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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.
Alex Brill is a research fellow at AEI.
The current fiscal crisis facing state and federal budgets is the largest in recent history. Continued wasteful spending in the Medicaid drug program is a problem requiring policymakers’ prompt attention.
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