Pharmaceuticals: pharmaceutical cost controls--2005. End of Year Issue Brief

The enactment of the Omnibus Budget Reconciliation Act of 1990 (OBRA '90) gave states the option of offering pharmaceutical benefits within their Medicaid programs. But the law placed restrictions on states' flexibility to control what prescriptions they would cover and required the states to reimburse outpatient prescription drugs from manufacturers that signed rebate agreements with the U.S. Department of Health and Human Services. Forty-nine states--Arizona is excluded, based on its program structure--and the District of Columbia currently offer prescription drug coverage under the Medicaid Drug Rebate Program. During the past four years, states all over the country have been plagued with revenue shortfalls in their state Medicaid budgets. While the fiscal situation improved for most states in the 2004 legislative session, many states still face budget pressures in 2005. Compounding existing budget pressures are threats from the Bush Administration to shift increased costs of the Medicaid program on to the states. All things considered, the economic pressure of funding Medicaid is at the top of legislative agendas in 2005. As in previous years, states are attempting to reduce costs to their Medicaid programs by seeking savings in their pharmaceutical programs. Prescription drug costs are highly attributed as a contributing factor to the fiscal climate of state Medicaid programs. Currently, prescription drug spending outpaces that of every other category of health care and drug prices are rising faster than inflation. In response, states are instituting a variety of pharmaceutical cost control measures such as creating preferred drug lists (PDLs), negotiating supplemental rebates, forming bulk purchasing pools, promoting generic drug substitution and implementing price controls. As prescription drug cost containment tools have gained acceptance and momentum, they continue to be controversial. This issue brief explores the debate, history, methodology, utilization and 2005 legislative activity surrounding the most commonly used and emerging pharmaceutical cost control measures.