Prescription Drug Cost Savings Policy Guide

Background: In 2007, the U.S. spent $287 billion on pharmaceutical drugs, as stated earlier, representing 14% of all health care expenditures and a significant driver of health care costs.  Driving this expense is the drug industry which spends $30 billion each year on marketing, pitching the most expensive drugs over less expensive yet equally or more effective medications, like generics. At least $7 billion of PhRMA-money is targeted directly at physicians. In fact, the drug industry spends more money marketing drugs than it does developing new medications, according to a 2005 report from the Center for Public Integrity, Drug Lobby Second to None: How the pharmaceutical industry gets its way in Washington.  

As a result, costs are rising for states, employers, families, hospitals and insurance companies, and more Americans are unable to fill their prescriptions because of spiraling costs.  The New York Times reports that 1 in 7 Americans went without prescribed drugs in 2007, up from 1 in 10 in 2003. Even working adults who have private employer-based insurance are being hit, with 1 in 10 unable to pay for their medications. As the Times reports, the effects of higher health care and prescription costs and the economic downturn are hurting low-income Americans the most, with 3 in 10 unable to fill a prescription because of the cost.  Even 1 in 4 adults on Medicaid or other state program said they had difficulty paying for medications.

Public support: A new survey from the Kaiser Family Foundation and Harvard School of Public Health finds that 52% of Americans believe there isn't enough government regulation of the price of prescription drugs. And, 9 in 10 support allowing the federal government to use its buying power to negotiate lower prices from drug companies, something which states are increasingly doing.  According to a 2005 Kaiser Family Foundation poll, 70% of Americans believe the drug industry puts profits ahead of people and almost 60% of Americans blame the drug industry for rising health care costs. The public's perceptions are not unfounded.  

Expand Use of Effective Medications and Generics: For Medicaid and other public programs and as a voluntary guide for private plans, institute or strengthen an existing Preferred Drug List (PDL) with Prior Authorization that prioritizes the most effective medications, not simply the newest “celebrity” drugs.  PDLs enable states to reduce drug costs by prioritizing drugs that are safe, highly effective, and typically less expensive than brand name drugs. As Prescription Policy Choices reports, at least 40 states have some sort of PDL regulating physicians' prescribing practices.  PDLs with prior authorization can effectively cut program costs without adversely affecting patient health, as long as best practices are followed and needed medications not on the preferred list can be prescribed in a timely manner. PDLs are a good way to expand the use of generic medications that are less expensive but equally or more effective than their brand-name couterparts.

  • Maine's PDL has kept Medicaid drug cost increases to below 3% annually, while federal government increases average around 13% annually.
  • Texas' PDL saved the state's Medicaid and SCHIP programs $116 million in 2007.
  • West Virginia’s PDL kept the state’s growth in pharmaceutical costs to 0% in its first year, compared to a prior annual growth rate of 16%.

*** Model PDL Legislation/Best Practice: Model legislative language for a PDL with prior authorization can be accessed here. 

Access Reduced Drug Prices: Maximize participation in 340B pricing, a provision of the Federal Public Health Act that authorizes discounted drug prices (below Medicaid levels) for certain populations and safety net health care providers, like patients at federally qualified health centers and prison populations.  States have numerous options to ensure that populations and programs eligible for 340B pricing are receiving the reduced prices, resulting in savings for state budgets and consumers.

  • Under 340B, drugs prices are 19% below the average Medicaid best price net or rebates, 39% below the average reimbursement from insurers, and 51% less than average wholesale price (AWP). 
  • Eligible entities include community health centers, hospitals that serve a disproportionately large Medicaid population, and programs that serve populations with costly medical needs, like AIDS clinics.
  • Texas saves $10 million per year using 340B pricing for its prison population
  • Hospitals that are eligible for and are utilizing 340B pricing save state Medicaid programs an average of $300,000 per year
  • 340B pricing can make specialty drugs more accessible for patients, and more affordable for states and providers.  Examples include medications for Multiple Sclerosis, Cancer, Antivirals, and Rheumatoid Arthritis
*** Model Reduced Drug Prices Legislation/Best Practice: Create a task force to determine how best to expand 340B pricing opportunities in your state.  Model language can be found in LD 711 (ME), enacted in 2003, and titled: Resolve, To Lower the Costs of Prescription Drugs through the Use of the Federal Public Health Service Act. Other examples of state legislation resulting in expanded 340B pricing are:

Regulate Pharmacy Benefit Managers: Better regulate or eliminate Pharmacy Benefit Managers (PBMs), who act as middlemen between drug manufacturers and public and private health plans, negotiating prices for prescription drugs.  The PBM industry is highly corruptible and lax oversight of PBM business practices have resulted in ethical lapses and instances of PBMs pocketing discounts they negotiated for health plans, rather than forwarding discounts through to their clients.  To get their drug on a health plan's benefit list or formulary, drug companies make payments to PBMs that are proportionate to how often the drug is prescribed.  PBMs boost their profits by pocketing some or all of these payments instead of passing them along as savings to their customers. 

  • Three PBM companies administer 80% of all private prescription coverage and each pocket annual revenues exceeding $15 billion.
  • The three largest PBM companies manage the drug benefits for 95% of Americans with prescription drug coverage.
  • From 1997 to 1999, Medco Managed Care, then a subsidiary of Merck, was paid $3.5 billion in rebates it negotiated from manufacturers, the majority of which were not passed through to health plans and consumers.
  • Illinois has estimated it could save $10 million annually by directly negotiating prescription drug prices for the state employee health plan instead of using a PBM.
  • The University of Michigan saved $8.6 million in 2003 by downsizing from 5 to 1 PBMs and better regulating the single remaining manager.
*** Model Legislation/Best Practice: Eliminate contracts with outside PBM vendors, and move drug price negotiations in-house for state programs.  Or, at a minimum, require transparency, a fiduciary relationship, and annual audits of all PBMs to insure that the full value of negotiated discounts, rebates, or other financial considerations are passed through. Model legislation enacting greater transparency and establishing a fiduciary relationship can be downloaded here.  This model language should be strengthened by:
  • Adding a PBM registration provision with the bureau of insurance;
  • Requiring any PBM operating in the state to file annual certifications with the bureau to show that they are in compliance with the PBM transparency and other rules in the model law;
  • Adding a cross-reference to the bureau’s market conduct authority and authority to charge companies for a market conduct exam to review compliance with these rules, and adding a requirement that the bureau carry out a market conduct exam at least once every five years;
  • Adding a cross-reference to the bureau’s enforcement and penalty provisions.
  • Model legislation requiring an annual audit of PBMs is Texas’ SB 704, enacted in 2009. 


  • Prevent Excessive Rx Co-Pays: LD 807, enacted in Maine, prevents pharmacies from charging a co-pay that exceeds the retail price of the prescription being filled.  This can save money for consumers and Medicaid. 
  • Promote Generics: Promote generic medications through PDLs, pharmacy regulations, physician vouchers, and other initiatives that promote the use of lower cost generics when the generic is scientifically shown to be equally or more effective than its brand name equivalent.
  • Bulk-Purchasing: Create or join an existing multi-state purchasing collaborative, such as the Sovereign States Drug Consortium, to combine the purchasing power of state programs, achieving savings for taxpayers and plan beneficiaries.