Adam Searing, director of the Health Access Coalition, has argued for such a "preferred drug list" for years. Each time, he has lost, leaving North Carolina as one of only six states that don't use these lists to save Medicaid money.
"The pharmaceutical industry is enormously politically powerful in North Carolina," Searing said. "They've blocked every move to establish a preferred drug list."
Tuesday's development doesn't mean Big Pharma won't continue to flex its muscles at the General Assembly. And it doesn't mean lawmakers won't back down. While in past years, textile and tobacco companies held sway on Jones Street, these days the clout comes from homebuilders and banks or from hospitals and the health care industry.
The state's prison system, for example, has tried for years to negotiate cheaper rates on medical care for inmates treated outside prison. The costs have nearly doubled to $83.4 million in the past five years.
After being rebuffed or ignored by the legislature, the department has not been able to tie rates to Medicaid or the State Health Plan, which could save up to $21 million a year, according to an actuarial study done last year for the department. But this may be the year: The House budget rolled out Tuesday would tie the cost of inmate care to Medicaid rates.
Because the pharmaceutical industry has become a pillar of the state's economy, it makes it much harder to force the companies to cut prices for Medicaid drugs. North Carolina has 18,673 jobs in pharmaceutical and medicine manufacturing, according to the N.C. Department of Commerce. These jobs pay well, with an average annual salary of $73,904.
Sen. Bill Purcell of Laurinburg, a physician and senior budget writer, said he and his colleagues know how important these jobs are to the state.
"From a political standpoint, you've got to be darn careful," said Purcell, a Democrat. "Drug companies don't like preferred drug lists. At least we can say we're friendly to the drug industry."
And the drug companies have been friendly to state politicians, donating nearly $700,000 in campaign money over the past four years, including $532,755 for state legislators.
Purcell helped craft a Senate budget in April that took baby steps toward creating a preferred drug list. The Senate's list would start a year from now, but only if the state can't induce $20 million in savings in the next 12 months just from encouraging doctors to prescribe generics. Instead of looking first for voluntary savings, the House budget announced Tuesday would make the list mandatory.
How preferred lists work
There's big money in Medicaid, the government's health care program for the poor. In North Carolina, Medicaid spends about $1 billion a year on prescription drugs. Federal spending accounts for two-thirds, while state taxpayers pay the rest.
Drug costs have been going up for several reasons, including some that state bureaucrats can't control. Every year, Medicaid covers more people. Every year, more drugs become available to cure or control diseases. The new drugs can be more effective and are generally more expensive.
A preferred drug list would push physicians to prescribe generic drugs or, if a generic isn't available, one of the less-expensive brand-name drugs on the list. The lists use a "pay to play" scheme: Pharmaceutical companies must offer rebates to get their name-brand drugs on the preferred list.
Doctors would have to get prior approval to prescribe a drug not on the preferred list, so sales of nonapproved drugs generally go down.
Preferred drug lists are common: Blue Cross and Blue Shield has one, as do Aetna, the federal Departments of Defense and Veteran Affairs and other health care plans. The State Health Plan has one, but lawmakers inserted a catch when they mandated that the preferred drug list be "open." As a result, the plan must pay for virtually any drug prescribed, except for cosmetic and erectile dysfunction prescriptions.
Forty-four states and the District of Columbia have adopted preferred drug lists in their Medicaid pharmacy programs. Many also participate in "pooled purchasing drug plans," in which states combine their purchasing power to nudge drug manufacturers into giving greater rebates. Other states buy drugs directly from manufacturers to cut costs. Florida saved $61 million annually earlier this decade; Michigan has saved $26 million a year.
According to the National Association of Chain Drug Stores, every state program emphasizes that patient safety and clinical efficacy come before cost savings.
North Carolina could save up to $84 million a year -- $28 million in state funds and $56 million in federal money -- if it adopted a preferred drug list and rebate plan, according to a March report by the Mercer Group, a Minnesota consulting firm. The House hopes its plan would cut $40 million to $50 million from the state budget.
Big political contributors
The drug industry prefers voluntary measures such as having state officials encourage doctors to prescribe more generics.
Officials at GlaxoSmithKline declined to be interviewed for this story, but a spokeswoman for North Carolina's largest drugmaker issued a statement saying preferred drug lists interfere with the individual relationship between a doctor and a patient.
"Our position has been known to the General Assembly for quite some time," the statement said. "We are working with government officials and other stakeholders in North Carolina to determine how we can more effectively achieve savings without compromising patient care."
GSK employs about 5,000 people in Research Triangle Park. Besides being the largest pharmaceutical employer, the company is the largest political contributor among drug companies in North Carolina. Between 2004 and 2008, Glaxo's political action committee and executives contributed at least $218,940 to state candidates. Other drug company PACs and executives contributed at least $456,205 during the same period.
The combination of jobs and political juice has given drug companies a formidable presence at the General Assembly.
"They are like tobacco companies," said Rep. Verla Insko, an Orange County Democrat and budget writer. "They are a major part of our industrial base."
Insko said there was scant support for a preferred drug list until last week, when budget writers learned they had to trim an additional $254 million from Medicaid. This forced even more draconian cuts in payments to doctors, to nursing homes and to community support services.
"The preferred drug list doesn't have any direct impact on patients," Insko said. "The impact is spread on big drug companies based all over the world."
Proposed drug restrictions have run into trouble in the past.
In 2002, as the state was grappling with a budget crisis, DHHS Secretary Carmen Hooker Odom announced her plan to cut the rise in Medicaid costs with a preferred drug list. Key lawmakers killed the plan after drug companies put on a full-court press at the legislature.
"I've never seen so many thousand-dollar suits and gold watches in one place," said Searing, whose Health Access Coalition is part of the N.C. Justice Center. The center is an advocate for low-income people. (News & Observer President and Publisher Orage Quarles III is on the center's board.)
Paying top dollar
Changing the way drugs are prescribed to treat mental illness is one example of how the state could save millions of dollars.
When the General Assembly killed Odom's attempt to implement a preferred drug list, lawmakers specified that the secretary of Health and Human Services could not create such a list for a class of drugs known as atypical antipsychotics, which can be very expensive.
Last year, DHHS set up a committee of doctors and pharmacists to examine how much money could be saved using a preferred drug list for the mental health drugs.
According to minutes of the panel's March meeting, Dr. Michael Lancaster, director of the Division of Mental Health, said the state could save $8 million a year, but only if the General Assembly repealed the prohibition it passed in 2002.
Dr. Marvin Swartz of Duke was curious about the political climate: Would the proposal be dead on arrival at the General Assembly? Not this year, because of the budget, Lancaster said.
One way to save huge amounts of money would be to keep doctors from prescribing expensive drugs for uses not approved by the FDA, Swartz said.
One example was Seroquel. In North Carolina, Medicaid spends more on Seroquel than all other drugs: $29.4 million in the fiscal year that ended in June 2008. The FDA has approved Seroquel for treating two serious mental diseases: schizophrenia and bipolar disorder.
Yet doctors were prescribing Seroquel for other uses: for insomnia or for children 5 and under who are too young to be diagnosed as bipolar or schizophrenic. Neither of these uses is approved by the FDA, but DHHS has no power to stop such prescriptions short of a preferred drug list.
Mental health drugs are not the only area where a preferred drug list could produce savings.
Two of the costliest Medicaid drugs are used to treat gastroesophageal reflux disease: $7.8 million was spent on Nexium and $6.7 million on Prevacid.
Searing pointed out that there is a generic, over-the-counter drug that tests show is roughly equal in effectiveness and safety: Prilosec, at 1/10th the cost of the prescription drugs.
"It is equally effective for most people," Searing said.
Expensive prisoners
As the state's prison population has grown, so have the medical costs associated with aging inmates, mental illnesses and chronic diseases. The correction department cannot provide all medical care within the prisons; inmates go to local hospitals for operations or emergencies.
In the last fiscal year, the department spent $83 million on hospitals and other medical providers outside prison walls. Taxpayers foot these bills, which are much more expensive than reimbursements under Medicaid, the State Health Plan or private insurers.
There have been attempts to cut these costs; in 2002, the House passed a bill that tied the cost of inmate medical care at UNC Hospitals to Medicaid reimbursement rates. Senate Majority Leader Tony Rand, a Fayetteville Democrat, said he helped kill the bill in the Senate.
"I'm sure it had to do with what it would have cost UNC," Rand said. "It would have cost them a lot of money."
Hospital officials say that inmates cost more to treat than regular patients.
Karen McCall, spokeswoman for UNC Hospitals, said inmates require private rooms and separate check-in and registration. And even though the prison system provides a guard, the hospital must make sure there is 24-hour security. UNC does give a 10 percent discount off the billed price to the prison system, McCall said.
"We want to do our fair share in this effort, but we cannot take a disproportionate share of inmates," she said.
In 2007, the State Health Plan estimated the correction department could save 27 cents on the dollar if the hospitals were reimbursed at State Health Plan rates. Last year, an actuarial firm studied how much the department would have saved if the prison system had paid rates under 15 other plans: Medicaid, the State Health Plan and private insurance plans. Savings ranged from $6.5 million a year to $21 million.
But in the past few years, the Department of Correction has not been aggressive in pushing such a plan. Neither Rand nor lawmakers who write the department's budget were aware of the results of the actuarial study.
The department cannot just demand to be billed at the Medicaid or State Health Plan rates, said Jennie Lancaster, chief operating officer at the Department of Correction. It would require legislative action.
"We're not in a bargaining position," Lancaster said.
The House budget proposal announced Tuesday would provide prison officials new leverage: Hospitals could charge no more than 150 percent of Medicaid rates.
The N.C. Hospital Association does not support the change, said Hugh Tilson, the association's lobbyist.
"We're working on a compromise," he said.
Coming Thursday: Wal-Mart pays up, but will others?
