Illinois Governor Pat Quinn, faced with a constitutional requirement to balance his state’s budget, is looking at making significant cuts to the state’s Medicaid program. Improving the efficiency of the Medicaid program is an obvious priority in Illinois, given both last year’s $2 billion shortfall in the program and the coming influx of enrollees that the 2010 health care reform law will make eligible starting in 2014. However, the pharmacy benefit cuts under discussion risk raising total Medicaid expenditures as they can lead to higher rates of hospitalization.

According to press reports, Illinois lawmakers are considering capping the number of prescriptions that a Medicaid patient can have at any given time. In Mississippi and Tennessee, Medicaid patients are allowed only five prescriptions per month, a policy that could save Illinois $136 million a year in drug spending. But that analysis just looks at pharmacy costs in isolation with no regard to the overall cost of treating a patient. In actuality, restricting access to pharmaceuticals can lead to more hospitalizations, which dramatically increase costs.

Recent research suggests that instead of arbitrarily reducing access to prescriptions, policies focused on improving adherence—that is, ensuring that patients take their prescriptions as prescribed without missing doses—hold more promise for cost savings. A study conducted by economist William Encinosa and colleagues has demonstrated how increasing adherence among diabetes patients can reduce hospitalization rates and save on health care costs. Another study, by Dr. Michael Sokol and colleagues, examined adherence among high cholesterol and hypertension patients in addition to those with diabetes and found similar results. New techniques and technologies have been shown to effectively improve prescription drug adherence. Private insurers have particularly strong incentives to coordinate care in this way, as is the case for Medicaid managed care organizations that include pharmacy services

In addition to saving money by reducing hospitalizations, another option the state could consider is ensuring that Medicaid patients receive the lowest-cost version of a given prescription drug. Research I have conducted on wasteful spending in the Medicaid drug program found that all too frequently states reimburse for a version of a drug that is more costly than another product with the exact same active ingredient, dose, form and bottle size. I estimate that the Medicaid drug program wasted $329 million nationwide in 2009. In Illinois, taxpayers could have saved about $11 million if the cheapest version of a given pharmaceutical had been consistently dispensed.

As Governor Quinn has noted, only the state pension system rivals the Medicaid program as the greatest financial pressure Illinois faces. The governor’s determination to make significant reforms to control spending is admirable. But a more careful assessment of the possible unintended consequences of simply restricting access to products and services is necessary.

Two options suggested here—improved adherence and consistent utilization of the lowest-cost versions of products—can achieve measurable success at reducing aggregate health care costs. They are only first steps, of course, and more significant reforms will be required soon. In fact, without radical changes that recognize the need for greater patient responsibility along with access to quality care, costs will never be truly contained. However, the greatest danger is that dramatic cuts in reimbursement or access will be implemented to achieve short-term savings but result in long-term increases in expenditures as well as degradation in health outcomes.

Alex Brill is a research fellow at the American Enterprise Institute in Washington, DC. He previously served as the policy director and chief economist to the U.S. House of Representatives Committee on Ways and Means.