State Drug Discount Plans Likely to Hurt More than They Help

Published July 1, 2003

On May 19, a 6-3 ruling of the U.S. Supreme Court gave a green light to Maine Rx, the State of Maine’s plan to extract prescription drug discounts, or rebates, from pharmaceutical manufacturers for drugs sold to consumers without prescription drug coverage.

Maine Rx has been tied up in court since it was approved by the legislature in 2000.

The Court’s decision was not an endorsement of prescription drug rebates. As is its job, the Court ruled on matters of law only.

Policymakers now should do their jobs by re-evaluating the effects such a government pricing proposal would have on the delivery of health care.

Unintended Consequences

Under Maine Rx, the state would lower the price of prescription drugs for residents without prescription drug coverage by requiring pharmaceutical manufacturers to pay a rebate similar to that offered under Medicaid.

The sponsors of Maine Rx offered it with the best of intentions. But their program is based on fundamentally erroneous assumptions and, as a result, its effects will be the very opposite of what they intended.

Federal law already requires pharmaceutical manufacturers to provide rebates, averaging about 20 percent off the retail price, to states for drugs that are supplied through the Medicaid program. Under Maine Rx, the state would require a similar discount for drugs prescribed to the expanded population served by the new program.

The state would impose a prior authorization requirement on the drugs of any manufacturer who opted not to discount its drugs for the Maine Rx population. This would make it more difficult for doctors to prescribe those drugs, ultimately restricting patient access to life-saving and life-improving medicines.

If Maine were successful in getting drug manufacturers to offer further discounts, other states would follow. Widespread demand for discounts could lead some pharmaceutical manufacturers simply to raise the base price of their drugs in order to recoup the discounts–essentially government-caused prescription drug price inflation.

Alternatively, drug manufacturers might cut expenses (to reflect the lower revenues they receive) by reducing their investment in research and development. Pharmaceutical firms invest billions of dollars every year in the research that is necessary to develop breakthrough treatments and cures. If those firms are making less money on the drugs they sell, they will have less money to invest in new drugs.

Mandates Are Not Negotiations

The advocates of Maine Rx say they are hoping to mimic the purchasing power of large private-sector entities by acting as pharmacy benefits manager for the state’s uninsured population. But in the private sector, discounts are negotiated, not mandated or secured by threat.

Some public-sector programs successfully mirror the private sector’s process of negotiation. Individuals covered by the Federal Employees Health Benefits Program (FEHBP), for example, are able to choose from competing plans that offer a variety of coverage options, including coverage for prescription drugs. A less-costly plan offers a restricted prescription drug benefit, while another plan is more costly but offers a broader drug benefit. The individual chooses the plan that best suits his or her needs.

Making Matters Worse

Maine Rx would weaken an already-suffering patient-doctor relationship. The prior authorization requirement is a burden on physicians and restricts their ability to treat patients as they see fit. State governments have already interfered in this relationship, most recently with cost-cutting efforts that limit the supply of prescription drugs available to Medicaid beneficiaries. Access to health care is not improved when a physician’s treatment decisions increasingly require the approval of government bureaucrats.

Maine Rx would also jeopardize existing private insurance coverage. When government-run health care programs are expanded, private programs are invariably contracted. Maine Rx targets individuals without prescription drug coverage. Individuals who are self-insured and employers–especially small businesses for whom employee insurance coverage is a costly benefit–might very well drop prescription drug coverage from their plans, knowing Maine Rx will be there to pick up the pieces. This is not a consequence to be encouraged.

Need for Congressional Action

The majority of Americans without prescription drug coverage are either elderly on Medicare with no supplemental prescription drug coverage or uninsured. Two key changes in federal policy would significantly improve their situations.

  • Comprehensive Medicare reform. By integrating prescription drug coverage into a full package of health insurance, based on the FEHBP model, senior citizens without prescription drug coverage would have access to a variety of coverage options.
  • Expanding coverage for the uninsured. Providing uninsured individuals with refundable health care tax credits would enable individuals to obtain the insurance coverage that best suits their needs, including access to the prescription drugs of their choice.

Alternatives for the States

While federal policymakers continue to work toward reform, states can and should adopt innovative approaches based on consumer-directed principles that improve the overall financing and delivery of medical care.

For example, state officials could encourage enrollment in existing private discount drug programs and provide financial assistance to individuals who need help covering co-pays or annual enrollment fees. (See “Stop Demonizing the Good Guys,” Health Care News, November 2001.)

Such an approach has been proposed at the federal level by health policy analysts at the American Enterprise Institute (AEI) and Galen Institute to address the need to secure prescription drug coverage for the minority of Medicare patients who do not have it. This approach could easily be replicated by the states.

Also, adapting consumer-directed approaches within Medicaid, such as the highly successful “cash-and-counseling” programs tested in Arkansas, Florida, and New Jersey, would allow individuals to determine which drugs and treatments they want to purchase.

Limiting Government’s Role

Maine Rx’s goal–to provide affordable prescription drugs–is a good one, but the program’s method is based on the flawed assumption that government bureaucrats are best equipped to make key health care decisions on behalf of patients.

On the contrary, the best way to ensure individuals have access to the prescription drugs and treatments they need and want is to allow them to make those decisions on their own, limiting the government’s role to financially assisting low-income persons who need it.

Nina Owcharenko is health care policy analyst at The Heritage Foundation. Her email address is [email protected].