IP-6-2002 (April 2002)
Author: Dr. Linda Gorman

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Executive Summary

Medicaid spending is projected to exceed $276 billion in 2003. It will be larger than Medicare. Some experts predict that without significant reform it will bankrupt the states by 2020.

Spending on prescription drugs is neither the largest nor the fastest growing category of Medicaid spending. In Colorado, Medicaid spends much more on hospital services, personal health care, nursing homes, and physician services than on prescription drugs.

Because prescription drugs reduce other health care expenses, controlling Medicaid prescription drug expenditures by arbitrarily limiting physicians’ freedom to prescribe risks increasing Medicaid spending in other categories.

• Using “clot-busters” to treat strokes saves about 4 times the drug price by reducing other health care costs. According to one estimate, using atypical antipsychotics to treat schizophrenia cost about $4,500 a year and saved about $73,000 a year in institutional treatment costs.”
• A 1993 paper examining formulary restrictions in 47 Medicaid programs found that “a restricted formulary may reduce prescription drug expenditures by approximately 13 percent, on average. Because of service substitution, however, such a policy does not translate into reductions in total program expenditures. Savings in the drug budget appear to be completely offset by increased expenditures elsewhere in the system.”

• A 1996 survey of 200 physicians in the Tennessee Medicaid managed care program found that two-thirds of those forced to change their patients’ prescriptions reported serious adverse consequences including death, strokes, and adverse drug interactions. In British Columbia, 27% of physicians surveyed reported admitting patients to hospitals as a result of problems created by government mandated prescription drug substitutions.
• Medicaid populations have a higher proportion of people with fragile health. People in poor health often need the reduced side effects common to newer, more expensive drugs.

The evidence suggests that drug utilization controls typically increase overall spending. The Michigan and Florida formulary programs lack any mechanisms for tracking their effects on overall spending or patient care.

• In 1992, the Health Care Financing Administration ran demonstration drug utilization review programs in Washington State and Iowa. The programs had no “measurable effects in reducing the frequency of drug problems or on utilization of and expenditures for prescription drugs and other medical services.”
• According to the Kaiser Commission on Medicaid and the Uninsured, neither the Florida nor the Michigan Medicaid formulary programs include any mechanism to track the overall costs and benefits or their drug formulary programs.
• An independent evaluation of the Florida program found that drugs with the highest denial rates were agents that “are often appropriate for use by patients with multiple illnesses, and persons who are medically complex and at high risk from adverse effects of drug therapy or inadequate treatment of their disease.

Formulary laws politicize medical care and promote unequal treatment by exempting politically powerful patient groups, primarily those with severe mental illness or AIDS, from their strictures. The poor, and debilitated, those who are ill-equipped to protest treatment, are the most likely to suffer.

• Michigan formulary advocates promised to forbid prior authorization for branded products with no generic competition. In 2001, the legislature scrapped that protection. Florida formulary advocates eased passage by exempting patients in nursing homes. After passage the nursing home exemption was eliminated.
• Relative to private plans, Michigan restricts patient access to drugs for cardiac conditions, depression, and diabetes. In Florida in 2001, only generic equivalents, all rated BX by the FDA, were allowed for thyroid replacement agents. BX means that there is inadequate clinical data to establish the highest level of brand-generic equivalency.
• In Florida, physicians reported that Medicaid patients denied drugs went without medicine until the situation was resolved. Multiple trips to the pharmacy were particularly difficult for recently discharged hospital patients and elderly patients with chronic conditions.