior-approval process, the bureaucracy is unbelievable,” Randy Miley, senior vice president of LifeStream Behavioral Center, a hospital for the mentally ill in Lessburg, Florida, told the Orlando Sentinel. “A patient shouldn’t have to wonder whether they are getting their medications.”

Florida’s experiment with supplemental rebates has been closely watched. Preliminary results confirm the fears of the program’s opponents. Dr. Cyneetha Strong-Smith, a member of the Pharmaceutical and Therapeutics Committee responsible for creating the state’s new formulary, told the Orlando Sentinel that the state’s Medicaid bureaucracy in the past sometimes didn’t return phone calls asking for prior approval. “Practically and realistically, my experience is it has just not worked,” she said.

Selecting which drugs to include in Florida’s formulary has become a political as well as medical exercise, with lobbying groups for the mentally ill and AIDs patients demanding that all drugs used by their constituents be automatically reimbursed under Medicaid. The arguments used are good ones—not all mentally ill patients respond the same or at all to many psychiatric drugs, and AIDs patients often need “cocktails” of many different prescription drugs–but hardly unique to patients of these types. Many patients react differently to many drugs, and giving doctors and patients the flexibility to experiment with different drug regimes would benefit them all.

In June, the Pharmaceutical and Therapeutics Committee announced that 71 psychiatric and HIV drugs would be placed on the formulary because their manufacturers agreed to pay supplemental rebates. Advocates for the mentally ill and AIDs patients were furious because access to drugs not on the formulary is likely to be delayed or restricted by doctors who believe the drugs are not covered by Medicaid.

Price controls and forced rebates artificially inflate demand for prescription drugs by insulating customers from the true cost of the drugs they choose to buy. In the case of seniors, many of whom take multiple prescription drugs, this poses a genuine threat to public health. Michael Arnold Glueck M.D. and Robert J. Cihak M.D. point out that 10 to 20 percent of hospitalizations of seniors are the result of drug side effects and unexpected interactions.

According to Glueck and Cihak, “No physician can completely understand all the interactions possible when multiple drugs are used.” Reducing drug prices across the board will compound what is already a growing public health problem.

For more information . . .

“Florida’s Folly: The Darker Side of the Sunshine State’s Drug-Pricing Scheme,” by William Orzechowski and Robert C. Walker, is available through PolicyBot. Request document #3264104.