Overspending on Multi-Source Drugs in Medicaid

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Executive Summary

The current fiscal crisis facing state and federal budgets is, as a share of GDP, the largest in recent history. Federal deficits combined with aggregate state budget deficits may total over $1.6 trillion in fiscal year 2011. Given these pressures and the added burden of recent health care reform legislation that will add 16 million new enrollees to Medicaid rolls by 2019, there is a clear and obvious need to identify potential savings opportunities to address budget pressures, particularly as they relate to health care spending. While some policymakers have advocated wholesale Medicaid reform, there are also intermediate opportunities for considerable savings within the existing program framework.

This working paper analyzes a large subset of 2009 Medicaid drug data from the Medicaid drug program and identifies twenty popular multi-source drugs (that is, prescription drugs for which both brand and generic versions are available) for which there are significant sales of the more costly product. The findings are consistent with the widely held opinion that brand drugs are more expensive than therapeutically equivalent generic products. Given this, the paper quantifies the potential savings that could have been achieved had Medicaid consistently used the lower-cost version of each of these twenty products.

The results show that, in 2009, states' Medicaid programs engaged in a large amount of unnecessary drug spending by reimbursing pharmacies for relatively costly brand products when alternative products with identical active ingredients were available at a lower cost. Specifically, the analysis identifies $329 million of overspending as a result of underutilization of the less costly (generic) and overutilization of the more costly (brand) versions of these multi-source products. Because Medicaid is a joint federal-state program, savings from addressing this problem would accrue to both states and the federal government, although the federal share of total Medicaid spending is generally about 57 percent.

The approach of a significant "patent cliff," when many blockbuster brand drugs will begin to face generic competition upon losing patent protection in 2011 and 2012, makes the likely future overspending in this program even greater if new policies are not promptly adopted. In addition to the 2009 data analysis, this paper analyzes ten brand drugs expected to go off patent in 2011 or 2012 and predicts total annual overspending of $289 million-$433 million.

Given rising pressures on states' fiscal budgets, these findings, considered in conjunction with the conclusions of previous studies, indicate that continued wasteful spending in the Medicaid drug program is a problem requiring policymakers' prompt attention.

Key Findings

  • Among twenty popular multi-source drugs, Medicaid overspent by an estimated $329 million in 2009 by reimbursing for more costly brand drugs rather than lower-cost, therapeutically equivalent generics. As total spending on these twenty multi-source products was approximately $1.5 billion, this means Medicaid overspent by 22 percent ($1.5 billion versus $1.17 billion) on these products.
  • Among the twenty drugs studied, Medicaid wasted an average of $95 per prescription.
  • Most of the overspending (85 percent) was concentrated in eight identified chemical compounds. Total waste for these drugs was roughly $279 million.
  • On the state level, the greatest amount of unnecessary spending was in California ($102 million), Texas ($31 million), Georgia ($25 million), and Ohio ($21 million). Per Medicaid enrollee, the most wasteful states were Vermont and Iowa ($31 per enrollee in each state), Maine ($18 per enrollee), and New Hampshire ($17 per enrollee).
  • There are ten brand drugs expected to lose patent protection in 2011 and 2012 for which Medicaid reimbursement levels were very high in 2009. Projections of overspending on these drugs, assuming generic utilization patterns comparable to what is observed in 2009 for products with generic equivalents introduced in 2007 or 2008, range from $289 million to $433 million. 

Alex Brill is a research fellow at AEI.

1. For an example of a proposal that advocates overhauling the Medicaid system, see Rivlin and Ryan (2010).

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