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Managing Program Costs in State Pharmacy Assistance Programs

State-sponsored pharmacy assistance programs (SPAPs) provide prescription drug coverage for low-income, older, and disabled persons who are not eligible for Medicaid and may have no other drug coverage. Like Medicaid and private insurance programs, SPAPs have confronted steadily increasing prescription costs as a result of rising prescription use, drug price increases, and shifts to newly introduced, more costly medications. Faced with higher costs and budget pressures, SPAPs have experimented with a variety of cost-control measures. Practices to encourage prescribing generic drugs have been particularly effective in achieve cost savings.

Managing Program Costs in State Pharmacy Assistance Programs is the third in a series of Commonwealth Fund reports examining the experience of SPAPs. Findings are based on results of a survey of all direct-benefit programs in place throughout the year 2000, as well as information collected through case studies of programs in Maine, Massachusetts, Minnesota, Nevada, New Jersey, Pennsylvania, South Carolina, and Vermont. State strategies for managing program costs include utilization management, which aims to limit use of higher-priced drugs and shift use where possible to less-expensive alternatives, and price management, which aims to negotiate or mandate deeper discounts from pharmacies and manufacturers.

Examples of Utilization Management

  • Mandatory generic substitution. About 50 percent of prescribed medications are generic drugs in state programs that require use of generic drugs when possible.
  • Prior authorization. Medicaid has been increasingly reviewing certain prescriptions for medical necessity prior to payment. Although most SPAPs do not use prior authorization to contain costs, those that do find it yields considerable savings. State officials have reported minimal impact on consumers' access to necessary drugs.
  • Drug utilization review, which provides informational warnings about potentially inappropriate prescriptions. Pennsylvania and New Jersey have gone a step further by convening panels of experts to develop prescribing criteria specifically for seniors and blocking payment for drug combinations and doses deemed unsafe. Preliminary data indicate the primary result is fewer medication errors.

Examples of Price Management

  • Manufacturer rebates are paid by the manufacturer to the state after the drugs have been purchased, with the amount based on the volume of drugs purchased by enrollees. Some states recover as much as a third of their state program costs from rebates.
  • Limiting pharmacy reimbursement rates and dispensing fees paid at the point of sale.
  • Indexing pharmacy reimbursement rates and dispensing fees to average wholesale price. Although most states use average wholesale price to define reimbursement rates, it may not accurately reflect actual pharmacy acquisition cost for brand-name drugs.

For more information and analysis of SPAPs, see State Pharmacy Assistance Programs: Approaches to Program Design (May 2002) and Enrolling Eligible Persons in Pharmacy Assistance Programs: How States Do It (Sept. 2003).

Publication Details



Managing Program Costs in State Pharmacy Assistance Programs, Kimberley Fox, M.P.A, Thomas Trail, M.S., Susan Reinhard, R.N., Ph.D., and Stephen Crystal Ph.D., The Commonwealth Fund, February 2004