Medicare Modernization Act: Impact of State Implementation Decisions

1. Medicare Modernization Act: Impact of State Implementation Decisions Haiden Huskamp AcademyHealth June 28, 2005

2. Basic Economics of Rx Drug Pricing • Large fixed costs of R&D • Marginal cost of production is very low • Patents establish temporary monopoly, which provides incentives for investment in R&D

3. Pricing in the Private Sector • List price does ≠ transaction price • Many plans/payers negotiate rebates from manufacturers in exchange for sales volume • Formularies are one tool

4. Example: Three-tier Formulary • Tier 1: Generics (e.g., $5) • Tier 2: Preferred Brands (e.g., $15) • Tier 3: Non-preferred Brands (e.g., $30)

5. How Does Medicaid Influence Prices? • Two key ways: • Medicaid Rebate Program • Use of pharmacy management tools

6. Medicaid Drug Rebate Program • Created by OBRA 1990 • To be eligible for Medicaid coverage, manufacturers must agree to provide rebates • State pays approximately 90% of AWP plus dispensing fee to pharmacy

7. Medicaid Drug Rebate Program (2) • For brand drugs, rebate=larger of 15.1% of average manufacturer price (AMP) or difference between average price and lowest price paid by any U.S. buyer; for generics, 11% of AMP • MMA says prices negotiated by new Part D plans can’t be considered in best price rebate calculations

8. State Drug Cost Containment Efforts • Many states have adopted variety of cost containment strategies (e.g., prior authorization, preferred drug lists, stepped formularies, generic substitution) • Prior authorization and preferred drug lists similar to private sector drug formularies • States use to increase bargaining power with manufacturers

9. State Drug Cost Containment Efforts (2) • Under MMA, dual eligibles no longer receive drug coverage from Medicaid • How will bargaining power of state Medicaid programs be affected? • Prices paid by states for non-duals could increase • Depends on drug class, tools used

10. State Pharmacy Assistance Program Prices • How will state pharmacy assistance program price negotiations be affected? • Can they use Part D prices as leverage in negotiations? • Bargaining power depends on wrap-around strategy

11. New Product Proliferation? • Transparency of pricing through web-based price comparison tool could result in proliferation of new product forms • Duggan and Morton (2004) found that Medicaid requirement that prices not increase faster than CPI resulted in introduction of more new product forms for drugs with high Medicaid revenues than for other drugs

12. R&D Effects? • State and Part D plan decisions about cost containment strategies to employ will affect return expected by manufacturers, particularly for drugs with low private market share • Some concern that could affect incentives for future R&D investment

13. Examples • Antipsychotic drugs • In 2001, Medicaid responsible for 52% of sales and 67% of Rxs (Frank, Conti, Goldman, 2005) • ARBs • From 2000-2004, Medicare responsible for 60% of sales (Frank, Newhouse, Seiguer, 2005) • Opthalmic drugs (e.g., Xalatan) • From 2000-2004, Medicare responsible for 72% of sales (Frank, Newhouse, Seiguer, 2005)

14. Part D Plan Pressure on Price • Part D plans negotiate prices with manufacturers on own (no national negotiation by Medicare) • But, many plan sponsors are bidding in multiple regions; many are large national organizations • If they use stringent management tools, could exert pressure on price

15. Future Medicaid Pressure on Price • National Governors Association recently called for: • Increased rebates for states • Ability to restrict coverage for certain drugs • Reference pricing (upper limit on state payment) • May be counterbalanced against loss of duals