Do State Cost Control Policies Reduce Medicaid Prescription Drug Spending?

• Author: Julie Hudman,Kosali Simon,Sharon Tennyson
• Published date: 01 March 2009
• Date: 01 March 2009
• DOI: http://doi.org/10.1111/j.1540-6296.2009.01153.x

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Risk Management and Insurance Review, 2009, Vol.12, No. 1, 39-66

FEATURE ARTICLES

DOSTATE COST CONTROL POLICIES REDUCE MEDICAID

PRESCRIPTION DRUG SPENDING?

Kosali Simon

Sharon Tennyson

Julie Hudman

ABSTRACT

We present the first systematic analysis of state policies limiting prescrip-

tion drug access under Medicaid during 1990–2004, documenting their impact

on states’ Medicaid prescription spending growth. Wesee substantial variation

in the number and type of policies used by states, but a clear upward trend in re-

strictions over time. Analysis of state level annual spending growth shows that

these restrictions have in general helped contain Medicaid prescription drug

costs and that some approaches, such as the use of preferred drug lists (PDLs)

and tiered copayment systems, may have been more effective than others.

INTRODUCTION

Nearly 60 million low-income individuals receive their health insurance coverage

through Medicaid, with the states and federal governments spending an estimated $300

billion per year on the program. This makes Medicaid the largest single health insur-

ance program in the United States (Congressional Budget Office (CBO), 2006). Medicaid

program costs have increased dramatically in recent years, and current projections sug-

gest that total costs will double over the next 10 years (CBO, 2006). Concerns about an

impending fiscal crisis have led to increased attention to policies aimed at managing

Medicaid costs.1

Kosali Simon, Associate Professor, Department of Policy Analysis and Management, 106 MVR

Hall, Cornell University, Ithaca, NY 14853; phone: (607) 255-7103; e-mail: kis6@cornell.edu.

Sharon Tennyson, Associate Professor, Department of Policy Analysis and Management, 137

MVR Hall, Cornell University,Ithaca, NY 14853; phone: (607) 255-2619; e-mail: st96@cornell.edu.

Julie Hudman, Independent Consultant, 204 Sunrise Road, Ithaca, NY 14850; phone: (607) 229-

3873; e-mail: julie_hudman@yahoo.com. This researchwas funded by an unrestricted educational

grant from the Merck Company Foundation. The authors would like to thank Gail Durrer of Na-

tional Pharmaceutical Council (NPC) for invaluable assistance with the data; Daniel Maeng,

Jamie Jun, and May Wong for excellent research assistance on the project; and officials at state

Medicaid offices for reviewing the state policy data used in this article. Weare grateful for helpful

comments from Amy Davidoff, Bowen Garrett, and Melissa Kearney. This article was subject to

double-blind peer review.

1See also Palmer (2006) and Baicker et al. (2008) for a discussion of the projected fiscal impact of

entitlement programs including Medicaid.

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40 RISK MANAGEMENT AND INSURANCE REVIEW

FIGURE 1

Medicaid Prescription Drug Expenditures, 1992–2003

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

$ Billions

Source: Author calculations.

Spending on prescription drugs has been the fastest-growing expense category in Medi-

caid in recent years, with expenses growing on average over 16 percent per year between

2000 and 2004 (Holahan and Cohen, 2006). This rapid cost growth has resulted in pre-

scription drug costs for state Medicaid programs in the neighborhood of $30 billion per

year (Holahan and Cohen, 2006). During the same time period, overall Medicaid spend-

ing grew a little over 9 percent per year (Holahan and Cohen, 2006). This growth rate

differential has led to drug costs rising from 7 percent of total Medicaid expenditures in

the early 1990s to over 14 percent in recent years.2These trends are displayed in Figures

1 and 2. Figure 1 shows annual nominal prescription drug expenditures and Figure 2

shows the annual share of total Medicaid costs accounted for by prescription drugs, for

1992–2003.

Policymakers’ concerns about managing the use and costs of Medicaid prescription drug

benefits have grown in response to these trends. Surveys of state Medicaid programs

in 2000, 2003, and 2005 concluded that states had already introduced many policies to

control their drug benefit costs, and the number of states implementing such policies

has increased each study year (Crowley et al., 2005).3In fiscal year 2005, 43 states

2Several papers document in more detail the growing costs of Medicaid prescription drug costs.

Tepper and Lied (2004) show trends in Medicaid prescription use and costs for 1985 to 2001.

Baugh et al. (2004) provide further breakdownsof this trend, showing for example that spending

amounts are the highest for central nervous system drugs. The most detailed study of trends

is Banthin and Miller (2006) who use Medical Expenditure Panel Survey 1996–2002 to look at

usage of any Medicaid prescriptions as well as the number of drugs conditional on usage, by

drug category as well as by population subgroups. They find that much of the growth comes

from the use of certain drugs such as antidepressants and from the use of newer medications.

3Federal rules do not requirestates to cover prescription drugs under their Medicaid plans, but all

states currently provide this benefit to most Medicaid beneficiaries. Federal law sets minimum