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April 2002
Vol. 5, No. 4, p 41–42.
matters of money

The Medicaid Effect

The costs of prescription drugs will be heavily affected by requests for prior authorization.

opening artAn old saying among sailors goes like this: “A boat is a hole in the water into which you throw money.” The same might be said of state Medicaid programs, which are in danger of sinking unless drastic measures are taken to plug the leaks. Medicaid, which services the health care needs of 44 million low-income people, is in a fiscal crisis: Its costs are steadily rising, even as state revenues have crashed in the wake of a national recession. “It’s like this,” says Donald Muse, president of Muse & Associates, a Washington, DC-based health care consultancy. “Medicaid is 20% of the average state budget, and Medicaid spending is typically going up 10% a year. Meanwhile, state revenues are dropping by about 5% annually. Add it up, and you see the states have a big problem to solve.”

Prior authorization
Solving the problem means cutting costs, and the Medicaid budget slashers are out in force, trimming the perceived fat from the bone. Nursing home and hospital budgets have been reduced, reimbursements to providers are being cut or delayed, and in some cases podiatry and dental coverage are being eliminated. Prescription drug coverage—a soaring expenditure under Medicaid, rising on average by 20% annually—is also under the blade. In a growing number of states, the name of the game in the Medicaid drug battle is “prior authorization”, meaning that doctors need state approval to prescribe certain brand-name prescriptions if generic or other lesser-priced alternatives are available. Prior authorization is not new; it has always been required for drug therapy under managed care. But only recently has the practice been applied in the cash-starved public sector. “We’re just bringing up the bloody rear,” says Annette Hanson, Massachusetts’ Medicaid director.

Muse jokes that prior authorization under Medicaid comes in 57 flavors. The more restrictive states, such as Florida and Michigan, place arbitrary maximums on some brand-name prescriptions even after they have been approved. More lenient states might require only that a doctor fill out a simple form to explain why the brand-name drug is preferred.

For the most part, drugs for life-threatening illnesses are exempt from prior authorization. But drugs for many other conditions, including mental illnesses, gastrointestinal disorders, arthritis, and more, are not. States around the country are currently working to create hit lists of drugs that will no longer be dispensed with impunity. If generic or less expensive alternatives are available, doctors must prescribe them instead. The need for prior authorization is clear, says Ray Hanley, Arkansas’ Medicaid director. “There is a tremendous problem in Medicaid with gross overprescribing of some very expensive drugs,” he explains. “In many cases, the generic is perfectly adequate.

While stakeholders everywhere recognize the need for cost-savings, prior authorization in Medicaid has emerged as a divisive issue. The pharmaceutical industry has fought it at every turn. Already, Maine and Vermont have been sued by the Pharmaceutical Research and Manufacturers of America (PhRMA) for expanding brand-name drug lists for which prior authorization is required. The core issues are, of course, whether drug restrictions will limit the quality of patient care, and whether curtailed drug benefits will provide the economic benefits that state officials expect.

Hanson, who is a physician, insists that generics are equally as effective and safe as their brand-name counterparts and that potentially risky switches are exempted by the state. A veteran of the public health trenches, Hanson is particularly irked by what she calls the “me too” drugs produced by the pharmaceutical industry.

An example of a “me too” drug might be Nexium, the heavily advertised “purple pill” and the next generation of Prilosec, an antiheartburn medication produced by AstraZeneca. According to Newell Augur, director of legislative and public affairs at the Maine Department of Human Services, Prilosec was “without question the most expensive drug in the Maine Medical Program.” Says Augur, “We were spending $8 million a year on Prilosec. After we put the drug on prior authorization, doctors started prescribing the generic, which is Protonix, and we saved more than $6 million in just six months.”

State officials say that the Medicaid drug-money problem can be traced largely to direct-to-consumer advertising by the pharmaceutical industry, which last year spent $2.5 billion on radio, TV, and print ads. Hanley points out that “hundreds of millions” were spent marketing Vioxx and Celebrex to a consumer audience, many of whom now expect treatment with these high-priced drugs rather than generic alternatives available at a fraction of the price.

But what about the patients? Do prior authorization and its associated drug limits pose health risks? Hanley says that if the criteria for drug selection are clearly articulated, and the doctor is fully engaged in the decision-making process, the risks to the patient are virtually nonexistent. In some cases, he concedes, side effects from older or generic drugs may be an issue. But the likelihood of these events is rare, he says, and the risk may not be worth the associated cost of making the latest and greatest available to everyone who asks for it.

Key arguments
Meanwhile, industry representatives have a slightly different take on the matter. Among the key arguments put forth by organizations such as PhRMA are that limited access to brand-name drugs will merely inflate Medicaid spending in other areas, such as surgeries, hospitalization, or prolonged treatments that might be avoided with better pharmacological care. Whether denial of certain high-priced drugs under Medicaid will harm patients and drive up health costs remains to be seen. Uwe Reinhardt, professor of economics and political affairs at Princeton University, and an internationally recognized authority on health care policy, says that some studies have shown that strict limits on drug treatment can lead to increases in overall health spending. “The problem is that this is hard to show statistically, and it’s even harder to convince lay people of it when [drug] costs are rising at double digits,” he says.

An important point, state officials argue, is that prior authorization does not mean that a desired prescription will not be filled. Augur points out that turnaround times in Maine are typically less than five hours, and that roughly 90% of brand-name prescription requests are granted. However, there are virtually no data describing response characteristics for other state programs, most of which are still in their infancy. Nancy Lorenz, an attorney with Greater Boston Legal Services, says that she is aware of at least 70 denied requests for brand-name drugs (most used to treat psychiatric conditions) that she says are being appealed in both Massachusetts and federal courts. Prior authorization in Massachusetts’ Medicaid program, which mandates the use of generics for a wide range of selected brand-name drugs, was begun in late November 2001.

“The patients I represent have been denied repeatedly,” she says. “In one case, the review board suggested the generic might have come from a bad batch and advised the doctor to try it again.” Lorenz says that several of the doctors to whom she has spoken appear to resent prior authorization’s intrusion on their own decisions. But Reinhardt counters that doctors should understand the fiscal restraints and recognize that every prescription written under Medicaid poses a tax burden on their fellow citizens.

Regardless of their beliefs about prior authorization in Medicaid, stakeholders unanimously agree that it is here to stay. States around the country are racing to implement their own programs, a trend that will likely accelerate in the coming year. Cost-saving estimates from these programs are still preliminary, but expectations are high. Hanson suggests that prior authorization will save Massachusetts $10 million in 2002, a figure that she expects to rise as the program takes hold.

Charles W. Schmidt is a freelance writer living in Portland, ME. Send your comments or questions regarding this article to mdd@acs.org or the Editorial Office by fax at 202-776-8166 or by post at 1155 16th Street, NW; Washington, DC 20036.

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