PharmExec Blog

Drug Reimbursement and the "New Medicaid"

by Tom Norton

A lot has been written about the “state option” created by the Supreme Court ruling on HCR, and what it means to American medicine. Sorting out an opinion will, to a degree, depend on whom you read and what you believe.

But regardless of where you come out on this issue, there is little doubt that the Congressional “threat” to withhold funding from those States that might not comply with the law was obliterated by Chief Justice John Roberts.  Indeed, in his Majority opinion [pp. 49, 50] Roberts clearly states the responsibility for decisions regarding the “New Medicaid” will fall on the states; not the feds.  Potentially, a stunning decision.

The Governors and the “New Medicaid”

And what will the states do with this new responsibility?  Several Republican Governors have said they will wait until the November Elections to “make up their minds” on this matter.  Following the election, theoretically, they can reject the law; accept it in full; or attempt to make some sort of deal with the feds that benefits their state.  And, interestingly, more than a few Democratic Governors appear to be thinking the same way, too. 

Why are the Governors balking at this new law?   Well, one of the biggest concerns governors in both parties have is, “How will I pay for the ‘New Medicaid’, once the HCR law takes hold?”  Currently, the measure is structured to provide “full federal coverage”, but only through 2016.  From there on out, the “match” rate will gradually slip to 90% federal coverage, with the states picking up the difference. Still, 90% coverage sounds pretty good, right?  Not really.  If you are a governor, whether Republican or Democrat, tasked with balancing a budget annually, the idea of millions of new Medicaid patients showing up on your state Medicaid rolls has got to be unsettling.  A 10% increase in Medicaid costs could be disastrous for any state.

And why is that?  One point few folks understand today is that Medicaid already is the largest annual operating cost each state must manage.  On average, Medicaid takes up 22% of all state budgets, with some higher, like Florida’s 28%.

So, the Governors’ fears about New Medicaid’s additional 10% costs are well founded given today’s realities.  However the future is even scarier.  HHS now suggests the current 2012 Medicaid budgets of approximately $450 billion will double by 2019 to $900 billion, due primarily to the new HCR law.

Why Is New Medicaid Important to the Rx Industry?

If you don’t think the New Medicaid will significantly impact drug sales, consider these facts:

First, today more than 50 million Americans are Medicaid patients. When you add in the 30-40 million New Medicaid patients anticipated under HCR, you are potentially looking at nearly 100 million Americans — just shy of 1 in every 3 – who will be receiving Rx care under New Medicaid.

Second, if I still need to underscore the growing importance of the New Medicaid, I predict that something marketers call a “halo effect” will develop in New Medicaid.  That is, the New Medicaid pharmaceutical service precedents, or “halo,” will drive not only the pharmaceutical services provided under Medicaid, but also those provided in the private sector.  “If it is good enough for New Medicaid pharmacy services, it is good enough for my private patients, too” will soon be the mantra we will be hearing from ACOs all over the nation.

A Brief History of Medicaid Rx Reimbursement

With this interesting background, let’s step back and consider what the Supreme Court decision could mean for drug reimbursement based on Medicaid’s previous 47-year history.

Not to put too fine a point on it, but when Medicaid initially came on line in 1965, industry saw it as a bonanza.  Suddenly, millions of new patients had full drug coverage.  All a company had to do to get a drug reimbursed under a state “Medicaid formulary” was certify that the product was FDA approved.  The Golden Era of Medicaid Drug Reimbursement unfolded!

Ten years later, the gravy train ended.  By the late 70’s, in the face of ballooning drug costs, the states’ began to review the idea of restricting Medicaid drug coverage.  In a relatively short amount of time, “cutting the drug line” became a common state Medicaid practice.  How was this accomplished?

First came the generic substitution laws in the 1980’s and 1990’s, which mandated the use of the lower cost generics for Medicaid patients.

Then came California’s innovative “drug rebate” strategy that required manufacturers to pay additional monies for “the opportunity” to do business with the California Medicaid formulary.

Later, states devised a plethora of new Medicaid cost cutting ideas including “fail first” drug utilization, “prior authorization”, “drug category exclusions”, and many more, all designed to reduce access to brand name products.

More recently, states have been utilizing something called “therapeutic interchange,” or TI.  TI allows for direct drug switching from a brand name product to a non-analogous generic, if it saves money.

All totaled, billions of dollars in brand name drug sales were wiped out, and it was all achieved legally by the actions of the state Medicaid agencies.

How Will the States Administer the New Medicaid Drug Programs?

Does this Medicaid Rx history foretell how the states will act on their new Supreme Court-endorsed responsibility?  Certainly.  In fact, the way I see it, it’s very clear how the states will act.

Specifically, look for a continuation of state Medicaid policies that are “working,” such as:

  1. Restrictions in the number of drugs per class that are going to be paid for
  2. Restrictions & prior approvals on the use of products in “high cost” categories, i.e., biotech products, etc.
  3. Outright denials of use for specific “high cost” products viewed as “lifestyle” RXs, i.e., weight loss, erectile dysfunction, etc.
  4. Increased co-pays for patients who want to use any brand name drugs
  5. New and deeper drug rebate demands from all state Medicaid agencies
  6. Widening use of “therapeutic interchange” and other “drug switching” concepts
  7. Continued movement towards all-generic Medicaid formularies

If you are a brand drug marketer, or someone responsible for brand name drug research, what can you expect under New Medicaid?

Well, as a brand drug marketer, despite the prospect of 30 to 40 million new “customers” in 2014 under the new, more muscular Medicaid, if you appreciate Medicaid’s pharmacy history, I would not be making big plans for major sales surges.  Unlike the 1965 start-up of Medicaid, this will be different. My guess is that the millions of newly insured patients will be lost to generic mandates, probably right from the start of the program in January 2014.

As a brand drug researcher, the impact also could be difficult.  If Medicaid now restricts the use of newly created entities, even “break-through” products, it’s difficult to see how future new products will come into general use for New Medicaid patients. In this reality, at some point, brand name companies will have to ask, “One third of the country is in this drug program.  Why are we doing all of this R&D if New Medicaid won’t pay us for our drugs?”  Good question.

So, with the states now free to manage their New Medicaid obligations, I think the drug industry needs to be honest with itself.  Unlike the federal government, the states have to balance their budgets each year.  This means they will do what’s necessary to stay in the “black”, even if that includes doing the “difficult stuff” like drastically restricting access to brand name drugs for their most needy citizens and yes, rationing Rx care.

Not pleasant, I know, but I think it’s an accurate view of the future for New Medicaid drug reimbursement.

Tom Norton is principal at NHD Smart Communications. He can be reached at

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One Comment

  1. Chuck
    Posted August 9, 2012 at 3:44 pm | Permalink

    If erectile dysfunction drugs are considered “life-style drugs, how do birth control drugs escape it? Obama has clearly indicated his intent on making birth control available to everyone.

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