The Pharmaceutical Industry versus Medicaid — Limits on State Initiatives to Control Prescription-Drug Costs
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《新英格兰医药杂志》
The need to manage escalating health care costs while maintaining reasonable access to care is becoming the salient challenge in U.S. health care policy. Insurance coverage is patchy and incomplete, and serious problems with access persist. The health care system has not succeeded in controlling expenditures. The cost pressures resulting from technological advances and an aging population are likely to exacerbate the problem of access.
Nowhere is concern about cost and access more pressing than in the provision of prescription drugs through state Medicaid programs. Prescription drugs are the fastest-growing component of health care spending.1 Medicaid has been hit hard — its spending on drugs soared from $4.8 billion in 1990 to $21.0 billion in 2000.2
A variety of state initiatives have emerged for reducing expenditures on prescription drugs. These initiatives have been informed in their design by experience in other countries3,4,5 and facilitated by the Medicaid program's waiver provisions, which afford states latitude to engage in policy experiments. The initiatives have met with vigorous opposition from the drug industry. A series of legal challenges, in which manufacturers of pharmaceutical products allege that some of the new schemes exceed states' powers, have been percolating through the lower courts. In 2003, the litigation reached the Supreme Court in the case of Pharmaceutical Research and Manufacturers of America v. Walsh.6
A central question in much of the litigation is whether states may use Medicaid's buying clout to cross-subsidize drug purchases for residents who, although medically needy, do not qualify for Medicaid. More generally, these cases have emerged as an important test of the boundaries of federalism — that is, of the division of power between federal and state governments. In an era of skyrocketing expenditures and eviscerated state budgets, the stakes for state Medicaid programs are enormous.
In a complicated and divided decision, the Supreme Court in Pharmaceutical Research and Manufacturers of America v. Walsh signaled its receptiveness to relatively broad state experimentation in the area of prescription drugs but imposed some important boundaries and caveats. In this article, we describe some of the leading strategies states have used in the battle against rising drug costs, we review the attendant litigation, and we extract some key policy lessons for states' pursuit of a balance between cost and access.
Pharmaceutical Costs under Medicaid
The federal statute and regulations that established the Medicaid program erect an intricate legal regime, compounded in its complexity by the "system of cooperative federalism" whereby control over the program is shared by the federal and state governments.7 The structure of Medicaid has recently been carefully reviewed in the Journal.2 In brief, states manage their Medicaid programs under federal rules. State programs must cover specified types of services for "categorically eligible" beneficiaries, but they may elect to provide more extensive benefits and cover other groups of medically needy people. Coverage of outpatient prescription drugs is optional, but all states provide drugs to categorically eligible beneficiaries, and most offer some coverage to medically needy beneficiaries.8
A survey showed that 44 states considered the cost of prescription drugs to be one of the top three influences on Medicaid expenditures in 2002.9 Drug costs rose at an average annual rate of 18.1 percent from 1997 to 2000 — more than twice the 7.7 percent annual growth rate for Medicaid expenditures as a whole.10 It is particularly alarming that these expenditures have spiraled upward in the face of fairly stringent federal provisions for controlling price, coverage, and use.
The federal Medicaid statute regulates price directly, by imposing ceilings on the amount Medicaid will pay pharmacies for drugs, and indirectly, through a rebate program. The Omnibus Budget Reconciliation Act of 1990 made Medicaid's drug purchases contingent on the willingness of pharmaceutical manufacturers to give rebates to the federal government.11 The rebates for nongeneric medications are no less than 15.1 percent of the average manufacturer's price, which is the average price paid to a manufacturer by wholesalers for a drug distributed to retail pharmacies.12 The rebate program reduced Medicaid's drug expenditures by an estimated 20 percent in 2000.13
With respect to coverage, the Medicaid statute allows states to exclude certain categories of drugs — in particular, weight-control drugs, fertility drugs, and cosmetics. In addition, states may require the substitution of generic drugs for nongeneric drugs when therapeutic equivalency has been shown. They may institute "fail first" programs, in which patients must fail to benefit from less expensive, usually older, drugs before more costly ones are used. States also may limit the number and size (the amount of medication and the number of refills) of prescriptions covered by Medicaid and may impose small copayments.13
To control use, state Medicaid programs may require prior authorization for outpatient drugs. Federal law also permits drug formularies, or lists of preferred drugs, provided that any drug excluded from the formulary lacks a "significant, clinically meaningful therapeutic advantage" over an alternative that is in the formulary.14 Formularies are always paired with the requirement of prior authorization, because outright exclusion of drugs from coverage is prohibited (except for the limited categories described above). Hence, the formulary essentially establishes fast-track approval for listed drugs and subjects the rest to prior authorization. Prior-authorization programs, on the other hand, may stand alone, and when they do, it is permissible for states to make authorization contingent on the drug's cost.
State Efforts to Obtain Greater Discounts
Emboldened by budget cuts, several states have moved with unprecedented aggressiveness to force deeper and wider drug discounts. Two types of programs — supplemental rebates and expanded discounts — have become particularly controversial.
Supplemental-Rebate Programs
Many states have adopted supplemental-rebate programs, whereby they demand rebates from drug manufacturers at levels exceeding those required by federal law. A state agrees to place the products of compliant manufacturers on a list of preferred drugs and subjects drugs made by noncompliant companies to a prior-authorization requirement. Under this requirement, physicians must obtain approval by telephone for each prescription, an inconvenience that can translate rather dramatically into reduced market share,15 creating a powerful incentive for pharmaceutical companies to agree to rebates. Supplemental-rebate programs are operating in 9 states and have been proposed in 14 others.16
The programs in Florida and Michigan are of particular interest because of the litigation surrounding them. Adopted in May 2001, Florida's program was unique in offering manufacturers who sought a preferred listing a choice between giving supplemental rebates and funding disease-management programs.17 Companies that refused to do either had their drugs saddled with the prior-authorization requirement, although Florida gave the prescribing physician the final authority to prescribe the first-choice drug as long as he or she made the required telephone call.15
Michigan implemented a similar program in 2001 to combat Medicaid expenditures that were absorbing nearly 20 percent of the entire state budget.16 Generic medications and drugs that were considered to be the best in their therapeutic class were automatically included in the Michigan Pharmaceutical Product List. In order to avoid the need for prior authorization for any other drug, the manufacturer had to agree to pay a supplemental rebate so that the cost of a drug after the rebate matched the lowest price (anywhere in the country) of the cheapest "best in class" drug.
Expanded-Discount Programs
Several states have sought to expand rebates beyond Medicaid prescriptions to prescriptions for medically needy residents of the state who do not qualify for Medicaid. Vermont and Maine have been the leading innovators, acting under the demonstration-waiver provisions of the Social Security Act.18 Their examples have inspired Connecticut, Hawaii, and New Mexico to enact similar programs and have attracted the interest of at least 16 other states.19
Vermont's Pharmacy Discount Program expanded the federal Medicaid rebate to apply to all Vermonters with incomes up to 300 percent of the federal poverty level who lacked prescription-drug coverage, as well as Medicare beneficiaries with incomes up to 150 percent of the poverty level who carried no supplemental drug coverage.20 Patients in these categories could purchase drugs at a discount of 17.5 percent.
Maine has promulgated two programs that use Medicaid's purchasing clout to obtain discounts on prescription drugs for state residents who have no Medicaid coverage. The Healthy Maine Prescriptions Program was enacted in 2001 under a demonstration waiver.21 It extended drug discounts of up to 25 percent to 225,000 persons who had incomes from 185 percent to 300 percent of the federal poverty level and had no insurance. The legality of the program is now in question.
Healthy Maine's predecessor was a 2000 initiative called Maine Rx. Enacted but never implemented, Maine Rx similarly authorized the state to negotiate rebates for non-Medicaid prescriptions and imposed a prior-authorization requirement for prescriptions given to Medicaid beneficiaries for drugs made by companies that did not grant rebates.22 Unlike Healthy Maine, Maine Rx was intended to apply to all Maine residents who were not eligible for Medicaid and lacked other drug coverage, not merely those below a specified income cap. Another distinction was that the program was not conducted under a demonstration waiver. Furthermore, unlike Florida, Maine did not permit payment for drugs made by noncompliant manufacturers, even if a physician insisted.23 Implementation of Maine Rx was stalled in 2000 when several drug companies organized a resistance effort that turned to litigation.
The Pharmaceutical Industry's Response
The pharmaceutical industry has vigorously contested the discount initiatives in Florida, Michigan, Vermont, and Maine through its main trade organization, Pharmaceutical Research and Manufacturers of America (PhRMA). Decisions handed down in these cases in the past year shed light on the options open to state Medicaid programs.
PhRMA's Cases
The case against Florida, filed in August 2001, turned on the sharpness of the distinction between the drug list and prior-authorization components of the program. PhRMA characterized the drug list as a formulary, put it at the heart of the rebate program, and argued that the state's program was in conflict with the federal Medicaid statute because it used financial (rather than clinical) criteria to build the list. The trial court, and later the U.S. Court of Appeals for the 11th Circuit, rejected this argument.15 Both courts ruled that the state had created a prior-authorization program, not a formulary in the statutory sense. Consequently, PhRMA's arguments collapsed in two places: financial criteria could be used, and technically, the drug list did not exclude anything from coverage but merely shifted certain decisions to the prior-authorization track. In addition, the appellate court held that the rebate program served the primary purpose of the Medicaid statute — to provide medical services to low-income people — by driving down the cost of prescription drugs.15 The Supreme Court has declined to hear PhRMA's appeal of this decision.24
In Michigan, PhRMA challenged the rebate program in state and federal court and lost in both forums.25,26 The accusations were built on those made in Florida. In March 2003, the federal trial court ruled in the state's favor, finding that, as in Florida, the Michigan Pharmaceutical Product List constituted a prior-authorization program, not a formulary, and could therefore use nonclinical criteria; Congress did envision that states might exact rebates above and beyond the federal rebate; the rebate program was not obviously inconsistent with "the best interests of recipients"; and the program's pricing strategy did not constitute regulation of interstate commerce in violation of the commerce clause of the Constitution.
In contrast to these losses in Florida and Michigan, PhRMA has scored some victories in its litigation against the Vermont program. An appellate court found partial fault with Vermont's expansion of its program to include non-Medicaid populations.20 Because the government contributed no Medicaid funds toward the purchase of discounted prescriptions for people who were not Medicaid beneficiaries, the program violated the federal rule that drug manufacturers owe rebates only for drugs "for which payment was made under the State plan."27 In response to this ruling, Vermont has decided to contribute some state money to the expanded rebate program.28
PhRMA has also litigated to invalidate both Maine programs. The legality of Healthy Maine, the later program, remains undecided for the moment, largely because the state created a moving target when it modified several features of the program in response to the Vermont ruling. Most notably, the state added a small contribution to the rebate pool. The federal circuit court declared the original version of the program unlawful, deeming it indistinguishable from the Vermont program, but the court declined to review the new version of the program until the Secretary of Health and Human Services has been given a chance to approve the changes.29
The most important case in this flurry of litigation turned out to be the earliest — PhRMA's challenge to Maine Rx. It reached the Supreme Court in January 2003 and was decided in May 2003.
Maine Rx in the Supreme Court
PhRMA sought to enjoin the implementation of Maine Rx on the basis of two claims. First, noting that most drug companies sold their products to out-of-state wholesalers, which in turn sold the products to Maine retailers, PhRMA claimed that the program illegally regulated business beyond the state's borders, in violation of the commerce clause. Second, PhRMA alleged that the program conflicted with Congress's purpose in passing the Medicaid statute, which was to provide health services to the medically indigent. The supremacy clause of the Constitution provides that federal law trumps or preempts state law when the two clash in an area that the federal government has authority to regulate.30 Appealing to this principle, PhRMA argued that a clash existed in the program: Maine's use of prior authorization to force drug companies to give discounts to people ineligible for Medicaid served no "Medicaid purpose" and actually impeded Medicaid beneficiaries' access to medically necessary medications.
The district court accepted both of PhRMA's arguments and blocked implementation of the program in October 2000. The First Circuit Court of Appeals reversed this ruling in May 2001.23 The Supreme Court granted certiorari to review the case in June 2002, recognizing the "national importance" of the issues at stake.31 This grant of review in itself was controversial. Because the Maine Rx program had never been submitted for approval by the Department of Health and Human Services, the Bush administration argued that the dispute over the program was not yet ready for judicial review.32
Undeterred, the Supreme Court affirmed the decision to lift the injunction on the program by a vote of six to three.6 The Court's decision is a thicket of complicated concurring opinions and shifting coalitions of justices. Justice John Paul Stevens wrote the main opinion, but he was joined by a majority of justices only in his description of the facts of the case and his finding (unanimously supported) that the commerce clause was not violated.
The entire Court cursorily rejected the notion that Maine was attempting to regulate the price of out-of-state transactions. The profits of drug manufacturers might be affected by the manufacturers' voluntary participation in the rebate program, the justices wrote, but that did not constitute extraterritorial price regulation.
With regard to the preemption argument, a plurality of four justices found that the use of the prior-authorization mechanism to leverage discounts for citizens who were not eligible for Medicaid did not create a conflict with the federal Medicaid statute. Stevens, joined by Justices David Souter and Ruth Bader Ginsburg, held that providing access to medically necessary drugs for people who were ineligible for Medicaid and preventing their possible slide into poverty, and thus the need for Medicaid coverage, were legitimate "Medicaid purposes." In addition, Stevens argued that the prior-authorization program, like those used by managed-care organizations, encouraged the use of less costly medications and thereby reduced Medicaid's drug expenditures.
Justice Sandra Day O'Connor, joined by Chief Justice William Rehnquist and Justice Anthony Kennedy, dissented and criticized these arguments as lacking evidentiary support. Although the Court had previously recognized that Congress granted states broad latitude to define the package of benefits covered by Medicaid, O'Connor said, this flexibility did not extend to subsidizing health care for people ineligible for Medicaid.
Two aspects of the decision suggest that important policy and legal issues remain in flux. First, all the justices carefully couched their pronouncements in deference to findings that the Secretary of Health and Human Services might make concerning the legality of Maine Rx. The concurring opinions emphasized that subsequent legal proceedings should take into account the secretary's views on the extent to which expanded-discount programs benefit the Medicaid program and prior-authorization requirements harm Medicaid patients. If the secretary approved the program, PhRMA could challenge the decision but would prevail only if it proved the secretary's actions to be arbitrary and capricious, a very high standard.
A second point is that all the opinions except those of Justices Antonin Scalia and Clarence Thomas contemplate further legal proceedings in which details of the program will be examined to determine whether the rebates for non-Medicaid prescriptions in fact do redound to the benefit of Medicaid programs. O'Connor pointed out that the record in this case did not contain empirical evidence for the claims made in Stevens's opinion with respect to the relation between drug costs and the risk of poverty or the effect of prior-authorization programs on Medicaid costs and access to care. One reading of the plurality and dissenting opinions is that the key point of disagreement is their respective degree of optimism about the forthcoming evidence on this point. Stevens, Souter, and Ginsburg see a high probability that expanded-discount programs serve Medicaid-related goals but recognize that the evidence could point in the other direction. The dissenters are much more skeptical that the evidence will show a Medicaid purpose, but they stop short of declaring it impossible.
Where Do States Stand?
Despite its fractiousness and complexity, the Court's decision in Pharmaceutical Research and Manufacturers of America v. Walsh sends some discernible signals about the legal limits of states' innovative efforts to balance cost and access to care in the future. The bottom line seems to be that states will be permitted to try out drug-discount programs, but only if states work within certain boundaries and respect the role of the federal government in the joint governance of Medicaid. It is clear that states may create preferred-drug lists and require prior authorization for any drug, solely for financial reasons; coupling prior authorization and preferred-drug lists does not create a "formulary" within the meaning of the statute.26 It is also clear that aggressive supplemental-rebate programs that are confined to Medicaid populations and vetted by the Department of Health and Human Services are likely to pass muster.
For programs that try to use Medicaid's buying clout to cross-subsidize drug purchases for a broader group of state residents, the picture is still somewhat opaque. The Vermont and Healthy Maine cases indicate that one requirement for expanded-discount programs is that the state contribute some of its own funds to the rebate pool. In Walsh, the justices clearly indicated a second requirement: that states show that the non-Medicaid components of expanded-discount programs aid the central Medicaid mission.
How strongly states are able to make that case is an open question. It is likely that studies conducted by health services researchers rather than by states themselves will fill the evidentiary void. Health policy experts have observed that only a few programs like Maine Rx (e.g., some programs in Europe and Canada) have been subject to careful evaluation.33,34 On the other hand, a recent empirical analysis of the Department of Veterans Affairs revealed that restricted formularies did result in reduced costs.35 Although the empirical evidence is not unequivocal, a plurality of justices in Walsh did find that expanded-discount programs can serve legitimate Medicaid purposes, as long as the Secretary of Health and Human Services agrees.
Indeed, a key message from this body of litigation is that the courts will show deference to the determinations of the Department of Health and Human Services about whether a prescription-drug discount program serves a Medicaid purpose. The courts will enforce the statutory requirement that states seek the secretary's approval for such programs, and litigants seeking to overturn the secretary's findings will face a tough standard of review.
There is growing clarity about the federal government's position on expanded-discount programs. The Centers for Medicare and Medicaid Services recently notified state Medicaid administrators that such programs may advance Medicaid purposes if they can be shown to help low-income people procure affordable drugs, prevent a slide into poverty, or in some other way reap cost savings or gains in efficiency for Medicaid.36 The Department of Health and Human Services cautioned in its brief in Walsh that a state is unlikely to meet these criteria if its rebate program is not limited to financially needy persons.
Responding to this guidance, Maine recently revised its Maine Rx program to include an income-eligibility standard.37 In addition, the new Maine Rx Plus program will offer larger discounts than Maine Rx proposed to offer, and the discounts will initially be financed by the state, although it will try to negotiate discounts with manufacturers in the future. Other states appear to be set to follow Maine's lead. Prompted by the Walsh decision, Massachusetts announced a similar proposal in June 2003,38 and Connecticut also signaled its interest.39
State initiatives such as Maine's stand at the forefront of the nation's efforts to control health care costs. Some people may be uncomfortable with such initiatives in the light of the many unanswered questions surrounding them. One issue is whether prior-authorization requirements impede the access of Medicaid beneficiaries to essential care. Some evidence suggests that beneficiaries in some states are unable to fill prescriptions at their pharmacies because the physicians failed to request prior authorization.40 A second question is the extent to which prescription-drug discount programs will curb the growth of Medicaid's drug costs. The discounts are large but may prove no match for the cost pressure created by the enormous burden of chronic illness and disability in the Medicaid population and the comprehensive coverage provided by the drug benefit. Finally, it is uncertain whether the passage of legislation providing a Medicare drug benefit will pique Congress's interest in adopting a federal expanded-discount program patterned after the state initiatives, alleviate some of the fiscal burdens facing Medicaid by covering the drug costs incurred by persons eligible for both Medicare and Medicaid, or both. Notwithstanding these uncertainties, the Supreme Court has signaled that states may proceed with caution along these new roads to pharmaceutical cost containment, and states are responding with vigor.
We are indebted to Ashley Waters and Jennifer Gray for able research assistance.
Source Information
From the Department of Health Policy and Management, Harvard School of Public Health (M.M.M., D.M.S., T.A.B.); the Department of Medicine, Harvard Medical School (T.A.B.); and Brigham and Women's Hospital (T.A.B.) — all in Boston.
Address reprint requests to Dr. Brennan at Brigham and Women's Hospital, 75 Francis St., PBB4, Boston, MA 02115, or at tabrennan@partners.org.
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.
Iglehart JK. The dilemma of Medicaid. N Engl J Med 2003;348:2140-2148.
Maynard A, Bloor K. Dilemmas in regulation of the market for pharmaceuticals. Health Aff (Millwood) 2003;22:31-41.
Kanavos P, Reinhardt U. Reference pricing for drugs: is it compatible with U.S. health care? Health Aff (Millwood) 2003;22:16-30.
The fiscal survey of states. Washington, D.C.: National Governors Association, National Association of State Budget Officers, 2002. (Accessed January 16, 2004, at http://www.nga.org/cda/files/NOV2002FISCALSURVEY.pdf.)
Pharmaceutical Research and Manufacturers of America v. Walsh, 123 U.S. 1855 (2003).
Harris v. McRae, 448 U.S. 297 (1980).
Kaiser Commission on Medicaid and the Uninsured. Medicaid and the prescription drug benefit: cost containment strategies and state experiences. Washington, D.C.: Henry J. Kaiser Family Foundation, 2002. (Accessed January 16, 2004, at http://www.kff.org/medicaid/4063-index.cfm.)
Smith V, Ellis E, Gifford K, Ramesh R, Wachino V. Medicaid spending growth: results of a 2002 survey. Washington, D.C.: Henry J. Kaiser Family Foundation, 2002. (Accessed January 16, 2004, at http://www.kff.org/medicaid/4064-index.cfm.)
Schneider A, Elam L. Medicaid: purchasing prescription drugs. Washington, D.C.: Henry J. Kaiser Family Foundation, 2002. (Accessed January 16, 2004, at http://www.kff.org/medicaid/4025-index.cfm.)
Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, 4401, 104 Stat. 1388-143 (1990).
Social Security Act, 42 U.S.C. 1396r-8(c)(1)-(2) (2000).
Bruen BK. States strive to limit Medicaid expenditures for prescribed drugs. Washington, D.C.: Henry J. Kaiser Family Foundation, 2002. (Accessed January 16, 2004, at http://www.kff.org/medicaid/4030-index.cfm.)
Social Security Act, 42 U.S.C. 1396r-8(d)(4)-(5) (2000).
Pharmaceutical Research and Manufacturers of America v. Meadows, 304 F.3d 1197 (11th Cir. 2002).
Bernasek C, Farkas J, Felman H, Harrington C, Mendelson D, Ramchand R. Case study: Michigan's Medicaid prescription drug benefit. Washington, D.C.: Henry J. Kaiser Family Foundation, 2003. (Accessed January 16, 2004, at http://www.kff.org/medicaid/4083-index.cfm.)
Bernasek C, Harrington C, Ramchand R, Mendelson D. Florida's Medicaid prescription drug benefit: a case study. Washington, D.C.: Henry J. Kaiser Family Foundation, 2002. (Accessed January 16, 2004, at http://www.kff.org/medicaid/4031-index.cfm.)
Social Security Act, 42 U.S.C. 1315(a) (2000).
National Conference of State Legislatures. State pharmaceutical assistance programs (includes seniors, disabled, uninsured, and others). (Accessed January 16, 2004, at http://www.ncsl.org/programs/health/drugaid.htm.)
Pharmaceutical Research and Manufacturers of America v. Thompson, 251 F.3d 219 (D.C. Cir. 2001).
Act to Create the Healthy Maine Prescription Program, Me. Rev. Stat. Ann. tit 22, 258 (West 2003).
Act to Establish Fairer Pricing for Prescription Drugs, Me. Rev. Stat. Ann. tit. 22, 2681 (West 2003).
Pharmaceutical Research and Manufacturers of America v. Concannon, 249 F.3d 66 (1st Cir. 2001).
Pharmaceutical Research and Manufacturers of America v. Meadows, 123 S. Ct. 2213 (2003).
Pharmaceutical Research and Manufacturers of America v. Department of Community Health, 657 N.W.2d 162 (Mich. Ct. App. 2002).
Pharmaceutical Research and Manufacturers of America v. Thompson, 259 F. Supp. 2d 39 (D.D.C. 2003).
Social Security Act, 42 U.S.C. 1396r-8(b)(1)(A) (2000).
Governor signs bill to control drug costs through preferred drug list, other means. BNA Health Law Rep 2002;11:896.
Pharmaceutical Research and Manufacturers of America v. Thompson, 313 F.3d 600 (D.C. Cir. 2002), as amended, 321 F.3d 1134 (D.C. Cir. 2003).
U.S. Const. art. VI, cl. 2.
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Towse A. The efficient use of pharmaceuticals: does Europe have any lessons for a Medicare drug benefit? Health Aff (Millwood) 2003;22:42-45.
Morgan SG, Barer ML, Agnew JD. Whither seniors' pharmacare: lessons from (and for) Canada. Health Aff (Millwood) 2003;22:49-59.
Huskamp HA, Epstein AM, Blumenthal D. The impact of a national prescription drug formulary on prices, market share, and spending: lessons for Medicare? Health Aff (Millwood) 2003;22:149-158.
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Carrier P. Revised Maine Rx unveiled. Portland Press Herald. May 31, 2003:1A.
Klein R. Legislators seek drug discounts: Medicaid business would be leverage. Boston Globe. June 12, 2003:A1.
Sturges P, Edmondson T, Valliere R. Supreme Court rejects industry injunction in challenge to Maine drug rebate law. BNA Health Law Rep 2003;12:796-98.
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Related Letters:
State Initiatives to Control Medicaid Drug Costs
Weiner M.(Michelle M. Mello, J.D., )
Nowhere is concern about cost and access more pressing than in the provision of prescription drugs through state Medicaid programs. Prescription drugs are the fastest-growing component of health care spending.1 Medicaid has been hit hard — its spending on drugs soared from $4.8 billion in 1990 to $21.0 billion in 2000.2
A variety of state initiatives have emerged for reducing expenditures on prescription drugs. These initiatives have been informed in their design by experience in other countries3,4,5 and facilitated by the Medicaid program's waiver provisions, which afford states latitude to engage in policy experiments. The initiatives have met with vigorous opposition from the drug industry. A series of legal challenges, in which manufacturers of pharmaceutical products allege that some of the new schemes exceed states' powers, have been percolating through the lower courts. In 2003, the litigation reached the Supreme Court in the case of Pharmaceutical Research and Manufacturers of America v. Walsh.6
A central question in much of the litigation is whether states may use Medicaid's buying clout to cross-subsidize drug purchases for residents who, although medically needy, do not qualify for Medicaid. More generally, these cases have emerged as an important test of the boundaries of federalism — that is, of the division of power between federal and state governments. In an era of skyrocketing expenditures and eviscerated state budgets, the stakes for state Medicaid programs are enormous.
In a complicated and divided decision, the Supreme Court in Pharmaceutical Research and Manufacturers of America v. Walsh signaled its receptiveness to relatively broad state experimentation in the area of prescription drugs but imposed some important boundaries and caveats. In this article, we describe some of the leading strategies states have used in the battle against rising drug costs, we review the attendant litigation, and we extract some key policy lessons for states' pursuit of a balance between cost and access.
Pharmaceutical Costs under Medicaid
The federal statute and regulations that established the Medicaid program erect an intricate legal regime, compounded in its complexity by the "system of cooperative federalism" whereby control over the program is shared by the federal and state governments.7 The structure of Medicaid has recently been carefully reviewed in the Journal.2 In brief, states manage their Medicaid programs under federal rules. State programs must cover specified types of services for "categorically eligible" beneficiaries, but they may elect to provide more extensive benefits and cover other groups of medically needy people. Coverage of outpatient prescription drugs is optional, but all states provide drugs to categorically eligible beneficiaries, and most offer some coverage to medically needy beneficiaries.8
A survey showed that 44 states considered the cost of prescription drugs to be one of the top three influences on Medicaid expenditures in 2002.9 Drug costs rose at an average annual rate of 18.1 percent from 1997 to 2000 — more than twice the 7.7 percent annual growth rate for Medicaid expenditures as a whole.10 It is particularly alarming that these expenditures have spiraled upward in the face of fairly stringent federal provisions for controlling price, coverage, and use.
The federal Medicaid statute regulates price directly, by imposing ceilings on the amount Medicaid will pay pharmacies for drugs, and indirectly, through a rebate program. The Omnibus Budget Reconciliation Act of 1990 made Medicaid's drug purchases contingent on the willingness of pharmaceutical manufacturers to give rebates to the federal government.11 The rebates for nongeneric medications are no less than 15.1 percent of the average manufacturer's price, which is the average price paid to a manufacturer by wholesalers for a drug distributed to retail pharmacies.12 The rebate program reduced Medicaid's drug expenditures by an estimated 20 percent in 2000.13
With respect to coverage, the Medicaid statute allows states to exclude certain categories of drugs — in particular, weight-control drugs, fertility drugs, and cosmetics. In addition, states may require the substitution of generic drugs for nongeneric drugs when therapeutic equivalency has been shown. They may institute "fail first" programs, in which patients must fail to benefit from less expensive, usually older, drugs before more costly ones are used. States also may limit the number and size (the amount of medication and the number of refills) of prescriptions covered by Medicaid and may impose small copayments.13
To control use, state Medicaid programs may require prior authorization for outpatient drugs. Federal law also permits drug formularies, or lists of preferred drugs, provided that any drug excluded from the formulary lacks a "significant, clinically meaningful therapeutic advantage" over an alternative that is in the formulary.14 Formularies are always paired with the requirement of prior authorization, because outright exclusion of drugs from coverage is prohibited (except for the limited categories described above). Hence, the formulary essentially establishes fast-track approval for listed drugs and subjects the rest to prior authorization. Prior-authorization programs, on the other hand, may stand alone, and when they do, it is permissible for states to make authorization contingent on the drug's cost.
State Efforts to Obtain Greater Discounts
Emboldened by budget cuts, several states have moved with unprecedented aggressiveness to force deeper and wider drug discounts. Two types of programs — supplemental rebates and expanded discounts — have become particularly controversial.
Supplemental-Rebate Programs
Many states have adopted supplemental-rebate programs, whereby they demand rebates from drug manufacturers at levels exceeding those required by federal law. A state agrees to place the products of compliant manufacturers on a list of preferred drugs and subjects drugs made by noncompliant companies to a prior-authorization requirement. Under this requirement, physicians must obtain approval by telephone for each prescription, an inconvenience that can translate rather dramatically into reduced market share,15 creating a powerful incentive for pharmaceutical companies to agree to rebates. Supplemental-rebate programs are operating in 9 states and have been proposed in 14 others.16
The programs in Florida and Michigan are of particular interest because of the litigation surrounding them. Adopted in May 2001, Florida's program was unique in offering manufacturers who sought a preferred listing a choice between giving supplemental rebates and funding disease-management programs.17 Companies that refused to do either had their drugs saddled with the prior-authorization requirement, although Florida gave the prescribing physician the final authority to prescribe the first-choice drug as long as he or she made the required telephone call.15
Michigan implemented a similar program in 2001 to combat Medicaid expenditures that were absorbing nearly 20 percent of the entire state budget.16 Generic medications and drugs that were considered to be the best in their therapeutic class were automatically included in the Michigan Pharmaceutical Product List. In order to avoid the need for prior authorization for any other drug, the manufacturer had to agree to pay a supplemental rebate so that the cost of a drug after the rebate matched the lowest price (anywhere in the country) of the cheapest "best in class" drug.
Expanded-Discount Programs
Several states have sought to expand rebates beyond Medicaid prescriptions to prescriptions for medically needy residents of the state who do not qualify for Medicaid. Vermont and Maine have been the leading innovators, acting under the demonstration-waiver provisions of the Social Security Act.18 Their examples have inspired Connecticut, Hawaii, and New Mexico to enact similar programs and have attracted the interest of at least 16 other states.19
Vermont's Pharmacy Discount Program expanded the federal Medicaid rebate to apply to all Vermonters with incomes up to 300 percent of the federal poverty level who lacked prescription-drug coverage, as well as Medicare beneficiaries with incomes up to 150 percent of the poverty level who carried no supplemental drug coverage.20 Patients in these categories could purchase drugs at a discount of 17.5 percent.
Maine has promulgated two programs that use Medicaid's purchasing clout to obtain discounts on prescription drugs for state residents who have no Medicaid coverage. The Healthy Maine Prescriptions Program was enacted in 2001 under a demonstration waiver.21 It extended drug discounts of up to 25 percent to 225,000 persons who had incomes from 185 percent to 300 percent of the federal poverty level and had no insurance. The legality of the program is now in question.
Healthy Maine's predecessor was a 2000 initiative called Maine Rx. Enacted but never implemented, Maine Rx similarly authorized the state to negotiate rebates for non-Medicaid prescriptions and imposed a prior-authorization requirement for prescriptions given to Medicaid beneficiaries for drugs made by companies that did not grant rebates.22 Unlike Healthy Maine, Maine Rx was intended to apply to all Maine residents who were not eligible for Medicaid and lacked other drug coverage, not merely those below a specified income cap. Another distinction was that the program was not conducted under a demonstration waiver. Furthermore, unlike Florida, Maine did not permit payment for drugs made by noncompliant manufacturers, even if a physician insisted.23 Implementation of Maine Rx was stalled in 2000 when several drug companies organized a resistance effort that turned to litigation.
The Pharmaceutical Industry's Response
The pharmaceutical industry has vigorously contested the discount initiatives in Florida, Michigan, Vermont, and Maine through its main trade organization, Pharmaceutical Research and Manufacturers of America (PhRMA). Decisions handed down in these cases in the past year shed light on the options open to state Medicaid programs.
PhRMA's Cases
The case against Florida, filed in August 2001, turned on the sharpness of the distinction between the drug list and prior-authorization components of the program. PhRMA characterized the drug list as a formulary, put it at the heart of the rebate program, and argued that the state's program was in conflict with the federal Medicaid statute because it used financial (rather than clinical) criteria to build the list. The trial court, and later the U.S. Court of Appeals for the 11th Circuit, rejected this argument.15 Both courts ruled that the state had created a prior-authorization program, not a formulary in the statutory sense. Consequently, PhRMA's arguments collapsed in two places: financial criteria could be used, and technically, the drug list did not exclude anything from coverage but merely shifted certain decisions to the prior-authorization track. In addition, the appellate court held that the rebate program served the primary purpose of the Medicaid statute — to provide medical services to low-income people — by driving down the cost of prescription drugs.15 The Supreme Court has declined to hear PhRMA's appeal of this decision.24
In Michigan, PhRMA challenged the rebate program in state and federal court and lost in both forums.25,26 The accusations were built on those made in Florida. In March 2003, the federal trial court ruled in the state's favor, finding that, as in Florida, the Michigan Pharmaceutical Product List constituted a prior-authorization program, not a formulary, and could therefore use nonclinical criteria; Congress did envision that states might exact rebates above and beyond the federal rebate; the rebate program was not obviously inconsistent with "the best interests of recipients"; and the program's pricing strategy did not constitute regulation of interstate commerce in violation of the commerce clause of the Constitution.
In contrast to these losses in Florida and Michigan, PhRMA has scored some victories in its litigation against the Vermont program. An appellate court found partial fault with Vermont's expansion of its program to include non-Medicaid populations.20 Because the government contributed no Medicaid funds toward the purchase of discounted prescriptions for people who were not Medicaid beneficiaries, the program violated the federal rule that drug manufacturers owe rebates only for drugs "for which payment was made under the State plan."27 In response to this ruling, Vermont has decided to contribute some state money to the expanded rebate program.28
PhRMA has also litigated to invalidate both Maine programs. The legality of Healthy Maine, the later program, remains undecided for the moment, largely because the state created a moving target when it modified several features of the program in response to the Vermont ruling. Most notably, the state added a small contribution to the rebate pool. The federal circuit court declared the original version of the program unlawful, deeming it indistinguishable from the Vermont program, but the court declined to review the new version of the program until the Secretary of Health and Human Services has been given a chance to approve the changes.29
The most important case in this flurry of litigation turned out to be the earliest — PhRMA's challenge to Maine Rx. It reached the Supreme Court in January 2003 and was decided in May 2003.
Maine Rx in the Supreme Court
PhRMA sought to enjoin the implementation of Maine Rx on the basis of two claims. First, noting that most drug companies sold their products to out-of-state wholesalers, which in turn sold the products to Maine retailers, PhRMA claimed that the program illegally regulated business beyond the state's borders, in violation of the commerce clause. Second, PhRMA alleged that the program conflicted with Congress's purpose in passing the Medicaid statute, which was to provide health services to the medically indigent. The supremacy clause of the Constitution provides that federal law trumps or preempts state law when the two clash in an area that the federal government has authority to regulate.30 Appealing to this principle, PhRMA argued that a clash existed in the program: Maine's use of prior authorization to force drug companies to give discounts to people ineligible for Medicaid served no "Medicaid purpose" and actually impeded Medicaid beneficiaries' access to medically necessary medications.
The district court accepted both of PhRMA's arguments and blocked implementation of the program in October 2000. The First Circuit Court of Appeals reversed this ruling in May 2001.23 The Supreme Court granted certiorari to review the case in June 2002, recognizing the "national importance" of the issues at stake.31 This grant of review in itself was controversial. Because the Maine Rx program had never been submitted for approval by the Department of Health and Human Services, the Bush administration argued that the dispute over the program was not yet ready for judicial review.32
Undeterred, the Supreme Court affirmed the decision to lift the injunction on the program by a vote of six to three.6 The Court's decision is a thicket of complicated concurring opinions and shifting coalitions of justices. Justice John Paul Stevens wrote the main opinion, but he was joined by a majority of justices only in his description of the facts of the case and his finding (unanimously supported) that the commerce clause was not violated.
The entire Court cursorily rejected the notion that Maine was attempting to regulate the price of out-of-state transactions. The profits of drug manufacturers might be affected by the manufacturers' voluntary participation in the rebate program, the justices wrote, but that did not constitute extraterritorial price regulation.
With regard to the preemption argument, a plurality of four justices found that the use of the prior-authorization mechanism to leverage discounts for citizens who were not eligible for Medicaid did not create a conflict with the federal Medicaid statute. Stevens, joined by Justices David Souter and Ruth Bader Ginsburg, held that providing access to medically necessary drugs for people who were ineligible for Medicaid and preventing their possible slide into poverty, and thus the need for Medicaid coverage, were legitimate "Medicaid purposes." In addition, Stevens argued that the prior-authorization program, like those used by managed-care organizations, encouraged the use of less costly medications and thereby reduced Medicaid's drug expenditures.
Justice Sandra Day O'Connor, joined by Chief Justice William Rehnquist and Justice Anthony Kennedy, dissented and criticized these arguments as lacking evidentiary support. Although the Court had previously recognized that Congress granted states broad latitude to define the package of benefits covered by Medicaid, O'Connor said, this flexibility did not extend to subsidizing health care for people ineligible for Medicaid.
Two aspects of the decision suggest that important policy and legal issues remain in flux. First, all the justices carefully couched their pronouncements in deference to findings that the Secretary of Health and Human Services might make concerning the legality of Maine Rx. The concurring opinions emphasized that subsequent legal proceedings should take into account the secretary's views on the extent to which expanded-discount programs benefit the Medicaid program and prior-authorization requirements harm Medicaid patients. If the secretary approved the program, PhRMA could challenge the decision but would prevail only if it proved the secretary's actions to be arbitrary and capricious, a very high standard.
A second point is that all the opinions except those of Justices Antonin Scalia and Clarence Thomas contemplate further legal proceedings in which details of the program will be examined to determine whether the rebates for non-Medicaid prescriptions in fact do redound to the benefit of Medicaid programs. O'Connor pointed out that the record in this case did not contain empirical evidence for the claims made in Stevens's opinion with respect to the relation between drug costs and the risk of poverty or the effect of prior-authorization programs on Medicaid costs and access to care. One reading of the plurality and dissenting opinions is that the key point of disagreement is their respective degree of optimism about the forthcoming evidence on this point. Stevens, Souter, and Ginsburg see a high probability that expanded-discount programs serve Medicaid-related goals but recognize that the evidence could point in the other direction. The dissenters are much more skeptical that the evidence will show a Medicaid purpose, but they stop short of declaring it impossible.
Where Do States Stand?
Despite its fractiousness and complexity, the Court's decision in Pharmaceutical Research and Manufacturers of America v. Walsh sends some discernible signals about the legal limits of states' innovative efforts to balance cost and access to care in the future. The bottom line seems to be that states will be permitted to try out drug-discount programs, but only if states work within certain boundaries and respect the role of the federal government in the joint governance of Medicaid. It is clear that states may create preferred-drug lists and require prior authorization for any drug, solely for financial reasons; coupling prior authorization and preferred-drug lists does not create a "formulary" within the meaning of the statute.26 It is also clear that aggressive supplemental-rebate programs that are confined to Medicaid populations and vetted by the Department of Health and Human Services are likely to pass muster.
For programs that try to use Medicaid's buying clout to cross-subsidize drug purchases for a broader group of state residents, the picture is still somewhat opaque. The Vermont and Healthy Maine cases indicate that one requirement for expanded-discount programs is that the state contribute some of its own funds to the rebate pool. In Walsh, the justices clearly indicated a second requirement: that states show that the non-Medicaid components of expanded-discount programs aid the central Medicaid mission.
How strongly states are able to make that case is an open question. It is likely that studies conducted by health services researchers rather than by states themselves will fill the evidentiary void. Health policy experts have observed that only a few programs like Maine Rx (e.g., some programs in Europe and Canada) have been subject to careful evaluation.33,34 On the other hand, a recent empirical analysis of the Department of Veterans Affairs revealed that restricted formularies did result in reduced costs.35 Although the empirical evidence is not unequivocal, a plurality of justices in Walsh did find that expanded-discount programs can serve legitimate Medicaid purposes, as long as the Secretary of Health and Human Services agrees.
Indeed, a key message from this body of litigation is that the courts will show deference to the determinations of the Department of Health and Human Services about whether a prescription-drug discount program serves a Medicaid purpose. The courts will enforce the statutory requirement that states seek the secretary's approval for such programs, and litigants seeking to overturn the secretary's findings will face a tough standard of review.
There is growing clarity about the federal government's position on expanded-discount programs. The Centers for Medicare and Medicaid Services recently notified state Medicaid administrators that such programs may advance Medicaid purposes if they can be shown to help low-income people procure affordable drugs, prevent a slide into poverty, or in some other way reap cost savings or gains in efficiency for Medicaid.36 The Department of Health and Human Services cautioned in its brief in Walsh that a state is unlikely to meet these criteria if its rebate program is not limited to financially needy persons.
Responding to this guidance, Maine recently revised its Maine Rx program to include an income-eligibility standard.37 In addition, the new Maine Rx Plus program will offer larger discounts than Maine Rx proposed to offer, and the discounts will initially be financed by the state, although it will try to negotiate discounts with manufacturers in the future. Other states appear to be set to follow Maine's lead. Prompted by the Walsh decision, Massachusetts announced a similar proposal in June 2003,38 and Connecticut also signaled its interest.39
State initiatives such as Maine's stand at the forefront of the nation's efforts to control health care costs. Some people may be uncomfortable with such initiatives in the light of the many unanswered questions surrounding them. One issue is whether prior-authorization requirements impede the access of Medicaid beneficiaries to essential care. Some evidence suggests that beneficiaries in some states are unable to fill prescriptions at their pharmacies because the physicians failed to request prior authorization.40 A second question is the extent to which prescription-drug discount programs will curb the growth of Medicaid's drug costs. The discounts are large but may prove no match for the cost pressure created by the enormous burden of chronic illness and disability in the Medicaid population and the comprehensive coverage provided by the drug benefit. Finally, it is uncertain whether the passage of legislation providing a Medicare drug benefit will pique Congress's interest in adopting a federal expanded-discount program patterned after the state initiatives, alleviate some of the fiscal burdens facing Medicaid by covering the drug costs incurred by persons eligible for both Medicare and Medicaid, or both. Notwithstanding these uncertainties, the Supreme Court has signaled that states may proceed with caution along these new roads to pharmaceutical cost containment, and states are responding with vigor.
We are indebted to Ashley Waters and Jennifer Gray for able research assistance.
Source Information
From the Department of Health Policy and Management, Harvard School of Public Health (M.M.M., D.M.S., T.A.B.); the Department of Medicine, Harvard Medical School (T.A.B.); and Brigham and Women's Hospital (T.A.B.) — all in Boston.
Address reprint requests to Dr. Brennan at Brigham and Women's Hospital, 75 Francis St., PBB4, Boston, MA 02115, or at tabrennan@partners.org.
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Related Letters:
State Initiatives to Control Medicaid Drug Costs
Weiner M.(Michelle M. Mello, J.D., )