Cheaper By The Dozen:
States Successfully Mandate the Extension of
Drug Discounts to Affect More Low-Income Persons

By Phyllis Griffin Epps

With the approval of the Department of Health and Human Services (HHS), several states are experimenting with ways to extend a prescription drug benefit to poor persons whose incomes exclude them from Medicaid coverage.  Bolstered by recent victories in federal court, Maine, Florida, and other states require pharmaceutical manufacturers to extend existing rebate agreements to include drugs purchased for low-income persons not eligible for traditional Medicaid coverage.  Efforts by the pharmaceutical industry to block such arrangements have been largely unsuccessful.  The result is cheaper drugs for the state-as-bulk-purchaser and for more low-income persons.

Pharmaceutical manufacturers who want their products made available to Medicaid beneficiaries participate in rebate agreements.  To get their product on the list of drugs pre-approved for payment from a Medicaid program, manufacturers rebate to the states a portion of the price of the drug.  The amount of the rebate is based on reports on the utilization of each manufacturer’s covered outpatient drugs by Medicaid beneficiaries in the state.  The federal government will reimburse states only for drugs purchased from manufacturers who agree to pay rebates to states.  The manufacturer must pay a rebate on drugs purchased with payments under the State plan, as opposed to expenditures from money reimbursed to the State by the federal government.  The result of the agreement between the manufacturer and the Secretary of the Department of Health and Human Services (HHS) is a reduction in the cost of prescription drug coverage.

Take the case of Healthy Maine.  Maine requested and received approval from the HHS Secretary to implement the Healthy Maine Program (HMP) as a “demonstration project” intended to assist in promoting the objectives of Medicaid.  A key part of this approval included the designation of state expenditures for extending “pharmacy-only benefits” under HMP as payment made under a State plan.  The designation holds subject to the condition that federal reimbursement obligations remain below the amount received in rebates from drug manufacturers.  In other words, HHS agreed to recognize money spent by Maine to extend coverage to low-income persons not otherwise eligible for Medicaid as tantamount to expenditures made under a Medicaid plan.
Healthy Maine consisted of two parts.  The first part, called the “Drugs for the Elderly” (DEL) component, was to provide a prescription-drug benefit seniors whose income was low but not enough to trigger eligibility for Medicaid coverage.  Maine subsidized a part of the cost for generic drugs, drugs related to certain conditions, and catastrophic expenditures that exceed $1,000 per year.  The second part of Healthy Maine, called the “non-DEL” component, covers all non-DEL drugs purchased by people with incomes below 300 percent of the federal poverty level.  Because HHS agreed to recognize the state subsidies as payments made under a Medicaid State plan, the drug purchases made under the DEL are subject to manufacturer rebates.  Also, the State may recover federal reimbursements for the subsidies but only up to the average percentage of manufacturer rebates.  The amount of payment remaining after rebates and reimbursements is categorized as a “State-only” expense.  In effect, Maine enrolled residents with incomes as much as three times federal poverty limits who don’t have health coverage or qualify for Medicaid into the Medicaid program so they could get the same rebates or discounts that drug makers give to the Medicaid program.

The Pharmaceutical Research and Manufacturers of America (PhRMA), an association of pharmaceutical manufacturers and biotechnology companies, challenged Healthy Maine on several grounds.  The strongest argument was that Maine’s two percent payment could not lawfully be considered a payment under a Medicaid State plan that triggers manufacturer rebates.  PhRMA succeeded in its challenge against a similar program in Vermont.  Pharm. Research and Mfrs. of America v. Thompson, 251 F. 3d 219 (D.C. Cir. 2001).  In the Vermont program, some state payments were tied to anticipated manufacturer rebates.  On August 10, 2001, the program was struck down as unlawful because that portion of state payments did not constitute payments under a State Medicaid plan within the meaning of the law.

Maine avoided the fate of the Vermont program by arranging to contribute two percent toward the cost paid by the patient.  Unlike the Vermont plan, Maine’s two-percent payments are in addition to and separate from the manufacturers’ rebates.  That two percent comes from “State-only” money, or money for which no federal matching funds are paid.  Maine increased non-DEL payments to pharmacists by about one dollar per drug purchase.  On February 25, 2002, the United States District Court for the District of Columbia rejected PhRMA’s argument, noting that HHS approval of the two-percent payment as an appropriate Medicaid expenditure was lawful. Pharm. Research and Mfrs. of America v. Thompson, 2002 WL 262037 (D.D.C. Feb. 25, 2002).

On July 1, 2001, a Florida statute took effect that requires drug manufacturers to agree to a ten percent discount in addition to average federal rebates of 15.1 percent if they want their drugs on the preferred list of Medicaid drugs.  For drugs not on the preferred list, prior authorization of each prescription is required.  Approval is automatic upon request.  The purpose of the supplemental rebates is to increase savings by encouraging physicians to prescribe drugs on the preferred list and limiting the list to those drugs offered at cheaper cost.

Many manufacturers resisted the additional rebates.  In turn, their drugs were removed from the state’s preferred list even as the same drugs remained on the federal list.  HHS approved Florida’s program for supplemental rebates, but not until September 18, 2001.  On December 28, 2001, the United States District Court for the Northern District of Florida held that the Florida prior authorization program was lawful. Pharm. Research and Mfrs. of America v. Medows, 2001 WL 1694101 (N.D. Fla. Dec. 28, 2001).  The court relied in part on an earlier decision regarding Healthy Maine to support the conclusion that the Florida law was not pre-empted by federal law. Pharm. Research and Mfrs. of America v. Concannon, 249 F. 3d 66 (1st Cir. 2001).  “The federal law,” it noted, “does not purport to guarantee a market share.  It only requires that a State Medicaid Program make available all of the drugs on the federal drug formulary. The purpose for which prior authorization is required is related to the goals of the Medicaid program, to provide drugs to Medicaid beneficiaries at the lowest cost possible.”  Medows, 2001 WL 1694101. This opinion is consistent with the decision of the Michigan Court of Appeals to lift an injunction against a similar program one month earlier.

It is safe to conclude that courts are likely to allow states to require additional discounts of drug makers for drugs included in state-funded prescription drug programs.  As in Maine, even a minimal additional expenditure by the state will be sufficient to demonstrate that such programs are consistent with the goals of the Medicaid program.  As in Florida, it is even questionable whether prior HHS approval is necessary to State efforts to extend prescription drug benefits to larger groups of low-income people.  Those who join the drug makers in opposition to efforts to link a preferred list of drugs to cooperation with additional rebates include advocates for consumers who need one or more drugs made more difficult to obtain due to new bureaucratic hurdles.  Their voices may not be loud enough to hear over the cheers of those persons with new access to more affordable drugs and the exhortations of those in states that have yet to show similar initiative.