Medicare Modernization Act:
Impact of State Implementation
Decisions
Haiden Huskamp
AcademyHealth
June 28, 2005
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
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
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)
How Does Medicaid Influence
Prices?

Two key ways:

Medicaid Rebate Program

Use of pharmacy management tools
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
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
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
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
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
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
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
Examples

Antipsychotic drugs


ARBs


In 2001, Medicaid responsible for 52% of sales
and 67% of Rxs (Frank, Conti, Goldman, 2005)
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)
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
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