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Prior-Authorization Programs for Controlling Drug Spending
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     Spending for prescription drugs represents more than 10 percent of the nation's health care costs and is currently the fastest-growing component of health care expenditures.1 The rapid increase in drug spending has resulted from the expansion of the volume of medications prescribed, as well as a shift toward the inclusion of more new and expensive drugs. Medicaid programs have been especially vulnerable to the skyrocketing spending on drugs, which has often exacerbated state budget woes. Increasing at more than twice the rate of overall Medicaid spending, Medicaid expenditures for prescription drugs rose 18 percent annually between 1997 and 2000.2

    Medicaid programs use a variety of strategies to control spending. Federal law requires pharmaceutical companies to sell their products to Medicaid at discounted prices. Medicaid programs also use copayments, requiring beneficiaries to share the costs of medications, to discourage the use of unnecessary medications. The use of financial incentives to reduce expenditures on drugs is common in the private sector, where many insurers have established three-tier pharmacy programs. Drugs in the top tier typically require a copayment of $25 to $35 for a month's supply of medication, whereas generic drugs usually require a copayment of $5. However, the inability of Medicaid beneficiaries to afford high copayments makes it impractical for Medicaid to achieve substantial savings with these sorts of programs.

    Recent efforts by state Medicaid agencies to control costs have instead focused on expansions of and innovations in prior-authorization programs. Many Medicaid programs have developed lists of preferred drugs, which identify the medications that do not require prior authorization in order to be covered. The programs vary from state to state, but most preferred-drug lists include generic drugs and medications that are less costly than others in the same class. As their name implies, prior-authorization programs require the submission of clinical information for review before Medicaid will pay for medications that are not on the preferred-drug lists. In some states, this information is communicated by telephone; in others, clinicians complete and fax forms.

    In recent years, some states have used prior-authorization programs as a vehicle to gain leverage in price negotiations with pharmaceutical companies.3 Companies agree to sell their drug to Medicaid at a lower price, and in return, the state agrees to place the medication on the state's preferred-drug list. Inclusion on this list is a strong incentive to pharmaceutical companies, which know that prior-authorization requirements are a hurdle that will almost certainly reduce the use of their drug.

    Prior authorization is sometimes required when a new class of drugs is introduced. For example, cyclyooxygenase-2 inhibitors (coxibs) are a much more expensive alternative to nonselective nonsteroidal antiinflammatory drugs (NSAIDs). Although the two classes of drugs have similar efficacy for the treatment of conditions such as arthritis, the coxibs present a lower risk of gastrointestinal complications. As a result, state Medicaid programs have implemented prior-authorization programs to restrict coverage of coxibs to patients who are at high risk for gastrointestinal complications from nonselective NSAIDs. As reported by Fischer et al. in this issue of the Journal (pages 2187–2194), prior-authorization requirements effectively controlled the prescribing of coxibs and achieved sizable savings for Medicaid. Pharmaceutical companies' marketing efforts, including direct-to-consumer advertising, encouraged the use of coxibs and most likely resulted in increased use even among patients who were at at low risk for gastrointestinal bleeding. Merck recently removed rofecoxib from the market because of concern that it causes cardiovascular complications. The prior-authorization programs for coxibs that were implemented by both Medicaid and private insurers thus not only reduced spending, but also most likely improved clinical care.

    Important questions remain about the effect of prior-authorization programs on clinical outcomes. On the positive side, preferred-drug lists can improve outcomes by excluding drugs that are less safe than other drugs with similar efficacy. On the other hand, prior-authorization restrictions have the potential to reduce patients' access to beneficial drugs, especially when the requirements for documentation are onerous and the appeals process is restrictive. When clinicians change patients' drug regimens in response to modifications in reimbursement policies, there is some risk of increased side effects and lower compliance. For example, a study of a private insurer's three-tier pharmacy program showed that higher copayments for medications in the most expensive tier prompted some patients to discontinue use of a medication, rather than switch to a less expensive drug.4 We do not know how often the inconvenience of prior authorization prompts providers and patients to forgo the use of effective and appropriate medications.

    Not only is information limited about the effects of prior-authorization programs on clinical outcomes, but also their effects on the costs of health care have not been fully explored. From the Medicaid perspective, such programs can achieve dramatic reductions in drug expenditures. The savings to Medicaid are far greater than the costs of running this type of program. However, from the societal perspective, the costs of the program are greater than the costs to Medicaid of administering it.

    A hypothetical case illustrates this point. A pharmacist informs a Medicaid patient that prior authorization is now required for his antihypertensive medication, which has controlled his blood pressure well for several years. The patient and the pharmacist each call the prescribing physician to let her know that prior authorization is required. The physician reviews the state Medicaid preferred-drug list and notes that Medicaid covers a similar medication without requiring prior authorization. She determines the equivalent dose of the new medication and calls the patient, advises him that she would like to switch to a less expensive drug, and requests that he return to the office in one month to confirm that his blood pressure is controlled by the new medication. A member of the physician's office staff calls in the new prescription to the pharmacy, and the patient makes another trip to the pharmacy to pick it up.

    Clearly, efforts to prescribe in accordance with the preferred-drug list can demand considerable time from the patient, the pharmacist, and the physician and her office staff. In addition, prior-authorization programs have the potential to generate hidden additional costs to be covered by Medicaid, such as the cost of an extra office visit for monitoring blood pressure after a switch to a new medication.

    Despite the extra burdens imposed on physicians, they may prefer prior-authorization programs to alternative strategies for controlling Medicaid costs, such as reducing Medicaid's physician fees or eliminating coverage of some drugs altogether. The way in which prior-authorization programs are designed and administered is likely to make a critical difference in their effectiveness and acceptability to doctors and patients. When preferred-drug lists are developed thoughtfully and based on accepted evidence, they can guide clinicians to choose the cheaper of equally effective drugs, and the extra time required to refer to the preferred list before initiating treatment with new medications is modest. Clinicians might also find preferred-drug lists useful in responding to patients' requests for the newer and more expensive, but not necessarily better, drugs they see advertised on television. On the other hand, prior-authorization programs will save Medicaid more money if they are applied to all patients, even those who are already taking a drug on the restricted list and doing well. If preferred-drug lists are revised frequently in response to price negotiations with pharmaceutical companies, the burden on clinicians and patients will be higher.

    Policies similar to Medicaid prior-authorization programs are likely to be used by drug plans that serve Medicare beneficiaries when Medicare introduces drug coverage in 2006. Expanded use of these programs will require physicians to become familiar with even more drug formularies and more procedures for prescribing drugs that are not on preferred lists. The satisfaction of patients and providers will hinge on the rationality and fairness of the preferred-drug lists and the burdens associated with navigating the system.

    References

    Levit K, Smith C, Cowan C, Lazenby H, Sensenig A, Catlin A. Trends in U.S. health care spending, 2001. Health Aff (Millwood) 2003;22:154-164

    The Henry J. Kaiser Family Foundation, The Kaiser Commission on Medicaid and the Uninsured. The Medicaid drug benefit: highlights from the KCMU 2003 survey of states. (Accessed October 29, 2004, at http://www.kff.org/medicaid/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=22177.)

    Mello MM, Studdert DM, Brennan TA. The pharmaceutical industry versus Medicaid -- limits on state initiatives to control prescription-drug costs. N Engl J Med 2004;350:608-613.

    Huskamp HA, Deverka PA, Epstein AM, Epstein RS, McGuigan KA, Frank RG. The effect of incentive-based formularies on prescription-drug utilization and spending. N Engl J Med 2003;349:2224-2232.(Mary Beth Hamel, M.D., M.)