A tamper-prone drug ‘cap’

by Bill Hammond |  | NY Torch

An outside analysis of New York’s spending on prescription drugs for Medicaid recipients raises questions about how the Cuomo administration is enforcing a newly enacted cap on those costs.

The analysis by the Menges Group, which was commissioned by the Pharmaceutical Research and Manufacturers of America, challenges the state’s projection that Medicaid drug costs will increase by 15 percent in the 2017-18 fiscal year.

Menges found that year-to-year growth in the state’s drug costs slowed dramatically after a spike in fiscal year 2015—and actually declined by 4 percent in fiscal year 2017 when rebates were factored in.

The study further cites the federal Centers for Medicare & Medicaid Services, which projects drug costs nationwide will grow at 6 to 7 percent, and statistics from major pharmacy benefit managers, which saw single-digit growth in Medicaid costs in 2016.

“Based on New York’s recent expenditure and growth trends, double-digit escalation in New York’s Medicaid prescription drug expenditures seems unlikely to occur in 2018,” the Menges report said.

The findings contrast sharply with an official forecast from the state Health Department, based in part on projections by the actuarial firm Mercer, which estimate 15 percent growth in the state’s Medicaid drug costs for fiscal year 2018.

(The Cuomo administration previously used exaggerated numbers to describe past drug costs—asserting they had jumped $1.7 billion in three years, when manufacturer rebates had reduced that amount by almost half.)

The state’s growth forecast plays a central role in enforcing the cap on Medicaid drug spending that was adopted last year as part of the state budget. The new law prescribes a maximum spending target for this fiscal year and next. If drug costs exceed that amount, the Health Department is instructed to identify high-cost drugs and seek additional rebates from manufacturers. If drug makers balk, the department is empowered to demand detailed information about they set prices, including records of a company’s research, manufacturing and marketing costs for the drugs in question.

Based on its 15 percent growth rate, officials expect to exceed this year’s cap by $119 million, or more than 12 percent.

The debate highlights some intriguing features of how the cap is working in practice:

First, the cap is much tighter than it appears at first glance.

Growth for fiscal year 2018—as specified in Section 280 of the Public Health Law—is limited to the 10-year rolling average of the medical inflation rate (currently 3.2 percent), plus five percentage points, minus $55 million. That sounds as if it allows a greater-than-inflation increase. To the contrary, the result of that formula, when applied to the state’s base-year net spending of $936 million, works out to just 2.4 percent—a third less than the rolling average of medical inflation.

The formula for fiscal year 2019 is even tighter—medical inflation plus 4 points minus $85 million. At current spending levels, that will likely amount to a 2 percent cut in Medicaid drug spending.

Second, whether state spending ultimately exceeds the cap is not necessarily relevant under the law.

The statute is based not on actual spending but projected spending, as determined by the Health Department and budget director. These projections are supposed to be based on expenditures in the early quarters of the year or “other relevant information,” but the law gives little further guidance on how they should be set.

Third, the higher that spending is projected to go, the more the state can demand in rebates from companies to close the gap.

Fourth, the statute makes no reference to reconciling those projections with actual spending after the fiscal year is complete.

Fifth, the Health Department has broad discretion on which manufacturers to target and how much money to demand, leaving the industry in the dark as to what pricing standards it’s expected to follow. The state could choose to go after companies that have arbitrarily and excessively hiked their prices, or it could go after companies with the deepest pockets.

The combined effect of these provisions gives the state a powerful incentive to exaggerate projected growth as a way to maximize its leverage with pharmaceutical manufacturers and its savings for the state budget.

Saving money taxpayers is a legitimate goal, and the state has a duty keep all Medicaid spending, including spending on prescription drugs, under control.

However, the drug cap turns out not to be a uniform brake on rising costs, but a license to selectively squeeze discounts. Whether it uses that license responsibly and fairly remains to be seen.