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Drug Costs Run Free Under New York Medicaid
By Michael Luo, The New York Times
November 23, 2005
Penlac Nail Lacquer rarely cures the nail fungus it is designed to treat, yet it costs $130 a thimbleful. As a result, more than 20 state Medicaid programs and dozens of private health insurers require doctors to get advance permission to prescribe it. But not New York Medicaid, which spent $12 million on the drug last year, more than eight times as much as any other state.
New York spent $74 million last year, far more than any other state, on Nexium, the "new Purple Pill" for heartburn. The drug is virtually identical to Prilosec, available at one-sixth the cost over the counter, and so at least 20 state Medicaid programs and many private health insurance companies severely restrict its use. Only now, two years after other states began imposing limits on Nexium, has New York moved to restrict it.
And those amounts are pocket change compared with the $348 million or more that New York could have saved if it were as aggressive as a state like Michigan in setting the prices it pays pharmacies for the drugs they dispense. New York frequently pays many times more for drugs than Medicaid programs in other states.
For years, New York Medicaid, the state's health care program for the poor, has been an open-air bazaar for drug companies and their wares. Prescriptions that are severely restricted in many states are often dispensed freely here, and at higher prices, costing taxpayers hundreds of millions of dollars.
As a result, the state program spends more on drugs for each Medicaid recipient than any other state but West Virginia, according to federal statistics. While other states have tried to fight soaring drug costs, New York lacks even the most basic controls that dozens of other states and private health insurers have used.
"They call it the gold card," said William Scheer, president of the New York City Pharmacists Society and a pharmacy owner, referring to the state health care program. "You get anything you want with it."
New York Medicaid's spending on prescription drugs more than doubled in five years, to $3.8 billion in 2004 from $1.7 billion in 1999. Although some of the growth has been driven by the general rise in prescription drug prices of about 6 percent a year, much of it can also be traced to New York's failure to spend its money more prudently, according to an investigation by The New York Times. The spending is another reason the state's Medicaid program is, at $44.5 billion, by the far the largest and most generous in the country.
The costs can also be traced, in part, to years of industry lobbying in Albany. The nation's pharmaceutical companies have spent millions persuading state lawmakers not to adopt the kinds of controls that other states began instituting more than a decade ago. And pharmacist organizations have pressured the state program to pay pharmacies more than most other states for the drugs themselves.
This spring, New York finally adopted one of the most basic cost controls, a list that seeks to limit the drugs a doctor can prescribe, and officials of Gov. George E. Pataki's administration say they believe it will help rein in drug spending.
But even this bill has an unusual loophole that could undermine the restriction, allowing doctors to easily circumvent it. The loophole was supported by the pharmaceutical industry.
And it may now be too late for the bill to achieve the significant savings that would have occurred a few years ago. Beginning next year, Medicare, the federal health care program for the elderly, will pay for prescription drugs for many elderly people now on Medicaid, and Medicaid's reduced role will diminish its negotiating power with drug makers.
Congress also requires states to make payments to Medicare to cover some of the drug costs of people moving to that program, and the payments are based on the state's 2003 Medicaid drug spending. As a result, it punishes states like New York that were unusually generous in their drug coverage that year.
"It seems to me that they've sort of missed the boat on potential cost savings from these kinds of cost containment tools," said Jonathan Blum, who directs the handling of Medicaid issues at Avalere Health, a health care consulting firm.
Lobbying Against Controls
One of the most effective ways to reduce double- and triple-digit growth in Medicaid drug spending has been the "preferred drug list," used by more than 30 states and similar to lists long employed by private health plans and hospitals. Though New York has the nation's largest Medicaid budget, it has been years behind other states in trying to use these lists to control its costs.
The concept is simple. A state Medicaid agency, through a committee of doctors and pharmacists, selects the most effective medication in a particular class - for lowering cholesterol, for example - and lists it as the only one it will pay for. If another manufacturer wants its drug on the list, it has to lower its price substantially to be considered. Medications that do not make the list require special state approval.
Using the power that comes with controlling the preferred drug list, state officials can negotiate steep discounts from manufacturers vying for a place on the list. Some states have even combined their drug lists for greater negotiating power with drug makers, winning bigger discounts.
In 1991, California became the first state to adopt a preferred drug list for Medicaid. New York never attempted such a list until 2002, when Governor Pataki tried unsuccessfully to bypass the Legislature to create one. Lawmakers blocked the plan, and continued to resist similar efforts over three years. During that period, the proposal was the target of an expensive opposition campaign organized by drug companies.
The most pivotal opponents to the program were Hispanic lawmakers in the Democratic majority in the State Assembly, along with Hispanic advocacy groups, who wanted to retain an unlimited choice of drugs for Medicaid recipients. The Hispanic Federation, a coalition of health and social services agencies in the New York region, held repeated events in Albany to denounce the proposal, saying it endangered patients. Sylvia M. Montero, a longtime member of the federation's board, is a senior vice president of Pfizer, the nation's largest pharmaceutical company.
The federation has received financial contributions from Pfizer since the mid-1990s, including a $50,000 donation last year, said Lillian Rodriguez-Lopez, the federation's president. The group also receives contributions from other drug companies, she said, but she denied that the money played any role in the group's opposition to the plan.
Assemblyman Peter M. Rivera, a Bronx Democrat and chairman of the Assembly's Puerto Rican/Hispanic Task Force, helped lead the opposition to the drug list. Since 2002, he has received more than $20,000 in campaign donations from drug company interests, among the highest totals for state lawmakers.
"I am not doing this because I am in the pocket of the pharmaceutical companies," he said in an interview, explaining that he was opposed to limiting the drug choices of low-income recipients. "I am doing this because it's the right thing. The governor is trying to balance the budget on the backs of poor people."
Last spring, Mr. Rivera circulated a report among his colleagues saying that Hispanics as a group can react differently to drugs than others. As a result, the report said, pharmaceutical plans should cover a wide range of drugs because restricting them could force Hispanics to take some that are not appropriate for them.
While couching its conclusions in sober scientific language, the report was in fact a crucial weapon in the industry's campaign. It was issued by the National Alliance for Hispanic Health, an advocacy group in Washington that is heavily financed by pharmaceutical companies and has a corporate advisory board whose members are mostly pharmaceutical executives, according to the group's records.
The alliance worked on the report with the National Pharmaceutical Council, a trade group of major pharmaceutical companies.
Over all, pharmaceutical companies and trade groups, including Pfizer, Merck, Bristol-Myers Squibb and Eli Lilly, are among the biggest contributors to state politicians in Albany. Since 2002, they have given roughly $2.5 million to New York candidates and committees on the state level, channeling most of it to the majorities in the State Assembly and Senate.
Pfizer, which fought the drug list most vigorously, gave about $300,000 in campaign contributions last year alone, up from $100,000 in 2002.
With concerns about ballooning Medicaid costs looming larger, the Legislature finally approved a preferred drug program this spring. But the legislation included a significant loophole - championed by pharmaceutical lobbyists - that allows any doctor to prescribe a higher-priced drug not on the preferred list with a simple phone call to the State Health Department. Medicaid cannot deny the request, and it must foot the bill.
Supporters said the loophole would protect patients against arbitrary drug decisions by the state. But many critics inside and outside the state say the loophole makes New York's program one of the weakest in the country.
"My concern is that this is establishing a preferred drug list that is not a preferred drug list at all," said State Senator Raymond A. Meier, a prominent upstate Republican who led a Senate task force on Medicaid reform.
Mark Trail, director of Georgia's Medicaid program, which has reduced its average drug costs with a preferred list, predicted that the provision would seriously cut into savings. "If you build a dam and let it fill up and you open one of the floodgates," he said, "it's going to drain the pond."
Lost Savings
In 2000, New York State adopted one useful tool to control drug costs: a "prior authorization" requirement that forced doctors to get special state approval before prescribing certain drugs that had the potential to be abused or over-prescribed. And then, in 2003, the Legislature took that tool away.
The department had made only limited use of prior authorization compared with other states, but the potential cost savings were clear. In Georgia, Medicaid spending on heartburn drugs dropped to $26.7 million from $50.1 million in one year after it put on prior authorization the expensive class of drugs that includes Nexium.
But the requirement became a victim of the fight over the preferred drug list. In 2003, after Governor Pataki proposed the drug list, lawmakers did more than just reject it - they banned the Health Department from requiring prior authorization for any new drugs.
The provision, intended to maintain the Legislature's control over the preferred drug list while it was being debated, was supposed to be temporary, but it stayed on the books until this spring. And it ended up costing the state hundreds of millions of dollars, health officials now say.
Dennis P. Whalen, executive deputy health commissioner, said department officials were incredulous at the prohibition, because "this had been a very effective tool for us."
While pharmaceutical industry officials said they did not lobby specifically for the provision, they fought vigorously against strict prior authorization requirements, saying patients' lives could be endangered.
State Senator Kemp Hannon, chairman of the Senate's health committee, said Pataki administration officials had only themselves to blame for the loss of their prior authorization power, because they had initially tried to bypass the
Legislature in creating the preferred drug program.
The two-year ban had significant potential costs to the state. If New York required prior authorization for Penlac Nail Lacquer, for example - as do many other states, and as New York officials said they were considering doing before the ban - it could have saved millions of dollars. Penlac completely clears up nail fungus in only 5.5 to 8.5 percent of cases, according to the manufacturer's own literature.
Siri Childs, chief of pharmacy policy for the Washington State Medicaid program, called the drug "almost entirely ineffective" and said state officials there rarely approved its use.
Yet in New York, one man has been prescribed $9,500 worth of the drug since 2000, a total of 95 prescriptions, according to state records. One podiatrist wrote $334,000 in prescriptions last year, to 687 people. Overall, the state spent $12.2 million on the drug last year, compared with the next highest state, New Jersey, which spent $1.5 million.
Requiring prior authorization for Nexium and other expensive anti-ulcer drugs earlier would have been another major cost savings. Between 2002 and 2004, the state spent $157 million on Nexium alone, despite the availability of cheaper alternatives.
Only in October, however, four months after the passage of the preferred drug legislation, was the department finally able to require prior authorization for Nexium and drugs like it.
Paying the Price
The most prescribed drug in the New York Medicaid program last year was albuterol, a generic drug used to treat asthma, which was dispensed more than 700,000 times. But did New York get a discount for all those prescriptions? Just the opposite: it paid about $18.70 for a canister of albuterol, while Texas paid just $6.63.
Omeprazole, a generic drug for acid reflux, cost New York Medicaid more than $15 million last year. But the state paid $3.67 per 20 milligram capsule, while California's program paid just $1.44. In both cases, the extra money was pocketed by pharmacies across New York.
These examples are hardly anomalies. A 2004 report by the inspector general of the federal Health and Human Services Department found that New York and New Jersey consistently paid the highest price in the country on 28 drugs analyzed by auditors. In contrast, Michigan and Texas consistently spent the least.
The reason: those states have been far more aggressive than New York in setting lower reimbursement rates for pharmacists. New York, under pressure from the pharmacy lobby, has not kept up.
Medicaid programs do not buy drugs directly from manufacturers or wholesalers. Instead, Medicaid recipients get their prescriptions filled by pharmacies, and the state reimburses the pharmacies. (The system was set up, in part, to avoid having states get into the business of storing and distributing drugs.)
But states reimburse pharmacies using widely different rates. Michigan is less generous in its reimbursement rates, setting different rates depending on the size of the pharmacy. And a 2003 inspector general's report singled out the Texas Medicaid program for being more aggressive than others in demanding accurate wholesale price information from manufacturers, and using that as a guide in reimbursing pharmacies.
"The federal guidelines direct you to try to pay as close as you can to the pharmacy's actual cost and pay that pharmacist a reasonable dispensing fee," said Barbara Dean, a pharmacist for Texas Medicaid. "That's always been our goal."
But New York does not use the pharmacies' actual costs in calculating its reimbursement. Instead, it takes the published "average wholesale price," a figure provided by manufacturers that is generally far more than pharmacies really pay, and subtracts a set amount. Until recently, New York paid pharmacies 90 percent of the average wholesale cost for drugs in addition to a dispensing fee, one of the highest rates in the country. Many other states pay 85 percent of the average wholesale cost, or even less.
More than 40 other states also use a "maximum allowable cost list" for generic drugs, which uses actual prices from wholesalers to set the state's reimbursement rate. Though other states have found that the lists can save more than 25 percent of spending on generic drugs, which would amount to more than $170 million in New York Medicaid, New York uses only a federal version that is much less aggressive and comprehensive.
The lack of limits on drug prices has been costly. In the 2004 inspector general's report, New York's potential savings by reducing reimbursement rates was the largest of all 50 states. Auditors estimated that the state could save $13 million, or 15 percent, solely on the 28 drugs they sampled if New York's rates were similar to those of other states.
Governor Pataki has tried twice in the last few years to slash the pharmacy reimbursement in New York. As part of his 2003-4 budget, he asked the Legislature to approve a reimbursement rate of 85 percent of the average wholesale price. After lobbying from pharmacy organizations, the Legislature agreed to 88 percent of the average wholesale price.
Last year, Mr. Pataki again asked for the reimbursement to be reduced, this time to 85 percent of the average wholesale price of brand-name drugs and 60 percent for generics. Again, under pressure from pharmacy groups - which nearly doubled their political contributions to $156,000 in 2004 from $83,000 in 2003 - the Legislature agreed only to 87.25 percent for brand-name drugs, and 83.5 percent for generics.
Nevertheless, according to an analysis by the Times, New York still pays an average of 7 or 8 percent more than Michigan for the same drugs.
Craig Burridge, executive director of the New York State Pharmacists Society, said cutting back on reimbursements would be disastrous for druggists - as New York pharmacies face higher operating costs than those in other states - and much less effective than other statewide cost controls.
The chairman of the Assembly's health committee, Richard N. Gottfried, Democrat of Manhattan, said Pataki administration officials had failed to prove their case, and that lawmakers had resisted further cuts out of concern for independent drug stores.
"The governor has a responsibility to show that his budget cut proposals are justified," Mr. Gottfried said. "He didn't do that."
Clifford J. Levy and Tom Torok contributed reporting for this article.
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