Prescribing a Cure

Texas Lawmakers Look to Reduce Prescription Drug Spending  

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Legislative Affairs Feature - December 2000

By  Ken Ortolon
Associate Editor

Prescription drugs -- what they cost and how we, as a society, are going to pay for them -- was a key issue in the recently completed election. Pharmaceuticals are the fastest growing segment of the nation's health care delivery expenditures and have become the source of much discontent for retired Americans living on fixed incomes and current workers tired of seeing their health insurance premiums continue to rise.

According to a recent Kaiser Family Foundation study, Americans spent $91 billion on prescription drugs in 1998. That is expected to climb to $243 billion in 2008. Between 1970 and 1998, prescription drug costs grew from 7.4% to 15.4% of total health care spending. That, according to The New York Times , has had a disproportionately harsh impact on the elderly who make up only 13% of the country's population but account for a third of all prescription drug expenditures. And Medicare currently provides no drug benefit.

Another study, the 2001 Segal Health Plan Cost Trend Survey, shows that prescription drug benefits will continue to be the highest component of group health plan costs in 2001. Increases are projected at an annual rate of 20%. The high drug trend forecasts will add 2% to 3% to total medical plan expenditures next year, the survey shows. Drug claim expenses are expected to approach 15% of active health plan costs by 2001, up from 10% in 1995.

During this year's race for the White House, both major party presidential candidates touted plans to provide prescription drug benefits to elderly Medicare beneficiaries and campaigned on the issue extensively. In his campaign, Vice President Al Gore particularly vilified the pharmaceutical manufacturers for profiteering at the expense of the sick and the elderly.

Congressional candidates across the country, particularly the vice president's fellow Democrats, also campaigned hard on the issue in an effort to win the all-important vote of the elderly population -- a group that votes in large numbers.

The political rhetoric threatened to turn the drug companies into this year's version of the "evil" tobacco or managed care industries.

But with the election dust settling and the work of legislating for another 2 years looming on the horizon, it's not just Congress and the new administration in Washington, DC, that will have to grapple with how to pay for prescription drugs for our elderly, low-income, and other populations. State legislatures throughout the country are gearing up to try to find ways to rein in ever-increasing prescription drug budgets. Gordon Smith, executive vice president of the Maine Medical Association, says he won't be surprised if every state legislature tries to tackle the issue next year. The 77th Texas Legislature will be no exception when it convenes next month.

The illness

Last fall, Texas House Speaker James E. "Pete" Laney (D-Hale Center) directed the House Public Health Committee to review the role of the pharmaceutical industry in delivering health care in Texas. His charge specifically asked the committee to identify cost-drivers and opportunities to reduce costs. The committee also was asked to assess the role of pharmacy benefits managers and pharmacies.

The attention to prescription drug costs was particularly timely. State Rep Patricia Gray (D-Galveston), chair of the Public Health Committee, says state Employee Retirement System (ERS) officials have given notice that they will ask the legislature for $700 million in additional funds next year to cover increased prescription drug costs for more than 500,000 people within their system.

In 1999, lawmakers voted to give state workers a $100 per month pay raise. Earlier this year, ERS Executive Director Sheila Beckett told the Austin American-Statesman that increases in copayments on prescriptions and doctor visits would eat up about $60 of that raise. Those increases occurred even though ERS hired Merck-Medco nearly 2 years ago to act as pharmacy benefits manager for the ERS health plan and to try to put the brakes on rising drug costs.

Robin Strongin, senior research associate for the National Health Policy Forum, says public and private payers across the country are experiencing similar increases in the cost of prescriptions. "Clearly, the numbers support that the portion of a health care budget going for drug costs -- whether it's a Medicaid budget or a state employee health plan budget or what have you -- is going up," she said. The National Health Policy Forum is a nonpartisan health care think tank based at George Washington University in Washington, DC.

The causes of the explosion in prescription costs are varied, and Representative Gray, Ms Strongin, and others say solutions to the problem are likely to be complex.

The diagnosis

Ms Strongin says higher expenditures for prescription drugs cannot be pinned solely on rising drug prices or pharmaceutical industry profiteering, as some politicians would have voters believe. Prescription drug utilization also has risen, largely due to an aging population that is more reliant on prescription medications. Advances in pharmaceutical technology also are making available newer, more effective, and often more expensive drugs.

"There's a whole complex set of factors driving prescription drug expenditures," said Don Muse, president of Muse and Associates, a Washington, DC-based health care consulting firm. "For example, newer therapies have much fewer side affects, so they are being taken by larger portions of the population."

And, direct-to-consumer advertising of prescription drugs has spurred new demands.

A study published in September by the National Institute for Health Care Management, a nonprofit, nonpartisan group that researches health care issues, concluded that such advertising could be responsible for 10% to 25% of recent prescription drug spending increases. The study found that 25 of the most heavily advertised drugs accounted for more than 40% of the increase in retail drug spending in 1999.

There is debate over whether that is all bad. While some health care policy analysts blame direct advertising for increasing demand for prescription drugs, other analysts and pharmaceutical industry officials point out that such advertising may also be making patients more aware of illnesses they may not have known they had or treatment options of which they were unaware.

"Obviously, more people are taking prescription drugs because of the advertising," Mr Muse said. "The real question about direct-to-consumer advertising is, does it generate unnecessary prescription drug usage? Maybe sometimes, but a lot of times, no." Austin lobbyist Frank Santos, JD, who represents the Pharmaceutical Research and Manufacturers of America (PhRMA), admits that direct advertising probably has increased demand for some products, but it also has increased patient awareness of their own medical conditions.

"The anecdotes I hear are that it has increased peoples' awareness of certain diseases they may or may not have known they had and of available treatment options they may or may not have known about," he said.

The cure

Faced with those complexities, Representative Gray says her committee has focused its attention on the groups it believes have the most realistic chance of helping. The Public Health Committee report submitted to House Speaker Laney in late October laid out several policy options for bringing prescription coverage to the low-income elderly and for reducing state drug expenditures, but made no recommendations on which options to pursue.

"We want to try to find a way to extend prescription drug coverage to the poorest of our senior and disabled populations by covering low-income Medicare beneficiaries," Representative Gray said. "These are people below 120% of poverty level with more than $2,000 worth of assets. We currently pay their Medicare premiums to give them hospitalization and physician coverage, but we don't pay their prescription drug coverage."

Representative Gray says the committee also looked at ways to pool the state's drug purchasing programs to increase its power to negotiate lower drug prices from the pharmaceutical industry. By pooling the drug purchases of the state's criminal justice, mental health and mental retardation, and university systems with those of the Teacher Retirement System, ERS, and the state Medicaid program, Texas could form a pool with $2 billion to $3 billion in purchasing power, she says.

A similar concept already is being put to the test in the Northeast. Mr Smith from the Maine Medical Association says six New England states -- Maine, Vermont, New Hampshire, Connecticut, Rhode Island, and Massachusetts -- have joined New York in a purchasing pool that will attempt to leverage multistate purchasing power into lower drug costs for government health care programs in all seven states.

"We know that if we speak for millions of people in that Northeast corridor, the companies just can't walk away from us," Mr Smith said.

Meanwhile, Maine has gone one step farther than the purchasing cooperative and may have set the stage for pharmaceutical price control debates in states across the country. In August, a new state law took effect that Maine lawmakers hope will force drug companies to negotiate lower prices for the state's Medicaid population, it's low-income elderly drug program, and some 300,000 uninsured residents.

The law says companies that fail to negotiate will see their drugs subjected to prior authorization requirements under the state's Medicaid program. The law also threatens action under a state profiteering statute for those companies that don't agree to bring their prices down.

Mr Smith says SmithKline Beecham, Bristol Myers Squibb, and AstraZeneca already have said they won't ship their products to wholesalers in Maine. And PhRMA has challenged the law on grounds it violates the clauses of the US Constitution that govern interstate commerce and the supremacy of federal law over state law. Some 26 small generic drug manufacturers, however, have said they will negotiate with the state, Mr Smith says.

A federal judge issued a preliminary injunction in late October that prevents enforcement of the law pending the outcome of the lawsuit.

Ultimately, if pooled purchasing power and allegations of profiteering prove ineffective in controlling prescription drug expenditures, the statute gives Maine the authority to create a board to begin setting price controls on prescription drugs.

The Texas solution

Mr Santos says Texas is unlikely to go to the extent of enacting price controls. "The leadership does not appear to be moving in the direction of traditional price controls like those enacted in Maine," he said.

Representative Gray says she would like to include Medicaid in a purchasing pool, but Mr Santos says that could create problems with the current Medicaid prescription drug pricing structure. Unlike Medicare, Medicaid does provide a prescription drug benefit. And, Mr Santos says, drug manufacturers already provide substantial discounts in the form of rebates to the Medicaid program.

"PhRMA's position has always been that you cannot include Medicaid," he said. Under the Omnibus Budget Reconciliation Act of 1990, Congress requires the pharmaceutical manufacturers to rebate a percentage of Medicaid drug expenditures back to the states. Those rebates currently total about $200 million, Mr Santos says.

He suggests that adopting a pool purchasing system for all state pharmaceutical purchases -- including Medicaid -- may reduce drug prices for state employees, the prison system, and other state agencies. But, at the same time, a leveling of drug prices across state agencies might actually increase cost for Medicaid patients, Mr Santos says.

The cross-border traffic

Meanwhile, both Congress and some states are looking at the issue of importing low-price pharmaceuticals from other countries. Nearly every pharmaceutical market in the world is subjected to price controls, except for the United States. That means, Mr Smith says, that Americans are subsidizing prescription drugs elsewhere through high costs here at home.

That could begin to change. Congress was attempting to wrap up work late in the year on legislation that would allow the reimportation from other countries of cheaper drugs made by American manufacturers in US Food and Drug Administration-approved laboratories. (See " Bill Would Allow Drug Reimportation .")

In Texas, the Mexican-American Legislative Caucus recently held hearings in Corpus Christi on Texans buying prescription drugs in Mexico. (See "The Southern Exodus.") Residents of Maine, Minnesota, and other states adjacent to Canada also routinely cross the border to purchase drugs, which, because of Canadian price controls, often are one-half to two-thirds cheaper than American prices. That requires a prescription from a Canadian physician, but a senior advocacy organization in Maine helps facilitate that, Mr Smith says.

Ms Strongin from the National Health Policy Forum says she thinks it will take a mix of potential solutions to begin to bring pharmaceutical expenditures into check.

Representative Gray admits that even the idea of forming a state purchasing pool, which may sound simple, will be complex in execution.

"All of these things sound simple in concept but the devil is in the details," she said. "But if we don't look at them, we're wasting enormous resources."

Ken Ortolon can be reached at (800) 880-1300, ext 1392, or (512) 370-1392; or by e-mail at Ken Ortolon .

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