S tate B udget Cuts

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Case Study: Florida s Supplemental R eba te Pr ogram loridas Re bate Pro

An Approach to Reducing Drug Prices
Like many states, Florida has seen dramatic increases in Medicaid prescription drug costs in recent years. In response, Florida has created an innovative program to moderate that trend. This program, which the state implemented in 2001, combines negotiated manufacturer rebates with 1) a prior-authorization program that has physician education as its focus and 2) disease management programs that have the goals of reducing Medicaid spending and improving patients health status.1 It is too soon to know how successful Floridas approach will be in reducing costs and whether some aspects of the program might end up delaying patients access to drugs. It is not even certain that the program will survive a legal challenge from the drug industry. But Floridas program, if it is upheld in court, bears watching. Advocates should evaluate whether the program reduces drug costs and changes physician prescribing and whether it diminishes access to drugs. If the overall evaluation is positive, Floridas approach can be replicated by other states that wish to moderate spending on prescription drugs without reducing the drug benefit.

Floridas Quandary: Medicaid Deficits and Rising Drug Spending

In Floridas Medicaid program, spending for prescription drugs reached $1.3 billion in fiscal year 1999-2000. Prescription drugs accounted for 17 percent of Floridas total Medicaid spending, making drugs second in expenditures only to nursing homes.2 During the five fiscal years prior to 2001, Medicaid outpatient drug spending had increased at an average annual rate of 21 percent.3 The state estimated that spending increases would continue unabated unless changes were made to the program. At the same time that spending on prescription drugs was rising, Florida was facing an estimated Medicaid budget shortfall of $1.5 billion in FY 20012002, with 37 percent of that amount attributed to prescription drug spending.4 In light of the impending deficits, Floridas Office of Program Analysis and Government Accountability evaluated Medicaid prescription drug spending. That evaluation concluded that the increase in expenditures was due primarily to physicians switching patients to high-priced drugs, with price increases for existing drugs being a secondary factor. To promote more efficient and less costly prescribing, the evaluation report recommended that the states Agency for Health Care Administration develop a preferred drug list and negotiate rebates with manufacturers that would be in addition to those already received through the federal rebate program. (See Prescription Drugs in this kit for a discussion of the federal Medicaid drug rebate program.)

Floridas Supplemental Rebate Program

In May 2001, Florida lawmakers approved legislation allowing the state to negotiate additional rebates with drug manufacturers and to create a list of preferred drugs. Some aspects of the program were implemented in July.5 To go forward with the entire program, the state needed approval from the U.S. Department of Health and Human Services (HHS).6 Federal Medicaid rules allow states to develop a formulary, or preferred drug list, but states can only exclude drugs from this list if the drugs do not have a significant, clinically meaningful therapeutic advantage over other drugs on the formulary. (Excluded drugs must be available to Medicaid beneficiaries, but they can be subject to prior-authorization requirements.7) Florida wanted to develop a preferred drug list that excluded drugs not only for clinical reasons but also if their manufacturers did not enter into a supplemental rebate agreement with the state. This required that HHS approve an amendment to the states Medicaid plan. HHS Secretary Tommy Thompson granted that approval on September 18, 2001, and the program was fully operational by October 2001.8 The Florida law requires that manufacturers offer the state a supplemental rebate before their drugs can appear on the preferred drug list.9 In lieu of such supplemental rebates, manufacturers can provide programs, such as disease management services or health education, as long as the manufacturer can demonstrate that the program will save Medicaid $16 million per year (see box, Disease Management Pilot Programs). If program savings are less, the manufacturer must pay the difference between actual savings and $16 million.10 Drugs that are not on the preferred list are available to Medicaid beneficiaries, but a doctor must get verbal authorization from Medicaid program staff before the prescription can be filled. The threat of prior authorization was a necessary incentive to bring manufacturers to the negotiating table. The Florida Medicaid program says that it will not deny authorization; instead, the agency plans to use the prior-authorization process to educate physicians about less costly alternatives. When a physician calls, he or she will be informed about lower-cost drugs available from manufacturers that participate in the rebate program and will be asked if the prescription could be changed. The inconvenience of calling should cause physicians to favor drugs on the list. Initial results from Florida suggest that placement on the preferred drug list makes a difference in the use of a manufacturers drugs. This conclusion is illustrated by changes in the use of two anti-migraine drugs in the same therapeutic class since the preferred list went into effect: The Medicaid market share for Imitrex (GlaxoSmithKline PLC), which is not on the list, dropped from 60 percent to 6 percent while the market share for Maxalt (Merck & Co.), which is on the list, rose from 16 percent to 89 percent.11 The state estimates that the supplemental rebate program will reduce Medicaid drug expenditures by $214 million, or 15 percent, in the first year.12

CASE STUDY: FLORIDA 2

The!Drug!Industrys!Reaction:!The required supplemental rebates will not only reduce the states outpatient drug costs, they will also reduce drug industry profits. Recognizing the potential widespread application of Floridas approach, PhRMA, the drug industry lobby, sued the state in Federal District Court in northern Florida to stop the program. PhRMA claimed that the states law violated a federal rule requiring that all prescription drugs be available to Medicaid beneficiaries unless the drug offers no clinically meaningful benefit.13 In January 2002, the court held that the preferred drug list directed doctors and patients toward certain drugs, but patients were not prevented access to drugs not on the list. The court allowed the program to continue. The legal battle, however, is not over. PhRMA is planning to appeal the case to the Eleventh U.S. Circuit Court of Appeals in Atlanta.14

Floridas Disease Management Pilot Programs

Pfizer and Bristol-Myers Squibb agreed to provide programs for Florida Medicaid beneficiaries in lieu of supplemental rebates. Pfizers program will include disease management, health education, and expanded drug donations. The focus will be on four chronic conditions: congestive heart failure, diabetes, asthma, and hypertension. Pfizer has guaranteed that its programs will save Florida Medicaid $33 million over two years. Bristol-Myers Squibbs program will focus on 1) managing the health of Hispanic and African-American Medicaid beneficiaries with select chronic conditions and 2) placing lay health care workers in Community Health Centers to help Hispanic beneficiaries overcome language and cultural barriers. If these programs achieve their goalsimproving overall beneficiary health and reducing emergency room use and hospitalizationsthey will be worth examining and possibly replicating in other states. What advocates should keep in mind, however, is that manufacturers sponsor these programs. Safeguards should be in place to ensure that the programs actually focus on health outcomes and are not simply a means of promoting a manufacturers products when less costly or more appropriate alternatives may be available. Additionally, savings and health benefits will be difficult to measure accurately. The state may receive less from the programs than it would from supplemental rebates. Any state considering similar disease management agreements should examine how Florida is accounting for savings and evaluate whether that approach makes sense.
Source: National Governors Association, Addendum to State Pharmaceutical Assistance Programs, Public-Private Partnerships: The Florida Medicaid-Pfizer Inc. Pharmaceutical and Disease Management Pilot Program and Florida Medicaid and Bristol-Myers Squibb (Washington: National Governors Association, October 2001.

How the Program Is Operating: Protecting Consumers Interests in State Prior-Authorization Programs
Ideally, additional rebates could be extracted from manufacturers and physicians could be persuaded to alter prescribing practices to favor the least costly appropriate medicationand both could be done without states needing to resort to prior authorization. However, this is highly unlikely. What is more likely is that drug manufacturers will continue to focus their marketing on the highest-cost therapies, leading physicians to favor those therapies, and will continue to raise drug prices. This will require states to look for innovative ways to obtain lower drug prices and to change prescribing behavior.
CASE STUDY: FLORIDA 3

As noted, Floridas prior-authorization process for the supplemental rebate program serves principally as a means of educating doctors. Physicians calling for prior authorization are made aware of lower-cost alternativesan approach that could serve to counter excessive pharmaceutical industry advertising and promotion of high-priced brand drugs. Although the states position is that there will be no prior-authorization denials, consumer groups in Florida have identified cases of priorauthorization denials in which beneficiaries did not receive adequate notice of their rights.15 This underscores potential program pitfalls. If the program is not managed properly and if pharmacists and physicians do not work together, there could be delays in access or instances of beneficiaries forgoing medication because they do not fully understand their rights. Therefore, advocates in states contemplating Floridas approach should keep in mind Medicaids requirements and operational issues that could affect consumers access to drugs.16 Some Medicaid requirements and consumer protections that should be incorporated in any program are listed below.
! Prior authorization does not mean that a drug

cians and pharmacists need to understand their responsibilities. Patients should not leave a pharmacy without a prescription or without understanding when they can pick up their prescription if prior authorization is needed and cannot be obtained immediately.
!

Beneficiaries need to understand Medicaids required turnaround times and emergency access provisions. If there is a delay in getting a prescription or there is a denial of a prescription, beneficiaries should receive timely written notice explaining the denial and information on their right to appeal; they should also receive full coverage of refills until the appeal is complete. Pharmacists should be prepared to explain the prior-authorization requirement to patients and should not tell patients that a drug needing prior authorization is not covered. Pharmacists dispensing fees should be adequate. Whenever a pharmacist receives a prescription requiring prior authorization, the pharmacist should notify the state program, which should have primary responsibility for interacting with the physician. The state should have strict, prompt turnaround requirements for responding to the pharmacists regarding dispensing.

is not covered; it means that it must be approved in advance.

! Medicaid requires that prior-authorization de-

! The individuals providing prior authorization

terminations be made within 24 hours and that a 72-hour supply of a drug be dispensed without prior authorization in the case of an emergency.17
! Physicians and pharmacists need to have easy

should to be qualified. Floridas program is staffed by pharmacists and pharmacy technicians.

! Program glitches may occur at the outset. Ad-

access to the list of drugs requiring authorization and instructions for completing the process.
! Good communication is essential. Beneficia-

vocates should monitor new programs carefully, identify problems, and work with the state to correct them. Advocates should also be prepared to involve the press as necessary to bring attention to any access or operational issues that are not resolved quickly.

ries need to understand their rights, and physiCASE STUDY: FLORIDA 4

The Future for Florida and Other States

Floridas supplemental rebate approach holds some promise for a state struggling with rising drug spending and budget shortfalls. Other states, such as Michigan, are following Floridas lead. As in Florida, PhRMA has sued to stop the Michigan program. If done properly, Floridas strategy can save money with fewer limitations on access than some other approaches that states are considering to reduce Medicaid drug spending. But advocates will need to be vigilant. They need to make sure that prior authorization does not prevent access to drugs not on the preferred list but, rather, serves to educate physicians about prescribing options. Advocates should watch and learn as Floridas program unfolds. Ultimately, however, the courts will decide whether Floridas approach can be used in other states. The outcome of the Florida and Michigan cases should be monitored closely by advocates throughout the country.
1

This case study looks only at Floridas manufacturer rebate program and prior authorization associated with the rebate program. Other aspects of Floridas Medicaid prescription drug benefit are not evaluated. Nursing home spending accounted for 20 percent of service expenditures in 2000. Florida Office of Program Policy Analysis and Government Accountability Justification Review, Growth in Medicaid Prescription Drug Costs Indicates Additional Prudent Purchasing Practices Are Needed, Report No. 01-10, February 2001 (http://www.oppaga.state.fl.us/reports/health/r01-10s.html).

3 4 5

Ibid. Ibid.

The new supplemental rebates may not be less than 10 percent of the average manufacturer price (AMP, the average price paid by wholesalers) unless either the federal rebate, the supplemental rebate, or both rebates combined equal or exceed 25 percent of AMP. There is no upper limit on the rebate amount that the state may negotiate with manufacturers. (Washington: National Governors Association, Addendum to State Pharmaceutical Assistance Programs, Public-Private Partnership: The Florida Medicaid-Pfizer Inc. Pharmaceutical Management Pilot Program, August 2, 2001).

Under the Medicaid program, states that elect to cover prescription drugs must cover all FDA-approved drugs from every manufacturer that participates in the federal rebate program with the exception of drugs that fall into one of the following eight categories: anorexia, weight loss, or weight gain drugs; fertility drugs; cosmetic or hair growth drugs; drugs for relief of cough or cold; smoking cessation drugs; prescription vitamins and minerals; benzodiazepines; and barbiturates. [Section 1927(d)(1)(B)(ii)of the Social Security Act, 42 U.S.C. 1396r-8(d)(1)(B)(ii)].
6 7

Section 1927(d)(4)(C) of the Social Security Act, 42 U.S.C. 1396r-8(d)(4)(C) and Section 1927(d)(4)(D) of the Social Security Act, 42 U.S.C. 1396r-8(d)(4)(D). Florida was the first state allowed to negotiate supplemental rebates since the passage of the Medicaid Drug Rebate law in 1990. California negotiates rebates directly with manufacturers, but that is because of contracts that existed prior to 1990.

Agreement to pay the minimal supplemental rebate ensures that the state will consider a manufacturers drugs for placement on the preferred list but does not guarantee placement on the list. All antipsychotics, antidepressants, anticonvulsants, and HIV-related antiretroviral agents are exempted from the prior-authorization restriction (http://www.fdhc.state.fl.us/Medicaid/Prescribed_Drug/ rebate.shtml). Bob Sharpe, Pharmaceutical Manufacturers Formulary and Supplemental Rebate Briefing (Tampa: Agency for Health Care Administration, May 2001).
9

Kaiser Network, Daily Health Report, August 8, 2001, PhRMA Sues to Block New Florida Medicaid Drug Law (www.kaisernetwork.org).
10 11 12 13 14 15

Russell Gold, Federal Judge Lets Stand Florida Law Seeking Rebates from Drug Makers, The Wall Street Journal, January 3, 2002. PhRMA Sues to Block New Florida Medicaid Drug Law., op. cit. Russell Gold, op. cit. Ibid.

Conversation with Miriam Harmatz, Florida Legal Services, on April 24, 2002. In late March, Florida Legal Services filed a complaint in the United States District Court, Southern District of Florida, against the Agency for Health Care Administration of the State of Florida concerning Medicaid beneficiaries experiencing denials, delays, or reductions in drug coverage without adequate notice or opportunity for a fair hearing.

16 Many of the suggestions for adding consumer protections to prior authorization are from telephone conversations with Miriam Harmatz, Florida Legal Services, on January 24, 2002, and with Sheldon Toubman of New Haven Legal Services, on January 25, 2002. 17

42 U.S.C. 1396r-8.
CASE STUDY: FLORIDA 5

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