Prescription Drug Pricing

Between January 2000 and the end of 2005, prices for brand-name prescription drugs increased by almost 40 percent.1 The problem is literally an epidemic—nearly one quarter of Americans report that someone in their household did not fill a prescription, cut pills, or skipped doses in the past year because of cost.2 At the same time, rising drug prices have forced states to make drastic cuts in medical assistance programs.

One in four Americans—70 million—do not have insurance that covers prescription drugs. Of these, about 75 percent—52 million—are not eligible for Medicare, so the new Part D drug benefit won’t help them at all.3 And because of exclusions, deductibles and co-pays, most Medicare beneficiaries will receive grossly inadequate drug benefits.

Federal agencies are the only buyers of prescription drugs that pay negotiated fair market prices that are similar to those in the rest of the world and are, in fact, actually cheaper than drug prices in Canada. Uninsured Americans pay twice the fair market price for brand-name drugs, and states that don’t negotiate supplemental Medicaid rebates with drug manufacturers pay 20 percent more than the federal government. The chart below illustrates America’s unfair pricing structure for brand-name prescription drugs. AWP means Average Wholesale Price, the list price at pharmacies; AMP means Average Manufacturer Price, the price wholesalers pay to manufacturers; Medicaid means the price paid by states that don’t negotiate supplemental Medicaid rebates; FSS means the Federal Supply Schedule, the price paid by federal agencies; 340B means the price paid by federally-qualified health centers; and VA means the Veterans Administration price.4

In 2000, Maine enacted legislation that directs the state to use its bulk purchasing power to negotiate drug discounts for the uninsured. This law, called Maine Rx, was challenged in the courts but was upheld in 2003 by the U.S. Supreme Court.5 Revised and renamed Maine Rx Plus, the program has been in operation since January 2004 and serves nearly 100,000 residents with household incomes under 350 percent of the federal poverty level. Maine Rx Plus provides the largest drug discounts of any state program in America, saving participants an average of 26 percent on brand-name drugs and 51 percent on generics.6 The program is successful because it is based on fair market negotiations—drug manufacturers participate in negotiations because it enables them to be included on the state’s Medicaid preferred drug list. If a manufacturer does not negotiate, the state retains the authority to impose prior authorization in a manner consistent with the Medicaid program.

Maine Rx has a much less familiar cousin called the “Healthy Maine” program. Based on a section 1115 Medicaid waiver granted by the Clinton Administration, Healthy Maine covered families who earned less than 300 percent of the federal poverty level. The program extended state Medicaid rebates to help lower-income families who were not insured under Medicaid. Healthy Maine went into effect on June 1, 2001 and provided discounts of about 30 percent off brand-name prices for 110,000 Maine residents—approximately two-thirds of all residents who lacked prescription drug coverage, both seniors and non-seniors. In December 2002, the U.S. Court of Appeals for the District of Columbia ruled that the Healthy Maine program was not legal because one detail—a two percent financial contribution by the state—was not mentioned in the Clinton Administration’s Medicaid waiver.7 The court’s ruling meant that, in order to keep Healthy Maine running, the Bush Administration would have to sign a separate Medicaid waiver. Administration officials refused, arguing that they would not approve a program for residents over 200 percent of the poverty level.

The primary reason that states have not duplicated Maine Rx Plus is the threat of litigation by pharmaceutical manufacturers. But Maine Rx Plus is operating despite all the drug companies’ efforts to disrupt it. Opponents claim that the Bush Administration’s Center for Medicare and Medicaid Services (CMS) will block state programs—but CMS is not blocking Maine Rx Plus. Similarly, states can seek Healthy Maine waivers, as long as the proposed programs are limited to 200 percent of the federal poverty level. In 2005, Maryland enacted a law to duplicate Healthy Maine; its waiver request is pending. It should be noted that when Healthy Maine was in operation, that state did not negotiate supplemental Medicaid rebates from drug manufacturers, as most states do today. With supplemental rebates, Healthy Maine discounts will likely total 40 percent, almost the same as Canadian prices.