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Patient Care Squeezed by Soaring Drug Prices

April 2002

First Michigan and now Massachusetts have thrown down the gauntlet to the pharmaceutical industry over high drug prices and runaway healthcare costs. Will New York be next? Unable to sustain ballooning Medicaid drug budgets, these states are telling pharmaceutical makers to either bring prices down or face banishment to a list of medications that will require third party approval before they can be prescribed. In a highly competitive market, prior approval is a steep hurdle that effectively means the other guy's drug gets Medicaid's lucrative business; unfortunately, prior approval can create big hurdles for patients as well.

This is a high stakes game and an industry unaccustomed to being bullied has pulled out all stops to undercut its foes with lawsuits and public outcry. So far, judges have allowed the cost containing experiments to go forward, and after years of manipulation by the industry's public relations machine, their latest disaster alerts ring false. Still, many legitimate consumer organizations are alarmed about the impact these plans might have on the country's most vulnerable citizens: the elderly, the disabled and people with complicated treatment needs, including those with HIV.

According to a new report by the National Institute of Health Care Management, spending on prescription drugs in the U.S. increased faster than any other aspect of health care last year, hitting a new high of $154 billion. Medicaid expenditures on drugs have gone up by 18% per year for the past four years. Shrinking state and federal budgets have put Medicaid programs under tremendous pressure to hold down costs. Last year at least eighteen states passed laws designed to contain state or consumer drug expenditures and a number of experiments in tighter administration of public drug spending are underway. These responses are important to watch because trends in Medicaid often soon spread to other public health plans such as ADAP, the states' AIDS Drug Assistance Programs, or New York's drug assistance plan for low income seniors (EPIC).

For a large healthcare payer, there are really only two ways to rein in mounting drug expenditures. The hit to a state's drug budget is determined by this equation: Price x Utilization = Cost. If you can lower the price, you lower your overall costs; lower the quantities consumed, and costs also go down. Lower them both... Excelsior! In Medicare and Medicaid, drug pricing is addressed by laws that say companies must offer their best wholesale prices to government programs. This is supposed to ensure that government programs pay no more than any other large purchaser of drugs does. But because of a complex set of classifications and pricing tiers, some programs, such as the Veterans Administration (VA) get better prices than Medicaid. Still, government doesn't have a lot of leverage to bring prices lower than what manufacturers are willing to offer.


Cut Prices?

Efforts to bring drug prices down in the U.S. range from pitiful to quixotic with no really promising solutions in between. Several pharmaceutical manufacturers are boosting the idea of discount cards for seniors that would afford a 10 to 40 percent break off the suggested retail prices of their products. As one critic noted, a 10 percent discount on a Ferrari won't help someone who can barely afford a used car. President Bush has personally voiced his support for a national discount card.

At the other end of the spectrum, many patent reform advocates see excessive terms of market exclusivity as the culprit. Some have called for cutting back patent protection from 20 years to as little as three years before lower-cost generic drugs are allowed to compete. The strength of patent rights may also be conditional upon the source of the underlying research. U.S. research dollars very often contribute to the discovery of drugs that are subsequently developed by industry then sold back to government programs at monopoly prices. In effect, taxpayers are paying twice for these medications. Any other ground floor investor would be richly rewarded, advocates say, so why should the public good benefit less? Many are pressing the administration to apply an existing law that could compel drug companies with products derived from federally funded research to sell them at reasonable prices. This legislation, part of the Bayh-Dole Act, was passed in 1980 but its provisions have never been exercised.

Meanwhile, state governments, which bear much of the burden of escalating Medicaid drug prices, are searching for new, practical ways to hold down costs. Private prescription plans, hospitals, HMOs and other volume purchasers have been able to bargain with drug makers and pharmacists to get better deals. Last year several states decided to pool their purchasing power and improve their bargaining clout. But again, if prices are exorbitant to begin with, then few savings are possible and the discounts won are often soon erased by price hikes.

A few states have started to demand additional rebates from manufacturers. One approach is a kind of frequent buyer plan where credits for money spent on a particular company's drugs can later be exchanged for free product. Some rebate plans seek across-the-board discounts that demand similarly sized cuts from every maker and every drug, its base wholesale price notwithstanding. Rebate plans may save money, but they don't alter the disparity in pricing between similar drugs in a therapeutic class. This leaves the door open for preferred formularies and prior authorization schemes that try to steer patients and doctors away from using the higher-priced drugs. Not surprisingly, both consumers and the pharmaceutical industry dislike these plans.

The Industry Fights Back

The pharmaceutical industry's answer to all of these schemes is to call for open formularies and the freedom to raise prices at will. In Florida, rather than give back rebates, companies negotiated to invest the equivalent of rebate dollars in disease management education programs. The net effect of this maneuver -- as is intended from the industry's professional education efforts -- was to actually increase the utilization of drugs that year.

Pharma protests that the problem with pharmaceuticals in America is underprescribing, not overutilization; that many people who could benefit from new drugs are not yet aware that they are suffering. Direct-to-consumer advertising has caused demand for anti-depressants, ulcer drugs, allergy medicine and Viagra to surge. The industry is spending mightily, not only to grow the market for their products, but also to enlist consumer voices in the fight against drug limits. Recent news stories have detailed the manufactured nature of some of these so-called "astroturf" grassroots groups. A spokesman for the Pharmaceutical Research and Manufacturers of America (PhRMA), quoted in The Boston Globe, described his organization's response to the roll out of a prior approval plan in Massachusetts: "We will launch a grassroots education campaign, so they're aware of what the state's trying to do, before it's implemented." (See "PhRMA Speaks!" in this issue.)

Some analysts believe that maintaining market share is ultimately more important to pharmaceutical makers than short-term maximization of profits. If three similar drugs in the same therapeutic category are in the market at different prices, then there will likely be a fierce battle among them to preserve market share. A company will swallow lower profits rather than give up even one sale to a competitor, the theory goes. And with profit margins as steep as those in the prescription drug industry, a maker may well find price cuts preferable to ceding even a fraction of their drug's space on the pharmacy shelf.

Michigan Rebels

Against this background, the State of Michigan rolled out an aggressive plan to secure significant cost savings through rebates, without overtly intending to restrict consumer or provider choice about which drugs can be used. The Michigan plan created a preferred drug list with forty therapeutic categories. Within each category, the state's drug advisory panel chose the "best-in-class" drug as a benchmark. Drugs were selected by multiple criteria, not just by price, and in some categories, the best-in-class drug was not the cheapest contender. The state allows drugs that are on the approved list to be prescribed without prior authorization (PA); drugs not on the list can be prescribed, but the doctor must justify the choice. So far, this is not unusual for a PA scheme, but Michigan took an extra step. They said that makers of other drugs in a particular therapeutic category could have their products added to the preferred list if they were willing to cut prices to match that of the index drug. This is intended to bring the price of more expensive drugs in line with that of the best priced product in each class. The result is supposed to level the playing field for manufacturers and control costs for the state, all without creating artificial prescribing restrictions for patient or doctor. Companies might profit less, but they'd retain market share.

Michigan's plan was developed in secret then rolled out as a fait accompli. Not surprisingly the pharmaceutical makers were apoplectic. The industry spends billions on marketing and lobbying and plays hardball when forces intervene in their freedom to pursue market share. Lawsuits have been filed to prevent Michigan's program from going forward, but so far, the state plan has been upheld. This idea could yet be sunk if industry leaders stage a walkout rather than submit to additional rebates. Several large manufacturers have refused to lower prices to participate in Michigan's list, effectively abandoning market share by boycotting the system. The industry may decide that giving up market share in one or two states is an acceptable price to pay to stop this plan from spreading elsewhere. It remains to be seen if these tactics will work, but for now, some Medicaid patients in Michigan will certainly face restrictions and drug denials.

Michigan hopes this system will save them $42 million during its first year with PA. In March, Massachusetts announced that they were adopting a similar strategy and New York State is rumored to be next in line. Meanwhile in Washington, the powerful pharmaceutical lobby is hard at work mobilizing Congress and consumer groups against any effort to meddle with the sacred bonds between doctor, patient, and Madison Avenue.

Cut Utilization

Since prices are so tough to tackle, an easier path for government programs is to tighten up on utilization. Usually waste and fraud are the first to come under scrutiny; no one can complain about limiting those. Next come stricter controls over a short list of extremely expensive drugs and other treatments such as human growth hormone. Finally, discussion turns to plans designed to steer patients from expensive brand medications to equivalent generic versions or better-priced competitors. While ostensibly about price savings, these switching efforts may have unintended negative consequences on utilization and access. These solutions sound good in legislative chambers but they are creating a new wave of problems for patients -- especially when drug limits are implemented crudely or without regard for the consequences to those denied treatment or treated improperly.

Prior authorization (PA, also known as prior approval [or in California, TAR: treatment authorization request]) was born in the private health plan industry as a way to assure that the prescription of super-expensive drugs was justified. It requires an agent of the payer to review a drug prescription and approve its use for that patient before it can be dispensed. PA is supposed to be a checkpoint between the pharmacy and the consumer to ensure that the rules for dispensing drugs are followed. These rules may have their origins in concerns about drug safety, mandates to restrict waste and abuse, the desire to make drug selections more rational, and ultimately, the need to hold down costs. But it didn't take long for bureaucrats to recognize that utilization of the listed meds tended to drop significantly as the PA process increased the burden on doctors, patients and pharmacists. Doctors tended to choose a path of less resistance rather than deal with complicated forms and exasperating phone calls -- even if it meant not prescribing a drug they were convinced was appropriate for an individual patient.

So, the true impact of PA on utilization may not come from rationalizing the prescribing practices of doctors as much as from installing a mechanism that puts savings ahead of patients' needs. And it's foreseeable that PA schemes will cause the most trouble for people who use drugs the most -- usually the sickest and most vulnerable patients, such as seniors, cancer patients, or people with chronic illnesses such as AIDS who need multiple drugs to control side effects and prevent complications.

Crude Attempts to Control

Florida initiated a system in 2000 that put a four-drug cap on the number of brand name medicines a person on Medicaid could receive without getting prior authorization. This meant that someone already taking two drugs could show up at a pharmacy with three new prescriptions for a newly diagnosed condition and be told they could only fill two of them since they were over their four-drug limit. At this point the pharmacist is supposed to contact the doctor to see if one of the drugs could be changed to a medicine that didn't need PA. But according to a study of the program's impact on consumers conducted by the University of Florida, there were instances when patients simply thought that they had been denied access to a drug and went home without their medication. There was no good mechanism for following up with the doctor or for providing a temporary supply of the prescribed drug.

This study (widely distributed by the pharmaceutical lobby) also found hidden costs in Florida's poorly administered PA program. For example, if individuals' drugs are denied or interrupted, hospitalizations may increase or additional office visits may be needed to adjust doses or treat complications. A person with a well-managed medical condition who is receiving expensive drugs may actually consume fewer resources than someone with the same condition who requires frequent dose adjustments or more serious interventions that limit their ability to work and enjoy life normally. A Federal class-action lawsuit against Florida Medicaid has recently been filed on behalf of low-income patients who have been denied prescription drugs without proper notice.

New York Medicaid has begun its prior authorization program with a short list of the most expensive drugs. Serostim is a recombinant human growth hormone that can cost as much as $8,000 a month to use. The drug is approved to combat wasting syndrome in people with AIDS and may have other beneficial uses. It's also possible that abuse may be a problem. As one nurse who monitors patients on Serostim put it, "It makes you feel fifteen years younger." This is usually the first drug that state payers try to limit, not only for its exorbitant price, but because there is no evidence of benefit after the first 12 weeks of use. Because growth hormones are highly valued by bodybuilders for their ability to build lean muscle mass, Serostim prescriptions are also carefully scrutinized for fraud and diversion.

Serostim costs are a particular problem for New York State Medicaid since it is one of the program's top five most prescribed drugs. A policy requiring prior authorization for Serostim went into effect in New York on February 15 of this year. A local pharmacist reported to GMHC that before the new policy began she had twelve patients using the drug -- one month later she had four. And of those four, two are having or have had significant problems obtaining authorization to receive Serostim. One patient's doctor insisted that he got authorization for a 28-day supply. However when the pharmacist entered the authorization number into the automated phone system, only a one-day supply of the drug was approved. The pharmacist spent a week with Medicaid trying to solve the problem before sending the case back to the doctor to straighten out.

The other patient had his authorization rejected by Medicaid after the pharmacist punched in the code provided by the doctor's office. Eventually it was discovered that the doctor had written down the wrong code number in the first place. Despite these many, obvious sources of error, the state insists that prior authorization in New York is a simple three-minute process that works well.

There are signs that a major expansion of prior authorization for New York State Medicaid recipients will begin by including the therapeutic class of Cox-2 inhibitors used for arthritis pain management. New York's draft plan is typical in requiring a doctor to call and answer a long list of questions before receiving an authorization number. The patient would then take the authorized prescription to a pharmacy where the pharmacist confirms the PA by telephone. The cycle would be repeated after every two refills or after 60 tablets had been dispensed, whichever comes first. This elementary draft of a plan is sure to cause inconvenience and pain for affected patients unless strong consumer protections are added.

Consumers Resist

A letter written to state legislators by New York's StateWide Senior Action Council detailed some of the problems patients can expect if this system is implemented. The group is particularly concerned that stifling prescribing will make it impossible for many individuals who need medications to obtain them. Furthermore, StateWide anticipates that physicians already at the tipping point of their willingness to participate in Medicaid due to low reimbursement rates will simply refuse to treat Medicaid patients if the burden becomes unreasonable. "The plan will erect bureaucratic hurdles so high that most physicians will be unable to obtain prior authorization. Contemporary medical practice puts doctors under extreme time and economic pressure to abbreviate each patient contact, leaving them without time to make the telephone calls. Further, the telephone questions will be considered professionally demeaning, with doctors' professional judgement subject to second-guessing by an automated interactive phone system."

Dr. Robert Witzburg, chief of community medicine at Boston Medical Center echoed these fears to The Boston Globe, "It's a tremendous hassle. Prior approval saves money in the short term because doctors and patients just give up. But in the end you just substitute other high-cost interventions because the drugs were unavailable. It's a disaster."

New York's StateWide group also believes that doctors will inevitably avoid prescribing medications requiring PA, even it means compromising the best interests of the patient. Since the harmful outcomes are apparent to anyone who has experience with the realities of medical care, the group wonders about New York's true agenda: "Some... suggest that the state is simply proposing prior authorization to force pharmaceutical manufacturers into paying higher Medicaid rebates. They suggest that the state would drop the prior authorization if the manufacturers cough up more money. StateWide certainly hopes that this is not true since it would mean that the plan was intended, in effect, to hold hostage the medical needs of patients in order to procure money."

A Kinder System?

Theoretically, the problems with PA arise from poor implementation, not necessarily from the concept itself. There are proposals to use sophisticated networked computer systems to manage drug authorizations without creating undue burdens for the participants. Ideally, the transaction between a doctor, the PA plan's administration and the pharmacist would be swiftly and transparently handled so that patients are never confused or inconvenienced by delays, denials, or the need to make multiple trips to pick up their medicines. While the technology exists to make a pain-free system possible, ultimately the rules adopted by legislatures and administrators will determine how successful a PA program will be.

A national pharmaceutical benefits management company (PBM), First Health Services, is the vendor for Michigan's controversial PA plan as well as for a more conventional plan in New Jersey. The company would also like to bid to operate a proposed Medicaid PA plan in New York State. In its marketing efforts, First Health places the emphasis on safety. There are certainly important public health gains to be made from reducing prescribing errors, drug interactions and preventable side effects by using a central authorization system. Computerized review could detect potentially deadly drug combinations before they were dispensed. The patients likely to bear the greatest burden from PA, those who use medications the most, are also the patients most likely to have drug interaction problems and could benefit most from a system that analyzed their entire pharmaceutical usage in one place.

Another worthy goal of prior authorization is to educate providers. The aim is to alter physicians' prescribing patterns by asking them to think twice before requesting the latest and most expensive drug when an earlier, far less costly, drug performs just as well. The difficulty is to accomplish this without imposing frustrating barriers that compromise appropriate patient care. Some advocates are proposing other ways to encourage doctors to prescribe responsibly, such as counter-marketing programs designed to offset the millions of dollars industry spends influencing physicians' prescribing habits.

It's clear that safeguards must be put in place to ensure that cost cutting does not come at the expense of beneficiaries' health. One idea is to exempt entire classes of patients from PA based on their diagnosis. For example, it is understood at the outset that people with HIV on treatment will require multiple brand name medications, therefore an HIV diagnosis should be sufficient to justify a blanket PA. Another approach would be to exempt patients based on individual clinical necessity. A doctor should be able to make one phone call that would justify authorization of prescriptions for an entire year if a person has complicated treatment needs. These may be fair and humane solutions, but for budget hawks, one overarching question looms larger: If everyone who needs medication is able to obtain their drugs without barriers, will there be any room left to realize significant savings? And if the state can't save money without harming patients, then are plans to limit utilization merely papering over the crisis? It may all come back to prices.

Changes need to be made, and it's clear that the current system cannot continue to support the growing burden indefinitely. Most critically, the pharmaceutical industry needs to accept discipline over its pricing and marketing practices. As for the states, better provider education, a focus on waste and inappropriate prescribing, and measures to improve drug safety are all potentially positive outcomes of prior authorization plans. But crudely implemented schemes to limit utilization will only cause additional pain and suffering while simply shifting costs elsewhere.

Many thanks to Susan Dooha, David Wunsch, Gregg Gonsalves, Anne Donnelly and Lei Chou for help in preparing this article.

Prior Authorization: How Not to Do It
Example of an actual prior authorization procedure used by an HMO in Texas.

Applying for Prior Authorization

If you are currently taking one of the restricted medications, your doctor may request a review by calling the Plan's pharmacy benefits manager (PBM).

If review is not sought in advance, the process for prior authorization is as follows:

  1. The prescription is presented to the pharmacy. In other words, if you need a refill for your ongoing treatment or you need a new medicine, but your doctor forgot to check with the PBM first...

  2. When the pharmacy submits the prescription to the PBM, an on-line message tells the pharmacist that authorization is necessary. Sorry, there's a problem. No information about getting an emergency supply. No warning of possible risks to your health from discontinuing or delaying a treatment.

    The pharmacist is provided with the PBM's phone number to begin the authorization process. That's if the pharmacist has the time or patience to wait on the phone. More likely he says, "Come back tomorrow." Or simply, "Sorry, it was denied."

  3. The member should ask their prescribing physician to contact the PBM to discuss the criteria for use and other clinical parameters. The burden is on you. If you really want the drug you need to go back to your doctor and tell him he has to call the PBM with a good reason why you should have that medicine. Or maybe you just give up after hearing, "Sorry, it was denied."

  4. Coverage is decided and patient and physician receive notice of either approval or denial. If they approve the prescription (and you're not in the hospital from complications), you can go back to the pharmacy and pick up your medicine.

Hopefully, no more than a week has gone by.

If they deny authorization, go back to your doctor and start all over again.

If coverage is denied, your physician can request an appeal. With an appeal, new information MUST be provided. It's not enough to say that you really need this drug... your doctor has to come up with another reason why you should be treated the way he thinks is best.

Good luck!

We Can Do Better
The bottom line for any fair prior authorization (PA) system should be that no patient is denied medicine simply because arbitrary procedures haven't been followed.

The patient shows up at the pharmacy with a prescription. The script is entered into the pharmacist's computer, which communicates with the PBM. The PBM computer recognizes that the script is for a listed drug but the doctor hasn't obtained PA. At this point the PBM computer should:

  1. Approve a 30-day supply of the drug for the patient.

  2. Inform the pharmacist that a temporary exemption has been issued and print out a written notification to the patient.

  3. Send a written notice to the doctor that this drug requires PA and tell the doctor how to request authorization. Follow up with phone calls to the doctor.

  4. Ensure that all problems are resolved before the patient returns for a refill.

In cases when the doctor has correctly obtained PA, the patient should present the script to the pharmacist whose computer will confirm the authorization and approve dispensing the drug. No special action is required of the patient or pharmacist and the confirmation is handled transparently. Once authorized, PA should remain in effect for one year.

In cases when PA is denied but the doctor states the drug is medically necessary for the patient, PA must be granted and the drug must be dispensed.

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This article was provided by Gay Men's Health Crisis. It is a part of the publication GMHC Treatment Issues. Visit GMHC's website to find out more about their activities, publications and services.
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