Medicaid and Specialty Drug Costs

By October 10, 2017Commentary

Drug spending seems to bedevil all payers, including Medicaid.  A new MagellanRx report on fee-for-service Medicaid drug trends for 2015 and 2016 across 22 states finds that specialty medications are the biggest source of more spending.   (Magellan Report)   In 2015, across all drug spending, trend was 10.7% at a gross level and 3% net, or after all discounts and rebates.  For 2016, trend was 5.2% at a gross level and only 1.9% net.  But there is a sharp divergence in traditional and specialty drug trends.  For traditional drugs, 2015 gross average cost per prescription was $73.60 and that actually reduced to $73.38 in 2016.  At the more important net cost level, what the programs actually ended up paying, average cost was $32.95 in 2015 and $31.27 in 2016 or a 5.1% decline.  That is good for taxpayers and likely represents more generic use.  Now lets look at specialty medications.  Here we see the gross average per prescription cost in 2015 was $1786, rising to $2194 in 2016; while net average cost was $943 in 2015 and $1137 in 2016, a 20.5% increase.  Specialty drugs’ percent of overall prescription claim volume remained steady at 1.6%, so the rise in net costs is all due to pricing, both higher initial pricing and ongoing price increases.

For Medicaid, there is a minimum rebate of around 23% for new drugs and the rebates average over 53% across all drugs.  Notwithstanding this, manufacturers continue to sell to Medicaid programs and probably are making good profits.  The overall scheme for discounts and rebates across generics and brand drugs creates some bizarre incentives, such as it may be cheaper for states to continue to prefer brand names even after a generic introduction.  Notwithstanding this, overall the Medicaid FFS programs have a generic utilization rate in excess of 84% of all prescriptions.  The top 5 categories of drugs, in order, are antipsychotics, HIV/AIDS, hemophilia, stimulants, and anticonvulsants.  These five categories are 14% of claims, but 40% of spending.  Specialty drugs were 31.8% of spending in 2015, rising to 36.5% in 2016.  They are projected to be half of Medicaid drug spending by 2020.  So you can see why there is a disproportionate focus on managing their utilization and price.  Common management strategies across both drug types are to maximize generic use, have the cheapest possible preferred brand where there are alternatives, and set strict clinical criteria to justify use of expensive drugs which may not have clear effectiveness benefits.  The reform law’s Medicaid expansion is making Medicaid spending even more of a budget issue for states, particularly as federal contributions phase out.  Simply not sustainable is the best description for the state of Medicaid programs, and drug spending is a noteworthy part of the problem.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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