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Press Release

Burying a Time Bomb in Red Tape


In an attempt to ignore out of control spending, North Carolina government officials plan to limit access to prescription drugs for Medicaid beneficiaries. Unfortunately, this strategy is doomed to fail. Not only will it fail to close the budget shortfall, but will also fail the state’s Medicaid beneficiaries by depriving them of the therapies and medical treatments they need.

Indeed, Medicaid spending has grown at an unsustainable level in recent years and now threatens to explode the budget of the state and its counties. However, to address this problem by limiting access to the most cost-effective medical therapy available, prescription drugs, is to miss the point entirely. North Carolina should work to reform Medicaid by eliminating waste, fraud, and abuse.

By limited the price of, and access to, prescription drugs, North Carolina will directly limit innovation in new life-saving medicines. American drug companies develop far more new drugs than any other country in the world. Of the 152 drugs developed through 1975-1994, 45% were produced in the United States. The next highest producer is the United Kingdom, producing 14%. Drug providers simply will not develop drugs when the cost is more than the government-controlled price. Currently, pharmaceutical companies spend more than 20% of their sales just in the research and development of new life-saving drugs.

Whenever the government sets prices, it creates shortages and limits the creation of new products. Government control of the costs of prescription drugs will limit access to medicines and handicap innovation for new life-saving products.

Yet many in state government persist in trying to limit prescription drug access through a complicated formulary program where doctors are forbidden from prescribing drugs not on a state-sanctioned list. To get on this formulary list, drug manufacturers must pay the state a hefty ransom – essentially a hidden tax on pharmaceutical products that not only affects Medicaid beneficiaries, but all consumers in the state.

This state-sponsored extortion goes down like this: North Carolina Medicaid institutes a formulary that restricts the drugs that doctors can prescribe to patients in nearly all circumstances. North Carolina Medicaid then informs drug manufacturers that to get on this list – which provides access to between 9 and 13 percent of the entire instate market – they must pay the state 10 percent of the price of each prescription issued. Those pharmaceutical research firms unwilling – or unable – to come up with the scratch are effectively barred from 1/8th of the market.

By making an offer drug companies can’t refuse, the state government is able to transfer the costs of drug development onto the private sector and health insurers. When the cost of government-funded medical services, procedures, and therapies are artificially set below cost, private health care costs rise as consumers pay for the surplus enjoyed by the Medicaid beneficiaries. By raising private sector health care costs, North Carolina can launder this tax by moving its costs off of the state’s balance sheet.

Under current law, drug companies must provide each state’s Medicaid program with all of its drugs at the lowest price available in the state, or at a 15.1 percent discount to the average manufacturer’s price, whichever is less expensive. As a General Accounting Office study demonstrates, when these “rebates” went into effect in 1990, the price for drugs rose by 10 percent for HMOs and by 14 percent for group purchasing organizations. New restrictions on drugs, or crooked “pay to play” schemes, will exacerbate this problem and further increase private health care costs to make up for the below-cost care.

But by increasing costs for private sector health care, small businesses will feel the crunch from increased insurance premiums. This will cause even greater pressure to expand Medicaid rolls and institute a more universal health care system in North Carolina.

Yet pushing more people onto the rolls of a horribly bureaucratic and unsustainable system would be a disaster. From 1978 to 1998 total (state and federal) Medicaid spending rose 438 percent; that is, real spending quadrupled in the thirty-year period, while the number of recipients only increased by 53 percent over the same period of time. The system’s costs in North Carolina have grown by over 85 percent in the past decade.

But restricting access to prescription drugs destroys incentives for innovation, create supply shortages, and limits consumer autonomy. In addition to economic harm, formularies would also create an artificial barrier between patients and their doctors.

Given the overwhelming evidence of prescription drugs’ effectiveness as preventive medical treatment, plans designed to limit prescription drug spending will often lead to a dramatic increase in overall medical spending. A study by Columbia University economist Frank Lichtenberg found that every $1 in prescription drug spending saved $4 in hospital care. This is because prescription drugs are often used for preventive care, to prevent more debilitating- not to mention more expensive- medical conditions. While a $600 annual prescription for cholesterol-reducing drugs Zocor and Lipitor may seem expensive, if they can avert a $300,000 hospital stay and bypass surgery, they are more than worth the investment.

Strong armed tactics to limit access to prescription drugs hide Medicaid’s financial problems and cuts spending for the most cost-effective treatments available to Medicaid beneficiaries. Those concerned with drug innovation and choice in health care would be well served if North Carolina just said no to the “supplemental rebates” shakedown.

A better solution to exploding Medicaid costs would be to re-evaluate Medicaid eligibility to ensure that scarce resources are spent on those most deserving of government-financed health care. Medicaid was intended to be a safety net, not an entitlement for anyone who lacks employer-sponsored insurance. In addition, legislators should seek a comprehensive state-based Medicaid reform to ensure that beneficiaries seek value for state dollars. Too often, beneficiaries make careless decisions because they are not affected by the cost of care.

True reform can best be accomplished through tax credits, vouchers, and state-granted Medical Savings Accounts. Market incentives, not command-and-control bureaucracies that punish innovation and beneficiaries, are the best means to reduce Medicaid spending.