HHS approves first-ever multi-state purchasing pools for Medicaid drug programs

HHS Secretary Tommy G. Thompson today approved plans by five states to pool their collective purchasing power to gain deeper discounts on prescription medicines for their state programs. The multi-state purchasing pool plans approved today include Michigan, Vermont, New Hampshire, Alaska and Nevada. This is the first time in the history of the Medicaid program that states have worked together in this manner.

While states are not required to offer prescription drugs through Medicaid, all states do. However, continued escalation in the cost of providing prescription medicines has strained many state Medicaid budgets. Today’s historic action will give states unprecedented leverage in negotiating with drug manufacturers for lower prices. As part of our efforts to help states identify ways to reduce costs while improving quality, CMS will soon provide guidance to states on forming new purchasing pools and joining existing purchasing pools.

“By using the proven technique of negotiating lower prices, states will reap important savings on their drug costs,” Secretary Thompson said. “The ability to purchase drugs at a lower cost will help states continue to provide critical medications to the millions of low-income citizens who depend on the Medicaid program.”

Michigan, which began operating a joint purchasing pool with Vermont last year, estimates that it will save $8 million in its Medicaid program in 2004 as a result of the arrangement. Vermont reports that its Medicaid program will save $1 million in 2004 because of the purchasing pool. Other saving estimates include: Nevada: $1.9 million in 2004; Alaska: $1 million in 2004; and New Hampshire $250,000. Altogether, the pooled purchasing program will cover approximately 900,000 beneficiaries.

“This new approach builds on our efforts to help states use the best private-sector purchasing tools to lower costs, while assuring appropriate standards for proper access to medicines and quality care,” said Mark B. McClellan, M.D., Ph.D., administrator of the Center for Medicare & Medicaid Services, which oversees the Medicaid program.

Under the Medicaid law, drug manufacturers, in order to receive federal funding for their drugs, must first enter into discount -- or rebate -- agreements with HHS. The Bush administration has approved 22 state plans to negotiate extra, or supplemental rebates with manufacturers. States generally achieve negotiated discounts greater thanthose established by law for Medicaid by relying on a private pharmacy benefit manager to negotiate discounts based on a list of preferred drugs established by the state for their Medicaid beneficiaries.

CMS has worked with each of these states to assure effective implementation of price negotiations, including appropriate consideration of clinical impact. In determining what drugs are on the preferred drug list, states use a committee of clinicians and pharmacists to review medical needs before considering the discounts offered by drug manufacturers. The review ensures that the preferred drug list will provide Medicaid beneficiaries access to all drugs generally needed. In addition, federal law requires that drugs not on the list may still be prescribed for Medicaid beneficiaries but often require prior approval, generally leading to less utilization. Consequently, drug manufacturers often provide additional discounts to keep their drugs on the preferred drug list.

HHS has also defended the legal right of states to use these techniques. Earlier this month, the department won an important legal victory in the Circuit Court of the District of Columbia. The appeals court upheld a lower court ruling to allow states to continue to use preferred drug lists in their Medicaid programs.

All five of the states in today’s announcement have signed agreements with First Health Services Corp., a pharmaceutical benefit manager, to negotiate lower prices on their behalf with manufacturers. Other pharmaceutical benefit managers provide similar negotiating services. Although the states are pooling their efforts in buying drugs, they all will maintain their own preferred drug lists and exercise clinical oversight of those lists to assure adequate access to needed medicines for their beneficiaries. Because there are some overlaps on the preferred drug lists, pooling across states can lead to larger discounts on certain drugs.

Medicaid is a state/federal partnership program that provides health care coverage to over 41 million low-income children, elderly and disabled Americans. Over $280 billion was spent on the Medicaid program in 2003.