Health Reform WK-EDGE Drug benefits getting too costly for Medicaid, will they survive?
Monday, December 5, 2016

Drug benefits getting too costly for Medicaid, will they survive?

By Kayla R. Bryant, J.D.

Rising drug prices have been a hot topic lately, and state Medicaid programs are not immune to the effects of rising cost. Programs have some tactics in their arsenal to control drug spending, such as preferred drug lists and prior authorizations, but these methods may not be enough to handle increases. Pricing unpredictability and the inability to accurately budget for drug coverage expenses compounds the problem for states. This Strategic Perspective will explore the drug spending issues facing Medicaid programs and possible strategies for mitigating the effects of price increases.

Coverage Design and Reimbursement

Medicaid is not required to provide pharmacy coverage, but states nonetheless cover outpatient prescription drugs for most enrollees. States are able to set certain coverage rules, within limitations. Preferred lists will usually contain available generic versions, while the expensive branded drug will be on the nonpreferred list. States may charge enrollees with incomes higher than 150 percent of the federal poverty level (FPL) a co-payment of up to 20 percent for nonpreferred prescriptions. States also may use approved lists and will decline to cover more expensive medications.

Reimbursement. The amount states receive in reimbursements may not exceed the lower of the estimated acquisition cost, plus a reasonable dispensing fee or the provider’s usual and customary charge to the public. Some multiple source drugs are subject to the federal upper limit (FUL) of reimbursement. The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148revised the FUL process, requiring that HHS calculate FULs as no less than 175 percent of the weighted average of the most recently reported average manufacturer price (AMP) for multiple source drugs that are pharmaceutically and therapeutically equivalent and available nationwide for purchase by retail community pharmacies. CMS created an exception for drugs with FULs lower than the average retail community pharmacies’ acquisition costs, in which the FUL is established using a higher multiple (42 C.F.R. Sec. 447.514(b)(1) and (2)). FULs are calculated on a monthly basis.

CMS rule settles ambiguities. CMS’ Covered Outpatient Drugs (COD) Final rule (81 FR 5170, February 1, 2016) implemented the ACA’s provisions governing COD reimbursement. CMS believed that this rule would assist states in managing drug costs as well as establishing fairer reimbursements. The rule provided clarity by defining AMP, which is used to determine manufacturer rebates, and establishing calculations and reporting guidelines for pricing. Drugs that are inhaled, infused, instilled, implanted, or injected (5i) are generally not dispensed through retail community pharmacies, but now have an AMP definition that will allow states to collect rebates on some expensive drugs.

CMS Provides Hard Facts on High Spending

The first-ever Medicaid drug spending dashboard, released with 2015 data, provides an in-depth look at just how much programs spend on certain drugs, costs per prescription, and annual growth. Two drugs cost Medicaid programs over $2 billion in 2015: Harvoni® (generic Ledipasvir/Sofosbuvir), used to treat chronic hepatitis C ($2.1 billion), and Abilify® (generic Arpiprazole), used for various mental and mood disorders ($2 billion). Limited comparable information is available for Harvoni, but the prescription fill count exceeded 78,000 and the average weighted cost per unit is $1,145. Generic Aripiprazole accounted for the spending spike in 2014, but was right at $2 billion for 2013 and 2015. Prescription fill counts went down significantly, but the average weighted cost per unit has steadily increased since 2011 and was up 15 percent over 2014.

Are States’ Tools for Offsetting Drug Price Increases Sufficient?

Overall, 20 drugs have increased in price by between 140 percent and 500 percent between 2014 and 2015. Medicaid spending for these drugs has gone from $146 million to $486 million. According to Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group, the dashboard focuses on a subset of expensive medications and ignores the efforts made by the market to hold down costs. Yet are those efforts sufficient enough to protect benefits?

Medicaid Drug Rebate Program. Section 1927 of the Social Security Act establishes that the federal government will only reimburse a drug manufacturer for outpatient drugs if the drug manufacturer enters into a rebate agreement with either HHS or the states, if authorized. Although Medicaid is a government program, these rebates act as private sector subsidies for a large portion of the program’s drug costs. Drug rebates are based on statutory formulas, and all rely on the AMP, necessitating a clear definition of what the AMP actually is and underscoring the importance of the COD Final rule. Roughly 600 manufacturers participate in the program and must pay the following rebates for different types of drugs:

  • innovator drugs: 23.1 percent of the AMP per unit, or the difference between the AMP and the best price per unit (subject to adjustments), whichever is greater;
  • blood clotting factors: 17.1 percent of the AMP or the difference between AMP and best price per unit, whichever is greater;
  • drugs approved by the FDA exclusively for pediatric indications: 17.1 percent of the AMP per unit or the difference between AMP and best price per unit, whichever is greater;
  • line extensions (new formulations) of a brand-name drug that is an oral solid dosage form: the rebate as calculated under section 1927 of the Social Security Act, or the product of (1) the line extension drugs’ AMP, (2) the highest additional rebate for the original drug, and (3) the number of units of each dosage form and strength, whichever is greater; and
  • noninnovator drugs: 13 percent of the AMP per unit.

Prior authorizations. Medicaid programs also can require prior authorizations for items and services, including drugs, before the program will pay. This process is intended to avoid paying for services that are not medically necessary. For example, in Ohio, brand-name prescriptions, some mental health services, dentures and braces, and some surgical procedures require a medical provider to submit a request. If the authorization is denied, it can be appealed.

Are these effective? According to Trish Riley, executive director of the National Academy for State Health Policy, states are reaching a critical point where hard decisions will have to be made. The unpredictability of manufacturer price hikes cause states to scramble to find money while spending on specialty drugs continues to increase. Medicaid programs cannot budget for just one drug and are forced to review all drug benefit spending to find savings wherever possible. If a new drug hits the market or sudden price hikes come into effect, states may not be able to adjust for the year. States must have balanced budgets, and increased pressure due to drug spending may lead to payment rate cuts. As it is, many providers are financially unable to participate in Medicaid due to the low rates.

Another expert told The Hill Extra that one of the drugs that has dominated recent headlines due to price increases, EpiPen® is not "breaking the bank" (see Mylan attempts to mitigate EpiPen® cost hike controversy, August 25, 2016). Even the expensive hepatitis C drugs, like the aforementioned Harvoni which costs $94,500 for a 12-week course of treatment (but offers a 98 percent cure rate), is not the only pressing concern. States are forced to pay for other expensive treatments, from cancer drugs to statins for lowering cholesterol. This cumulative effect makes adjustments difficult. As drug prices rise, the effects can be widely felt by all: taxes may increase, states may abandon other nonhealth projects, private insurance companies may raise premiums, and Medicaid enrollees might find that their coverage is limited elsewhere.

In an interview with Wolters Kluwer, David Kaufman, partner at Freeborn & Peters LLP, called the Medicaid drug pricing and rebate system "opaque," suggesting that increasing price transparency will provide more opportunities to find savings. When asked to describe a worst-case scenario if drug prices continue to soar unchecked, Kaufman envisioned a two-tiered health care system where innovative drug products are only available to those who can afford them, immediately affecting the Medicaid population. Long-term, this type of system could hurt society as a whole by reducing the market for new drug products and continued innovation.

Policy Changes Are Discussed, but Nothing Is Definitive

The Medicare Prescription Drug, Improvement, and Modernization Act (P.L. 108-173) created the Medicare Part D benefit, but prevents the government from using its power to negotiate drug prices directly with manufacturers for Part D, leaving that duty up to the insurers that offer the prescription drug plans. The Veterans Health Administration (VHA) offers fewer drugs in its national formulary than most Part D plans, allowing the VHA to decline to pay high prices and simply not cover a drug. The VHA pays 40 percent less for drugs than Medicare plans.

What does this have to do with Medicaid? California hoped it would have a lot to do with its Medicaid program, as the state wanted to leverage the VA’s prices for its own agencies. The (defeated) California Proposition 61, Drug Price Standards Initiative, was on the ballot during the November 2016 election. This proposition would have required state agencies not to pay anything above the VHA’s prices for prescription drugs.

The National Academy for State Health Policy (NASHP) met shortly before the election to discuss options for lowering prices for states, not just for Medicaid, but for state employees and the incarcerated. One suggestion involved a public utility-style regulation, in which a review board would oversee the pharmaceutical industry and approve prices and price increases. Another possibility was buying drugs from other countries at lower prices, as long as they met drug quality standards. Kaufman weighed in on some of the same possibilities, warning that regulations need to be enacted in stages and allow for adjustment. He noted that the pharmaceutical industry has provided some of the greatest advances in health care, and again stressed the necessity of maintaining innovation incentives.


Americans need health care, and health care includes medication. Many states have expanded their Medicaid programs, and all states are juggling their budgets to find money to sustain the Medicaid drug benefit. Yet as manufacturers continue to raise drug prices, states may have no other choice than to cut the benefit if they are unable to find a compromise. As a new administration takes office, protecting Medicaid enrollees’ access to medications will be a pressing concern.

Attorneys: David Kaufman (Freeborn & Peters LLP).

MainStory: StrategicPerspectives NewsFeed AgencyNews DrugNews EssentialBenefitNews MedicaidNews MedicarePartDNews

Back to Top

Interested in submitting an article?

Submit your information to us today!

Learn More