States vs. drug prices

Squeezed between declining revenues and expanding numbers of poor and uninsured residents who need medical care, the states have become laboratories for experiments in drug cost containment. As a result they are developing policies that could play major roles in shaping the economics of the biopharmaceutical industry, either by imposing explicit or implicit price controls that curtail incentives for innovation or, more optimistically, by creating markets that reduce spending on me-too drugs and free funds to spend on breakthrough products.

Although the drug industry's great fear is universal, single payer healthcare, the initial experiments will not occur in the general population, but among recipients of Medicaid, the state-based health care programs for the indigent. Nevertheless, these experiments are likely to serve as the blueprint for broader healthcare plans at both the state and national level. As such, the states right now are the place to watch.

Once obvious measures to squeeze fat out of the drug purchasing process have been exploited, states have five basic choices: prior authorization, preferred drug lists/formularies, supplemental rebates, reference pricing and price controls (see "Cost Containment Strategies," A2).

Of these, an approach now rolling out in Oregon is being pitched as the most innovator-friendly, as its creators argue that it will release funds to pay for innovative therapies, while addressing the state's desire to rein in costs and provide patient services.

The Oregon scheme currently relies on voluntary use of evidence-based preferred drug lists (PDLs). The plan focuses on therapeutic classes deemed to be heavy with "me-too" drugs such as allergy and heartburn medications.

Elsewhere, an approach using conventional PDLs created in less transparent processes coupled with prior authorization is likely to be most widely adopted, if the strategy withstands legal challenges from the pharmaceutical industry, because it yields the greatest savings to states.

In any case, critics of the schemes contend that any government-mandated effort to intervene in prescribing practices will inevitably distort markets, tilting them toward the cheapest rather than the most effective products.

The state dynamic

While Congress has struggled unsuccessfully for years to agree on a scheme for adding a drug benefit to the Medicare program serving the elderly, states have been quietly expanding outpatient drug coverage beyond the population that qualifies for full Medicaid benefits. But the benefit is becoming increasingly difficult to finance, as demand for drug coverage is expanding

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