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Stretching State Health Care Dollars: Pooled and Evidence-Based Pharmaceutical Purchasing

Executive Summary

In recent years, rising pharmaceutical costs have contributed in a major way to the growth of overall health care costs generally and of Medicaid outlays in particular. As a result, many states are implementing drug-cost-containment mechanisms that do not merely pass state expenditures on to consumers in the form of higher copayments and deductibles but instead put innovative approaches in place that reduce state costs so as to expand or maintain access.

These strategies are grouped in the corresponding ESRI report as follows:

  • Multistate purchasing and collaboration. By joining forces, states are able to enhance their bargaining clout—generally through a common pharmacy-benefits manager (PBM)—when negotiating drug prices with manufacturers. Because prices and rebates are tied to volume, potential savings to states rise as participation in a purchasing pool expands. States may pool purchasing for Medicaid beneficiaries, SCHIP enrollees, state employees, and other groups on whose behalf states buy pharmaceuticals.
  • Intrastate purchasing. Another form of bulk pharmaceutical purchasing involves pooling within a state—across agencies. Like multistate purchasing, intrastate pooling allows states to stretch their dollars by enhancing their purchasing power through administrative streamlining.
  • State-negotiated discounts and drug-only benefits. Some states are using their purchasing clout in the form of "pharmacy assistance programs" aimed at the elderly and people with disabilities who are not eligible for Medicaid and may not have any drug coverage. A related strategy taps federal matching funds to essentially expand Medicaid with a drug-only benefit.
  • Substitutions, evidence-based preferred-drug lists (PDLs), and supplemental rebates. For years, states have encouraged the use of less costly prescription drugs through generic substitutions or "therapeutic equivalents." Also, as of April 2004, 33 states operated, were implementing, or had enacted legislation authorizing PDLs for Medicaid beneficiaries. States may select "preferred drugs" from different classes of pharmaceuticals based on a committee's findings on therapeutic action, safety, clinical outcome, and cost. Drugs not on the list are not covered, or they require that the prescribing physician obtain prior authorization. Most states using a PDL also obtain supplemental rebates from manufacturers who want their products to be included on the PDL and available without prior authorization.

Publication Details



Stretching State Health Care Dollars: Pooled and Evidence-Based Pharmaceutical Purchasing, Sharon Silow-Carroll, M.B.A., M.S.W., and Tanya Alteras, M.P.P., The Commonwealth Fund, October 2004