By Nina Owcharenko
The United States Supreme Court recently issued a decision (PHRMA v. Walsh) to allow Maine Rx, a Maine government program requiring prescription drug discounts, to move forward.
While the Court’s decision focused on matters of law, and not policy, health policy makers at the federal level and in every state of the Union should resist accepting this as an endorsement of policy and instead re-evaluate the real effects such a government pricing proposal would have on the delivery of health care.
Unintended Consequences of Maine Rx
Under the Maine Rx program, states would provide prescription drugs at a discount to residents who are without coverage by requiring pharmaceutical manufacturers to provide a rebate similar to that offered under Medicaid. While well-intentioned, however, Maine Rx will have unintended consequences. The reason: The policy is based on fundamentally erroneous assumptions and will have the very opposite of the intended effects.
For example, Maine Rx requires pharmaceutical manufacturers to provide discounts or be penalized. Current law requires pharmaceutical manufacturers to provide rebates, averaging about 20 percent off the retail price, to states for drugs that are supplied through the Medicaid program. Under Maine Rx, the state would extend that requirement to the expanded population served by the new program. If a manufacturer chose not to provide the discount, the state would penalize the manufacturer by imposing a prior authorization requirement on their drugs, thereby restricting availability and deterring the prescription of those life-saving and life-improving drugs and treatments to its participants.
Second, Maine Rx sets up the start of a monopsony purchasing arrangement under which the government is the only buyer of pharmaceutical products. Maine government officials’ strategy is to leverage large populations for prescription drug discounts. This is often defended on the grounds that such an arrangement will secure vast economies of scale, similar to the purchasing power of large private-sector entities. However, in the private sector, the parameters for agreement are not based on government requirements. It is through negotiations, not mandates or regulations, that pharmaceutical manufacturers reach agreement with private insurers or prescription drug benefit managers (PBMs) for prescription drug coverage.
There are some public-sector programs that successfully mirror this type of private-sector process. The Federal Employees Health Benefits Program (FEHBP) provides perhaps the best example of such an approach. In the FEHBP, individuals are able to choose from competing plans that offer a variety of coverage options, including for prescription drugs. One plan may offer a more restricted prescription drug policy that is less costly, while another plan may offer a policy that is less restrictive but more costly. The key point is that the individual chooses the plan that best suits his or her needs.
If Maine were successful in getting manufacturers to agree to their discounts, other states would be sure to follow. Widespread demand for discounts could lead some pharmaceutical manufacturers simply to raise the base price of their drugs in order to recoup the discounts, or they may reduce their investment in future research and development. While pharmaceutical profits are criticized, it is those profits that are used to finance the billions of dollars needed to research and develop the next generation of breakthrough treatments and cures, whether for cancer or Alzheimer’s disease.
Other Side Effects
Aside from these fundamental problems, there are two other adverse effects that such an approach would have on the health care system.
First, Maine Rx would diminish the patient-doctor relationship. For drugs not on the list, doctors would have to receive prior approval from the state before prescribing those medications to their patients, thereby burdening and limiting their ability to treat their patients as they see fit. With the availability of treatment options indirectly controlled by the government, fewer and fewer decisions could be made without bureaucratic approval. This is reinforced by current state trends toward limiting the supply of prescription drugs to Medicaid beneficiaries to cut health care costs.
Second, Maine Rx could jeopardize existing private coverage. Public program expansions often come at the price of private program contractions. This is not good. While the intent of Maine Rx is to target low-income individuals who are without prescription drug coverage, there are no clear limitations. Therefore, businesses or individuals struggling to maintain coverage could decide to drop their prescription drug benefit in order to qualify for Maine Rx.
Urgent Need for Congressional Action
Most health policy problems are problems for state and federal officials. There are fundamental legal and structural reasons why state officials cannot resolve these problems by themselves, however, and the federal government has not done what it can and should do to alleviate these problems.
In this case, the majority of those without prescription drug coverage are either (1) elderly on Medicare with no supplemental prescription drug coverage or (2) uninsured. For these individuals, there are two major federal policy changes that could help significantly.
Comprehensive Medicare reform. By integrating prescription drug coverage into a full package of health insurance, based on the FEHBP model, seniors who are without prescription drug coverage would have access to a variety of coverage options.
Expanding coverage for the uninsured. Providing uninsured individuals with refundable health care tax credits would enable individuals without prescription drug, or general health care coverage, to obtain coverage that best suits their needs, including access to the prescription drugs of their choice.
Alternatives for the States
In the interim, while federal policymakers continue their efforts, states should adopt innovative approaches based on consumer-directed principles that improve the overall financing and delivery of medical care. For example, state officials could encourage enrollment in existing private discount drug cards with a prescription drug manager and provide some financial assistance to help those individuals in need with co-pays or annual enrollment fees. Such an approach has been proposed at the federal level by health policy analysts at the American Enterprise Institute (AEI) and the Galen Institute to address the need to secure prescription drug coverage for the minority of Medicare patients who do not have it. This approach could easily be replicated by the states. Also, adapting consumer-directed approaches within Medicaid, such as the highly successful “cash-and-counseling” programs tested in Arkansas, Florida, and New Jersey, would allow individuals to determine which drugs and treatments they want to purchase.
Limiting Government’s Role
Maine Rx’s goal to provide affordable prescription drugs is based on the flawed assumption that the government is best equipped to make key health care decisions on behalf of individuals. On the contrary, the best way to ensure that individuals have access to the prescription drugs and treatments they need and want is to allow them to make those decisions on their own, limiting the government’s role to financially assisting low-income persons who need it.
See Derek Hunter, “Government Controls on Access to Drugs: What Seniors Can Learn from Medicaid Drug Policies,” Heritage Foundation Backgrounder No. 1655, May 27, 2003.
See Joseph R. Antos, Grace-Marie Turner, and Robert E. Moffit, “Time for a Sensible Drug benefit,” Heritage Foundation Backgrounder No. 1573, July 23, 2002.
For a description of this approach, see James Frogue, “The Future of Medicaid,” Heritage Foundation Backgrounder No. 1618, January 16, 2003.
Nina Owcharenko is the senior policy analyst for health care at The Heritage Foundation and an adjunct scholar with the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (May 30, 2003). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.