State Medicaid Resource Kit: Maintaining Quality and Patient Access To Innovative Pharmaceuticals in Challenging Economic Times

STATE MEDICAID RESOURCE KIT:
Maintaining Quality and Patient Access

to Innovative Pharmaceuticals
in Challenging Economic Times
Prepared by
Mary Kay Owens, RPh, CPh
President, Southeastern Consultants, Inc.
NATIONAL PHARMACEUTICAL COUNCIL December 2006

Many thanks to Rebecca Stephens, Southeastern Consultants, Inc.,
and Kathryn Gleason, National Pharmaceutical Council,
for their greatly appreciated assistance with this project.

F OREWARD
States are struggling to provide quality, cost-effective health care for their Medicaid beneficiaries while making important
choices about which interventions to implement in order to manage health care spending. Appropriate cost containment
strategies should maintain access to quality care and avoid “false savings” produced by cost-shifting to other segments
within the Medicaid budget. States’ first steps must recognize the unique characteristics of the Medicaid population and
identify key elements of spending.
NPC developed the State Medicaid Resource Kit to help states better identify the needs of their populations and to
develop patient-focused cost management interventions while maintaining quality care. The Kit discusses the factors that
influence Medicaid spending, specifically pharmaceutical spending. In particular, the Kit addresses the careful application
of interventions for the aged, blind, and disabled populations – their intense use of resources brings close scrutiny of
costs, while their fragile health status requires a special need for individualized care.
The State Medicaid Resource Kit also contains a detailed discussion of the pros/cons and design issues for sixteen specific
strategies that states are exploring in the areas of quality assurance, utilization management, and operational systems.
Inclusion of these specific strategies does not signify or imply NPC support. Rather, they are included to provide a
comprehensive overview of the strategies being used to reduce pharmacy costs, enhance program efficiency, and improve
quality of care.
We hope you find the Medicaid Resource Kit helpful as you seek to understand your unique Medicaid population and
ways to provide quality, cost-effective care to the Medicaid beneficiaries in your state.
NATIONAL PHARMACEUTICAL COUNCIL

1894 Preston White Drive
Reston, VA 20191-5433
Tel. (703) 620-6390
Fax. (703) 476-0904
Web. www.npcnow.org
TABLE OF C ONTENTS
Introduction .........................................................................................................................3
Recent Changes Impacting Medicaid ....................................................................................3

Medicare Modernization Act of 2003: Part D Drug Benefit ........................................................................3
Deficit Reduction Act of 2005.........................................................................................................................3
State Medicaid Reform Initiatives ..................................................................................................................4
Population Characteristics.................................................................................................................4
Factors that Influence Pharmaceutical Spending ..............................................................................7
Medicaid Budget Strategies ..............................................................................................................7
Quality Assurance Initiatives.............................................................................................................9

A. Disease/Case/Care Management ......................................................................................................................................9
B. Centers of Excellence.......................................................................................................................................................13
C. Enhanced Data Analysis with Medical/Drug Review Management........................................................................14
D. Practice Pattern Analysis ................................................................................................................................................15
E. Enhanced Primary Care Case Management (PCCM) ..................................................................................................16
F. Pharmaceutical Industry Value-Add Programs ...........................................................................................................18
Utilization Management Initiatives ....................................................................................19

A. Patient Lock-in Program .................................................................................................................................................19
B. Fraud/Abuse Detection System/Audit Program ..........................................................................................................20
C. Co-payments for Prescriptions ......................................................................................................................................21
D. Prior Authorization Programs and Clinical Criteria Application............................................................................23
E. Third Party Liability ..........................................................................................................................................................25
F. Prescription Limits ............................................................................................................................................................26
G. Drug Therapy Parameters ...............................................................................................................................................28
Operational Systems Initiatives ..........................................................................................29

A. Decision Support Systems............................................................................................................................................................................................29
B. Reimbursement Policies.................................................................................................................................................................................................30
C. Preferred Drug Lists (PDLs)...........................................................................................................................................................................................31
Resources .........................................................................................................................................................37
References........................................................................................................................................................41
1
I NTRODUCTION
Medicaid is the nation’s largest health insurance program for low-income families, the elderly, and the disabled, covering
more than 55 million low-income individuals in 2006. The Federal government requires Medicaid to cover a broad range of
basic services, including physician and hospital services, nursing home care, and home health care.1 It also allows states the
flexibility to offer many optional services, such as prescription drugs (which every state currently offers), prosthetic devices,
dental care and others.2
The Federal government and the states share responsibility for financing Medicaid. The federal government provides a
guaranteed match to states for services to Medicaid enrollees. The federal matching percentage (Federal Medical Assistance
Percentage, or FMAP) is inversely proportional to a state’s average personal income relative to the national average and
varies by state from a low of 50 percent to a high of 77 percent.3 Over three quarters of states experienced a reduction in
their FMAP in either 2006 or 2007, with 19 states experiencing a decline in both years. These declines place pressure on
states to allocate additional state general revenues to maintain current program levels.4
In 2006, a dramatic shift occurred across all states as total Medicaid spending increased on average by only 2.8 percent.
This marked the lowest growth rate in Medicaid spending since 1996. Additionally, state revenues grew at a faster rate than
total Medicaid spending since 1998, further assisting states with the burden of financing Medicaid. A major factor in
dramatically slowing the program spending growth was a low enrollment growth rate of 1.6 percent (attributable mostly to
the improved economy) that resulted in fewer people becoming eligible for Medicaid services.5
R ECENT C HANGES I MPACTING M EDICAID

A number of recent federal legislative changes have occurred that significantly impact the Medicaid program: the Medicare
Modernization Act of 2003, which included the Part D drug benefit; the Deficit Reduction Act of 2005; and reform efforts
proposed and/or implemented by many states to reduce future Medicaid spending growth.
Medicare Modernization Act of 2003: Part D Drug Benefit

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) created a significant expansion of the
Medicare program by establishing a new prescription drug benefit (Part D). The new benefit has major implications for state
Medicaid programs – for the first time, beneficiaries who are eligible for both Medicare and Medicaid (dual eligibles) now
receive prescription drug benefits from Medicare, not from Medicaid.6
Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (DRA) contained thirty-nine sections that the Congressional Budget Office (CBO) estimates will
have an effect on federal Medicaid spending.7 These sections include requirements for documentation of citizenship and asset
transfer rules for determining Medicaid eligibility, reimbursement changes for pharmaceuticals, and the flexibility to increase and
enforce enrollee cost sharing requirements and offer alternative benefit packages. The DRA also contained appropriations for
specific Medicaid activities, for example, over $75 million annually between FY2007 and FY2010 for Medicaid program integrity
enhancements and over $75 million annually in FY2007 and FY2008 for transformation grants to states to increase quality and
efficiency of care.8 These generous appropriations should be considered by states as funding mechanisms to design, implement,
and enhance various quality assurance, utilization management, and operational system strategies outlined in the State Medicaid
Resource Kit.
3
The DRA includes net savings of $4.9 billion and gross savings of $11.5 billion over the next five years.9 The CBO estimates
that DRA provisions related to premiums and cost sharing will reduce federal Medicaid spending by $1.9 billion over the next
five years and by $9.9 billion over the next ten years – with approximately 70 percent coming from increased cost sharing
and the remaining 30 percent from premiums. The CBO estimates that the DRA will generate $3.9 billion in savings
attributable to changes in prescription drug payment policies, accounting for one-third of the Medicaid savings in the bill.10
State Medicaid Reform Initiatives

A number of states have designed and submitted Medicaid reform proposals to the Centers of Medicare and Medicaid
Services (CMS) via Section 1115 waivers or via state plan amendments under DRA provisions. Section 1115 waivers give states
the federal approval to alter the way they provide coverage and/or deliver Medicaid services outside the federal standards and
still receive federal matching funds. Recent waiver and state plan amendment activities have focused on reducing coverage
by reducing enrollment and benefits for segments of the population as well as by making broad structural changes to the
program.
State reform initiatives seem to have a common theme which includes introducing consumer-directed and market-based
principles into the Medicaid program. Many states’ reform proposals include features such as performance incentives,
outcomes monitoring, and consumer satisfaction surveys, to prompt individual providers and health plans to proactively
manage medical conditions, use preventative services, and follow recognized treatment guidelines and best practices. Health
plans and providers will have an incentive to provide quality care to attract consumers and obtain financial performance
rewards. These reform plans include the expansion of managed care to provide services through private health plans. States
such as Florida, South Carolina, Kentucky, and West Virginia are implementing plans that have similar characteristics and
themes.
P OPULATION C HARACTERISTICS
The factors with perhaps the greatest influence on Medicaid spending include demographics and special population
characteristics. As a whole, the Medicaid population uses health care services more intensively than the general population.
One study found that 61 percent of adult Medicaid enrollees have chronic or disabling conditions and that these enrollees are
15 times more expensive to treat ($6,672 annually) than those adult enrollees without such conditions ($432 annually).11 In
fact, the elderly and disabled Medicaid population (13 million people) account for 23 percent of enrollees and 68 percent of
expenditures while children and adults represent 70 percent of enrollees and 28 percent of expenditures (Figure 1). Nationally,
Medicaid provides health care coverage for 60 percent of long-term care residents, 44 percent of those living with HIV/AIDS,
and 20 percent of those with severe disabilities.12 These population groups are less likely to be in Medicaid managed care
programs due to their special needs, thus remaining in the fee-for-service setting.
Almost 7.5 million Medicaid beneficiaries are dual eligibles – individuals eligible for Medicaid and entitled to Medicare, the
federal health insurance program. Dual eligibles represent only 14 percent of Medicaid enrollees, but account for 40 percent
of total Medicaid spending. The shift of drug coverage for dual eligibles to Medicare Part D in January 2006 will only reduce
overall state Medicaid spending for the duals by 6 percent as Medicaid continues to provide long-term care services, some
acute care services, and Medicare premium and cost sharing payments for the duals.13 Providing health care to the dual
eligible population poses considerable challenges: approximately 62 percent of the dually enrolled population have less than a
high school education and three-quarters of the duals report some functional limitation with 28 percent reporting three to
six affected activities of daily living (e.g., eating, bathing).14
4
Figure 1
Percent Beneficiaries and Expenditures by Enrollment Group
Elderly 8%
Elderly 24%
Unknown 7%
Blind/Disabled 15% Unknown 4%
Adults 22% Blind/Disabled 44%
Adults 11%
Children 48%
Children 17%
Beneficiaries* Expenditures**
Elderly/Blind/Disabled = 23% Enrollees and 68% of Expenditures

*Beneficiaries are recipients of actual services.
**Total expenditures exclude administrative expenses. Source: CMS, MSIS 2003 data. Table 9
Within Medicaid the elderly, blind, and disabled populations are responsible for over 80 percent of state Medicaid drug
spending nationally (Figure 2).15 Average annual drug expenditures for the elderly and disabled enrollees are more than twelve
times the adults’ average annual drug expenditures and nearly twenty-four times those of a child.16 There are approximately
5.4 million elderly and disabled, non-dual enrollees that continue to receive drug coverage under the Medicaid program.17 The
elderly and disabled are faced with unique health variables, including a higher prevalence of multiple diseases that may
require more prescriptions, different reactions to medicines because of changes in metabolism and organ function that
demand individualized drug therapy, and age- and illness-related compliance and persistency challenges.
In addition to the elderly and disabled populations, Medicaid reflects our culturally and ethnically diverse national population.
Currently 38.8 million Hispanics live in the U.S. and represent 14 percent of the U.S. population.19 The U.S. Census Bureau
projects that, within the Medicare eligible population, the minority population will increase at twice the rate of non-
minorities in the next two decades.20 In the next three decades, the non-white and Hispanic populations are expected to
double, while the white population is expected to remain comparatively stable.21 Racial and ethnic groups can have different
physiological responses to drugs (e.g., differences in metabolism, clinical effectiveness and side-effect profiles) as well as
different psychosocial views of disease and the medications used to treat them.
Because individualized care and access to a broad variety of pharmaceuticals is extremely important for elderly and ethnically
varied populations, some traditional cost containment strategies may not be appropriate for Medicaid populations or may
need to be modified.22 For example, the development of preferred drug lists and formularies with mandatory prior
authorization for drugs not on the list can pose serious delays in access to treatment and result in negative patient outcomes
5
Figure 2
National Medicaid Drug Expenditures
Pre-Medicare Part D Shift for Duals, Jan. 2006
Percent Expenditures by Eligibility Group Pre-Part D*
Aged 25%
Children 9%
Blind &
Disabled
Adults 9%
57%
*Aged, blind, and disabled account for 82% of drug spending.

Duals account for 50% of total drug spending.**
Source: CRS, “Prescription Drug Coverage Under Medicaid”, February, 2006
**2004 Expenditure Report, National Association of State Budget Officers
if there are no appropriate safety nets and provider-friendly operational processes to quickly and effectively allow for
individualized care. Elderly and disabled enrollees, who are seriously ill, need acute treatment with antibiotics and/or other life
saving drug therapies, or need individualized treatment to carefully manage a chronic condition, often require immediate
access to the medicines selected by their doctor. Sociological factors and Medicaid enrollees’ limited understanding of drugs
and health care also compound the negative effects of delaying drug therapy and create patient confusion. Therefore, an
expeditious process for physicians to obtain exceptions to restrictive drug lists is essential.
Clinicians generally agree that specific groups should be exempt from the formulary, preferred drug list (PDL) or prior
approval process, such as patients with transplants, HIV/AIDS infection, serious mental illness, multiple chronic diseases, and
other high-risk groups. For those not exempt, a broad choice of covered products in each therapeutic class is particularly
necessary due to the complex utilization and disease patterns of the elderly, disabled, and chronically ill populations, as well
as the special needs of minority populations. Private managed care plans have used formularies and other strategies such as
co-payments and limits on prescribed drug benefits for years. However, it is important to understand that the elderly,
disabled, and chronically ill Medicaid populations are very different from the typically young, healthy managed care
population and therefore require a different approach to managing utilization and costs. Also, members of private plans often
have the money to buy the drugs they need regardless of the barriers presented, while impoverished Medicaid beneficiaries
have no choice but to accept what the program offers them. Creating barriers to treatment in a Medicaid population can
yield adverse clinical events and unnecessary program costs.
6
FACTORS THAT I NFLUENCE P HARMACEUTICAL S PENDING
While it is important to understand the factors that generally influence overall Medicaid spending and the challenges they
present, it is also important to understand the factors that specifically influence drug spending, even though drug spending
represents a very small percentage of total Medicaid expenditures.
Pharmaceutical expenditures accounted for less than 11 percent of total Medicaid spending in 2004 when adjusted for
manufacturer rebates paid to the program.23 This small percent will decline in 2006 by almost 50 percent due to the shift of
drug coverage into Medicare Part D that occurred for dual eligibles. Drug spending is often assumed to be a significant
component in rising Medicaid costs. However, many misconceptions exist about drug spending growth rates. A peer-reviewed
study examined in detail the contributing factors of increased drug spending within seven major drug classes over a three-
year period for several health plans. The results showed that volume factors (e.g., population size and utilization) contributed
significantly more to overall expenditure growth rates than price factors (e.g., inflation of price of existing drugs, price of new
entrants).24 Indeed, even where price is a factor, the Medicaid rebate formula holds states harmless from price increases that
exceed the consumer price index.
Population factors include total number of patients, including caseload and patient type, such as elderly,
disabled, adults, and children. Small increases in Medicaid caseloads of elderly and disabled patients can
significantly increase drug expenditures and overall Medicaid expenditures in the states.
Disease severity, disease prevalence, and the presence of co-morbidities (multiple diseases) greatly influence utilization
factors. Additional components of utilization include treatment intensity (e.g., the number of drugs prescribed) and the
addition of newer drugs and combination drugs to an existing regimen – all dictated by the disease and characteristics of the
treated population. Treatment intensity has recently been affected by the integration of disease management principles,
increased adherence of providers to national treatment guidelines, and through the recognized benefits of early drug
intervention for such diseases as diabetes, asthma, congestive heart failure, and HIV/AIDS. And, while these influences may
increase the spending on pharmaceuticals, they are often accompanied by decreased inpatient and emergency/urgent care
costs and increased quality of care.
States need to be aware of all the population and utilization factors as they consider and implement cost and quality
initiatives to improve their Medicaid programs without compromising the quality of patient care.
M EDICAID B UDGET S TRATEGIES

According to the National Conference of State Legislatures, “most cost containment strategies consist of one of four options:
do less, pay less, do for fewer people, or do better.”25 The “do less” and “do for fewer people” options involve cost-shifting as
patients without the necessary and appropriate care find their way into emergency rooms when their condition becomes
serious. The “pay less” option works only until underpaid providers refuse to treat Medicaid patients, participate in the
program, or simply shift the costs to private insurance26 or to the state’s charity care system.
The best approach is obviously to “do better.” Costs may be saved “by giving care more efficiently, eliminating unnecessary
and wasteful systems, and keeping people well by preventing rather than treating illness.”27 This Kit outlines sixteen specific
strategies states have used to reduce pharmacy costs and/or improve the quality of patient care. States need to evaluate the
pros and cons of each intervention to determine which ones are best suited to their Medicaid population. Because the growth
in Medicaid spending is influenced by many factors, each state’s response will be equally varied.
7
These strategies are divided into three categories: Quality Assurance Initiatives, Utilization Management Initiatives, and
Operational Systems Initiatives. Some studies show that spending on drug benefits can provide up to a four-fold return
through cost avoidance in other modalities of health care (e.g., ER visits, hospital admissions, etc.). States should seek to
obtain the maximum benefits of drug spending in Medicaid by first focusing on program management techniques that
have the least impact on reducing the delivery of individualized patient care. A comprehensive patient-centered approach
for the vulnerable Medicaid population should be preferable to, and ultimately more fiscally prudent than, an approach
that segregates and manages drug costs apart from other higher cost elements of health care delivery. This Kit is
intended to provide assistance in evaluating and implementing the best strategies.
8
Q UALITY A SSURANCE I NITIATIVES
A. Disease/Case/Care Management
Disease management (DM) is a strategy of delivering health services using interdisciplinary clinical teams, continuous analysis
of relevant data, and cost-effective technology to improve the health outcomes of patients with specific diseases.28 It also
includes self-care management techniques, patient education, and provider training. Disease management provides
individualized care plans based on clinical guidelines and evidence-based medicine to manage individuals with chronic,
treatable diseases such as asthma, congestive heart failure, and diabetes.29
Pros
Disease management programs enhance the communication between practitioners and patients, facilitate feedback necessary
for behavior modification (which may prevent disease progression), and measure the effectiveness of interventions. When
properly structured, disease management involves an integrated, comprehensive approach to patient care that extends
beyond a focus on the drug line-item. Disease management:
• Improves health outcomes and better measures the “value” of drugs and other services being provided;
• Takes a patient-centered approach to providing care by addressing psychological aspects, caregiver issues, and treatment of
multiple diseases using nationally recognized standards of care; and
• May lower costs by reducing the use of unnecessary services or avoiding costs completely due to improved clinical
outcomes.
Cons
Disease management often results in cost savings as many states have reported; however, these savings may take time to
materialize. Patients may suffer from more than one chronic disease making coordination of services essential. Patient care
should not be isolated in its own “silo” based upon the disease management focus area. Substantial improvements in the
state’s data collection and analysis may be necessary to accurately target a population or to calculate the medical and cost
outcomes of the intervention. Some patients may leave the Medicaid program before the benefits of their better care are
evident in cost savings. Disease management programs should be reviewed annually and revised as necessary based upon
new treatments and innovations in the standards of care.
States’ Experiences
For FY2007, the number of states planning to undertake new or expanded disease/case/care management programs increased
to 26.30 Figure 3 contains a program history of states engaged in disease management programs. In addition, Disease
Management Health Outcomes published an article detailing findings from three leading state Medicaid programs.31
Florida
Of all the programs currently implemented, Florida’s disease management program is considered the most ambitious. The
1997 Medicaid Reform Task Force recommended the implementation of a disease management program to enhance the
quality of care and to reduce unnecessary expenditures. The initial programs were then authorized in the fiscal year 1997-98
General Appropriations Act for asthma, diabetes, HIV/AIDS, and hemophilia. In the past few years, Florida has continued to
expand disease management services through disease management organization direct contracts and value-added
agreements with drug manufacturers. Florida Medicaid has implemented disease management programs for managing
beneficiaries with asthma, autoimmune disorders, congestive heart failure, diabetes, end-stage renal disease/kidney disease,
hemophilia, HIV/AIDS, hypertension, and mental health.32
9
Figure 3
State Medicaid Disease Management Program History
CONDITION STATES
Asthma Alabama, Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Mississippi, Missouri,
Montana, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, South
Carolina, Texas, Virginia, and Washington
Cancer Colorado and Montana
Congestive Heart Failure Florida, Indiana, Missouri, Montana, New Hampshire, New Jersey, North Carolina,
Oregon, Texas, and Washington
Diabetes Colorado, Florida, Illinois, Indiana, Maine, Maryland, Minnesota, Mississippi, Missouri,
Montana, New Hampshire, New Jersey, North Carolina, Ohio, Oregon, South Carolina,
Texas, Vermont, Virginia, Washington, and West Virginia
End-Stage Renal Disease Florida, New Hampshire, and Washington
Hemophilia Florida and Utah
High-Risk Pregnancy Arkansas, Colorado, and Maryland
(and High-Risk Neonates)
HIV/AIDS Florida and Indiana
Hypertension/Coronary Florida, Indiana, Maine, Mississippi, New Hampshire, South Carolina, Texas, and
Artery Disease Virginia
Mental Health/Depression/ Colorado, Florida, Missouri, New Hampshire, Texas, and Virginia
Schizophrenia
Sickle Cell Florida
Other (including Pain Management
and Immunizations) Maine and Montana
Sources: National Pharmaceutical Council, www.npcnow.org; Medicaid Disease Management Programs, Gillespie and Rossiter, Dis Manage
Health Outcomes 2003, 11 (6): 345-361; and National Conference of State Legislatures, State Disease Management Program Descriptions,
www.ncsl.org/programs/health/StateDiseaseMgmt1.htm, updated November 2005.
Florida Medicaid Net Savings Results

The results of the Florida Medicaid HIV/AIDS program in the first three years showed $8 million in actual net savings for
4,000 HIV/AIDS patients. Florida Medicaid also reported a net savings of $5 million for 3,600 congestive heart failure patients
over the first two years and an annual net savings of $6.8 million for 3,800 end-stage renal disease patients. As of 2005,
overall net savings recorded for Florida disease management programs totaled $19.2 million.33
In 2001, Florida passed a supplemental Medicaid rebate law that required drug manufacturers to offer financial support or
provide a value-added program in order for their drugs to be included on the state’s preferred drug list. Pfizer and Bristol-
Myers Squibb both negotiated with the state to provide value-added programs in the form of disease management:
10
• Pfizer operated three independent programs over two years which guaranteed savings to the state of $33 million and
renewed another two-year agreement for those programs with an additional guaranteed savings of $45 million.
— The disease management program targeted approximately 113,000 and actively managed 15,000 Medicaid enrollees
with four diseases (congestive heart failure, hypertension, diabetes, and asthma) and all co-morbid conditions.
— The health literacy program develops and studies new, culturally appropriate interventions for Medicaid patients with
cardiovascular disease and diabetes.
— The product donation program expanded Pfizer’s medication assistance programs by contributing free Pfizer
medications to Medicaid patients receiving their primary care in more than 20 federally qualified community health
centers across the state.34
• Bristol-Myers Squibb guaranteed savings of $21 million in the first-year period and another $9 million for an additional
two-year term. Bristol-Myers Squibb’s disease management program targeted 1,700 and actively managed 500 diabetic
Medicaid patients to emphasize patient empowerment and care management in behavioral health and in the treatment
and prevention of diabetes in African-American and Hispanic populations.35
Clinical Results
The Florida Medicaid agency reported to the legislature that in the first year of the value-add programs 34 percent of
severe asthmatics demonstrated improved outcomes, 48 percent of hypertensive patients lowered blood pressure, and 54
percent of heart failure patients lowered their clinical severity.36
Value of Value-Add Programs over Supplemental Rebates

Florida Medicaid further reported to the legislature that value-add programs offer more “value” through improved long-
term treatment outcomes and secure potentially greater
savings through reductions in hospital and ER use than Figure 4
offered by supplemental rebates.37
The Virginia Health Outcomes Partnership
Virginia
$3 - $4
Virginia implemented one of the nation’s first disease
management programs, which showed that improving the
management of asthma can reduce emergency and urgent
care services and increase the appropriate use of asthma
medications. The rate of emergency and urgent care
service claims for patients who participated in the
program declined by an average of 41 percent after the
program was implemented.38 Furthermore, a cost- $1
effectiveness analysis projected direct savings of $3 - $4
for every one dollar spent providing disease management
support to physicians in the Virginia Health Outcomes
Partnership (VHOP) project.39
Investment in Disease Projected Direct
Management Support of Savings to Medicaid
Physicians
Source: Rossiter, et al. The Impact of Disease Management on
Outcomes and Cost of Care: A Study of Low-Income Asthma
Patients, Inquiry, Summer 2002.
11
West Virginia
The West Virginia Health Initiatives Project was a pilot disease management program that used protocols, guidelines, and
educational materials developed by the Centers for Disease Control and the American Diabetes Association to improve
diabetes management for Medicaid patients. A crucial objective of the program was to ensure that guidelines containing best
scientific evidence became the basis of care tailored to individual needs. A program evaluation was conducted by West
Virginia University Center for Healthcare Policy and Research.40 Cost measures were not evaluated; however, chart reviews
showed increases in HbA1c lab tests, foot exams and lipid tests. In July 2001, state-wide expansion of the pilot program was
approved by CMS.
Colorado
The National Jewish Medical and Research Center served as the asthma disease management provider for Colorado Medicaid
fee-for-service members between October 2002 and August 2003, under a pilot program to test the cost effectiveness and
clinical efficacy of disease management for Colorado Medicaid recipients. The six-month study, which included data on 258
participants, showed a total dollar savings over the cost of the program of $202,991 or 37.4 percent.
North Carolina
In North Carolina, children under the age of 21 enrolled in a pediatric asthma management program implemented by the
state’s Medicaid program used certain health care services less frequently. Children in the program had a 34 percent lower
hospital admission rate and an eight percent lower emergency room rate, compared to children not in the program. Efforts to
educate patients about the use of anti-inflammatory drugs resulted in increased pharmacy costs, but lowered the overall cost
for children enrolled in the program by 24 percent compared to non-enrollees.41
Design and Policy Issues

• How are diseases and disease groups targeted? Diseases and disease groups are targeted based on:
1. Noncompliance with national treatment guidelines;
2. High potential for successful intervention to improve clinical outcomes;
3. Evidence of inappropriate expenses/utilization that can be substantially reduced; and
4. Common practice guidelines and accepted methods of treatment within the individual states.
• High resource utilizers can be identified through utilization data patterns (e.g., number of emergency room visits,
hospitalizations, prescriptions, etc.). To further limit the population selection, specific patient subgroup categories can be
included or excluded from intervention strategies. Those subgroup categories could include, for example, Medicare dually
eligible, long-term care, primary care case management, and managed care if the state determines these groups should be
excluded for various reasons.
• What are the intervention goals? The intervention process is key in the implementation of disease management
programs and most frequently involves direct patient and physician contact. Program goals for providers and physicians
include education about treatment guidelines and assurance that providers and physicians receive and use treatment
guidelines. Additionally, the programs intend to inform physicians about available referral and patient education programs,
and adjunct case management activities.
• Patient intervention goals often include improved patient understanding about their health and what impacts their health.
These goals are achieved by administering wellness and health surveys for baseline measures, risk assessment, disease and
lifestyle education, direct patient outreach, patient feedback regarding performance and outcome goals, and treatment
compliance education.
12
• How are outcomes measured? Outcome measures are difficult and expensive to measure; therefore, disease management
programs usually measure performance or process indicators. Performance (process) indicators measure the intermediate
success of a specific action or intervention, whereas outcome measures seek to determine the end result of an action or
intervention. Effective disease management programs will assess specific performance indicators at defined intervals
throughout the entire process and again terminally. These indicators include regular assessments and benchmarking that
measure, track, and compare performance to pre-defined target measures and baseline measures. For example,
performance indicators in a cardiovascular disease management program would measure blood pressure and lipid levels of
patients over time. Performance measures can be easily and quickly tracked, allowing disease management programs to
forecast the anticipated outcome based on the performance of specific intermediate measures.
• Outcome measures, on the other hand, seek to determine the end result of the action or intervention. For example, in a
cardiovascular disease management program, outcome measures would include the incidence of strokes, heart attacks, and
death in the intervention patient group. As stated earlier, outcome measures take longer and are more difficult and
expensive to measure, which is why most disease management programs rely on performance measures to assess their
effectiveness.
Federal and State Involvement/Constraints

Patient privacy is a concern as disease management and other third party vendors use patient records to develop targeted
interventions and assess outcomes. However, compliance with privacy regulations has been successfully accomplished by
states without jeopardizing administration of disease management programs. States should consider the funding sources to
be used for DM programs and consult with CMS regarding the options available to maximize use of state funds as well as to
maximize the portion of savings from the programs that accrue to the state. A communication was issued by CMS which
details suggested intervention and funding models for states to consider when implementing DM programs.42
B. Centers of Excellence
Centers of excellence are facilities or programs, such as hospitals, university medical centers, or specialized group practices
that have been selected, based on the level of quality and management of costs, to have patients channeled to them for
specialized treatment. For example, many managed care plans refer all transplant patients to a single hospital in a region that
has the best track record for success.
Pros
Centers of excellence ensure better adherence to national treatment guidelines for selected conditions and improved patient
outcomes, may enable scarce specialized resources to be focused for optimal cost and care efficiency, and can facilitate better
data collection and comparisons on outcomes enabling careful monitoring of care and services.
Cons
Centers of excellence require that patients be referred by their primary care providers for treatment, plan development, and
monitoring; however, primary care providers may feel that they are losing patients to other providers and may be reluctant to
refer. Patients may also be reluctant to change providers after establishing a relationship with a primary care physician.
Centers of excellence are not always conveniently located so coordination of transportation may become an issue. “Creating”
centers of excellence statewide, as discussed later, can increase costs in the short-term, but should have long-term savings.
In an effort to improve services for youth in state custody and those at-risk of state custody, Tennessee’s expanded Medicaid
program, TennCare, has committed an additional $1 million to expand the state’s Centers of Excellence for Children in State
Custody Program in the East Tennessee region. The Centers of Excellence work with children who have extremely complex
behavioral and medical problems by providing direct services, treatment plan review and development, and case consultation
and coordination.
13
• Has the state defined the disease and operational infrastructure for its centers of excellence? Centers of excellence
have traditionally been defined as physical locations where providers practice and patients are treated, such as academic-
based hospitals and clinics. However, this design concept does not lend itself to providing services to patients in a state or
region where transportation issues affect access to the centers.
• Modified design strategies for these centers include training local and regional providers in the use of treatment guidelines
and disease management principles and having them mentor other providers to promote integration of “best practices” to
achieve better outcomes and lower costs for patients with chronic disease. In essence, specialized providers throughout an
entire state implement disease management principles within their individual practices rather than at one physical location.
• However, this decentralized approach to centers of excellence may reduce the cost efficiencies, practice effectiveness, and
data collection associated with a physical entity that treats high volumes of patients with like conditions. Centers of
excellence focus on specific diseases or disease groups identified prior to implementation with the participating entities and
provider groups. Examples include congestive heart failure, respiratory diseases, HIV, transplants, cancer, and diabetes. A
disease-focused approach must also consider the patients’ other co-morbid conditions which may not be specifically
relevant to the Center’s area of expertise.

States should consider partnering with federally funded programs and health centers to share resources and to explore
additional government and private funding mechanisms to facilitate the establishment of community-based centers of
excellence.
C. Enhanced Data Analysis with Medical/Drug Review Management

This strategy involves identifying those patients with excessive and/or unusual utilization patterns such as using excessive
numbers of prescriptions, accessing many providers, numerous ER visits and increased use of other medical services through
enhanced claims analysis. Expertise in conducting specialized claims analysis and conducting medical/drug review
management and monitoring can be performed in partnership with specialized vendors and consultants, local medical
societies, academic based experts, peer review organizations and others who can assist with design and intervention
strategies to reduce unnecessary utilization and improve coordination of care in identified patients.
Pros
Enhanced data analysis and individual patient-focused reviews/monitoring are useful for identifying “utilization outlier”
patients with complex medical problems and a history of significant resource utilization. Focusing efforts on utilization outlier
patients can concentrate resources on patients that have the greatest potential for savings to the state through improved
coordination of care. This strategy can yield a great deal of information about coordination of care issues, provider practice
patterns, care management needs for patients, as well as deficiencies in operational policies and the overall delivery system.
Cons
Enhanced data analysis and individual patient-focused reviews/monitoring can be expensive and may require retooling of
existing compliance and monitoring programs. They usually require the expertise of specialized vendors as well as physicians,
nurses, and pharmacists needed to perform the review and monitoring activities. This strategy involves on-going and periodic
reviews, monitoring, and assessment of the effectiveness of intervention techniques employed with identified patients. When
the review reveals the presence of patient-related psychosocial and behavioral factors, these issues must first be resolved in
order to help the patient and other providers obtain the desired coordination of care and adherence to the treatment plan.
14
All states are required to have drug utilization review (DUR) programs, surveillance and utilization review (SUR) programs, and
peer review organization (PRO) programs. However, these programs are not usually coordinated in terms of common criteria
and goals and operate independently of each other limiting their effectiveness. For example, DUR programs are most often
confined to drug utilization issues and are not conducted as part of a comprehensive approach to disease and utilization
management of targeted outlier patients limiting their effectiveness and validity. Some states, such as Florida, have begun to
conduct telephonic medical and drug selection reviews with providers as part of an enhanced utilization and cost
containment strategy. Many states are now conducting disease-focused DUR activities that involve physician consultation
and education by other health care professionals under contract with the state to perform these activities. States could
benefit from integrating the activities of their compliance and monitoring programs, often performed by different vendors, to
achieve common goals and coordinate efforts that will increase the cost effectiveness of these programs.

• Does the state have the administrative and contract resources and expertise to expand data analysis and integrate
medical and drug management review programs? States need to consider a cost/benefit analysis of conducting these
activities and will need to assess the availability of contractors/staff to perform these activities. Existing computer systems
such as clinical decision support systems may be used to develop a specific methodology to identify patients for review
using detailed criteria, rather than random sampling, to ensure more success and cost effectiveness. The use of academic
health professionals on a contract basis in various regions of a state can be less costly for the state but requires a program
administrator to coordinate the review activities and ensure timely completions. For example, physician consultants can be
contracted to review claims histories and medical records via web secured communications and then consult with primary
care providers treating high utilization patients to improve care and reduce costs.
• Does the state and or its contractors have the computer hardware and software and expert staff to perform
detailed clinical and claims based analyses for the program? The use of a relational claims database that analyzes
claims across providers and sites of care, also known as a clinical decision support system, can be very useful for applying
specified criteria to the entire population and identifying targeted patients for review. States must have dedicated staff or
contracted vendors with expertise in complex claims analysis, Medicaid policy and reimbursement, and clinical expertise to
develop criteria and analyze the data.

States should review and have legal counsel interpret provider agreement provisions, patient enrollment requirements, and
patient confidentiality issues outlined in the Health Insurance Portability and Accountability Act (HIPAA) prior to
implementing or expanding this type of program to assure that the program procedures are in compliance with state and
federal regulations. Many of these compliance and review activities are already addressed in federal plan requirements, but
may vary by state depending on provider agreements and patient rights. Under the DRA, approximately $75 million was
appropriated in both FY2007 and FY2008 as transformation grants to states that can be used specifically to increase quality
and efficiency of care through strategies such as enhanced data analysis and medical/drug review management.
D. Practice Pattern Analysis

Practice pattern analysis is performed by a panel of physicians using set criteria to identify provider outliers for educational
intervention and to determine any necessary provider practice limitations. A vendor or specialized staff can be used to
generate provider profile data from a clinical decision support system. The profiles look for performance indicators such as
the rate of compliance with the National Council on Quality Assurance’s Health Plan Employer Data and Information Set
(HEDIS®) measures (e.g., appropriate prescribing of ACE inhibitors, the average costs per patient, the appropriate use and
frequency of HbA1c testing, etc.).
15
Pros
States can identify providers who fall outside of normal or target performance/process goals and may be incurring
unnecessary costs for the system. The review can also identify gaps in care coordination and/or failure to use accepted
treatment guidelines. Often providers who are not prescribing drugs appropriately will be highlighted by the analysis.
Targeted interventions can be designed to educate and assist each outlier physician to comply with expected performance.
Cons
Physician practice performance is influenced by many variables that can be easily misinterpreted resulting in incorrect
conclusions. Complicated issues such as case mix and condition severity are examples of variables that must be factored into
the analysis. States should develop staff or hire consultants with experience in practice pattern analysis methodology to
assist with the development and update of program evaluation and intervention procedures. Provider “backlash” against this
type of program can occur if providers are not informed and incorporated into the development process. Emphasis must be
placed on helping providers enhance the level of care they provide with the goals of improving patient health outcomes and
reducing inappropriate costs.
Private health plans and managed care plans have used various types of practice pattern analysis or provider “profiling” for
years. Medicaid fee-for-service programs have not embraced this concept, but several states are now exploring these
programs. Florida implemented a practice pattern analysis program in 1999 and continues to operate the program with the
assistance of a third party contractor and a panel of appointed clinical advisors. Tennessee conducted a large retrospective
claims analysis to measure baseline standards of care in various disease areas. The goal was to disseminate centers of
excellence treatment guidelines to improve the standards of care and patient outcomes throughout the system.

• Does the state or its contractor have the computer hardware and software needed to conduct practice pattern
analysis? This type of analysis requires the integration of medical and pharmacy claims data in a relational database or
decision support system platform that many states already have in place.
• Has the state consulted with providers and experts to develop the practice pattern analysis design and evaluation
plan? The analysis design should include the application of accepted statistical methods, specialty peer and regional
comparisons, and a severity of illness or case mix adjustment. An intervention and action plan should be developed and
applied to providers identified as true statistical outliers based on the agreed definition.

States should consider what, if any, action can be taken with providers who fail to comply with peer-based educational
interventions and are deemed extreme outliers that continue to contribute to poor outcomes and unnecessary costs to the
system. States have begun to create credentialing processes for providers as a condition of program participation and to
conduct peer review activities as required by federal law. States may wish to examine and/or modify provider participation
agreements and auditing procedures in tandem with the development of a practice pattern analysis program. Under the DRA,
approximately $75 million was appropriated in both FY2007 and FY2008 as transformation grants to states that can be used
specifically to increase quality and efficiency of care through strategies such as practice pattern analysis.
E. Enhanced Primary Care Case Management (PCCM)

Medicaid’s PCCM program links each Medicaid beneficiary to a single primary care physician (or practice) who is responsible
for managing all of the medical care services consumed by that beneficiary. PCCM programs usually pay for all care on a fee-
for-service basis. States’ ability to reinforce the primary care provider’s role in managing care requires the use of internal
system edits.
16
Pros
Enhanced PCCM ensures that beneficiaries receive coordinated care by having one physician responsible for the authorization
and oversight of all their services, which reduces unnecessary service duplication, utilization, and costs.
Cons
Enhanced PCCM adds complexity to the primary care physician’s provision of care because they become responsible for
authorizing and overseeing multiple treatment plans and services such as pharmacy services. If not implemented properly,
enhanced PCCM can create service access issues, such as delays in obtaining prescriptions or urgent care.
PCCM as it currently exists in Medicaid does little to truly manage care unless the state monitors individual practices since
providers/provider groups are paid a small monthly fee whether they manage care aggressively or not at all. Furthermore,
PCCM is often seen merely as a “gatekeeper” engaged primarily as a tool to enforce prior authorization of some specialist
services rather than as a way to intensify the involvement of the primary care physician or physician group in managing the
unique health circumstances of an individual patient.
Most states have PCCM programs that assign and compensate one provider/group as the primary care provider. These
providers are paid only a few dollars per member per month (PMPM) administration fee for performing the coordination of
care activities and they can have as many as a thousand patients assigned to them. Additionally, in most states, there are few
internal claims processing edits to prevent a patient from using any other Medicaid provider or service. This may soon change
as states embrace and develop reform plans that promote and even mandate better coordination of care, patient
accountability, provider incentive programs, and enhanced technology.
Florida was the first state to implement and pilot a new model of care which contracted with a regional pediatric physician
provider group to provide 24-hour nurse triage and enhanced primary care case management services to reduce unnecessary
emergency room visits and total health care costs for the pediatric population. The physician group receives fee-for-service
payments plus a PMPM administrative fee for primary care case management and also collects shared savings incentive fees
based on reduced costs. Results of this program show significant reductions in ER visits and increased medication
compliance. States should consider adopting this model to save dollars and improve the quality of care.

• Has the state solicited provider involvement in the design, participation criteria, and fee schedules for proposed
enhanced primary care case management programs? States can examine modifying the PCCM program to adequately
compensate providers for coordination activities and ensure that patients are using services in an efficient and coordinated
manner. These programs need to reward providers for achieving systemic savings rather than managing line item costs. This
can be accomplished through a contractual case management agreement with providers such as in the Florida pediatric
pilot program discussed previously.
• Does the state have the systems capability and provider buy-in to activate edits and coordinate authorizations for
the program enforcement? Other avenues to enhance primary care case management include more internal system edits
that prevent specific services from being approved without authorization by the primary care provider. Physicians would
have to be accessible to other providers on a 24-hour-a-day basis to ensure there are no access barriers (except for
emergency services).
• Has the state developed a provider incentive program with defined criteria measures and shared savings
methodology? States should consider shared incentive fees and larger PMPM administrative fees to providers for reducing
inappropriate costs and improving health outcomes. Specific cost and clinical criteria must be defined using statistically
sound evaluation and cost saving methodologies.
17
States will need to explore whether they already have the authority to implement these types of programs under their current
plans or waivers or determine if a plan amendment is required to perform demonstration pilots with enhanced primary care
case management programs and explore other reform efforts. The DRA appropriates $75 million in both FY2007 and FY2008
in transformation grant money to states for developing and implementing similar programs that enhance quality and
coordination of care.
F. Pharmaceutical Industry Value-Add Programs

Pharmaceutical industry sponsored and funded programs are often administered by independent contractors and may include
provider and patient educational and compliance programs, data analysis, disease/case/care management, outcome studies,
and clinical practice assessments.
Pros
These programs are sponsored with private funds and, in some cases, may be eligible for federal matching funds. They are
usually administered by a neutral third party and may not require extensive Medicaid staff time and resources. The
pharmaceutical industry has significant experience administering and designing a variety of programs to provide value to
payers, employers, providers, and patients, and has great interest in ensuring their success.
Cons
Pharmaceutical industry sponsored value-add programs in some cases may focus specifically on certain drug products or
diseases, which may further exaggerate budget and care silos (that may or may not achieve the goals of the state Medicaid
program). Some states may have budget and funding requirements that make it difficult for industry money to “get into” the
Medicaid program for use in value-added programs. After initial start-up, programs may require ongoing external funding or
annual state appropriations.
Many states have embraced industry sponsored value-add programs that include patient medication compliance, provider
prescribing education, patient disease education, disease/case/care management interventions, policy evaluation studies, and
outcome/utilization studies. Many states including California, Colorado, Florida, North Carolina, Pennsylvania, Tennessee,
Virginia, and West Virginia have implemented successful programs in partnership with the pharmaceutical industry.

How can states identify the common goals of the industry and the state in terms of health education promotion and disease
prevention? Many common goals exist between states and the pharmaceutical industry. These include provider adherence to
treatment guidelines, patient education and compliance, disease prevention and management, and the appropriate use of
medicines. Working together, the state and the pharmaceutical industry can prioritize and identify disease and clinical care
areas where programs can be designed and implemented to achieve common goals.
• How will states ensure that their goals are met when implementing industry sponsored value-add programs? States
have the ability to set the goals and parameters of any industry sponsored program to ensure that patients and providers
are appropriately engaged and that all legal and program requirements are followed. Forming a working partnership and a
written agreement will assure that both states and the pharmaceutical industry understand all the requirements of the
partnership. Many health care outcome improvements can be achieved by implementing a variety of programs that could
otherwise not be funded by state dollars alone.

States should examine current state and federal regulations and program constraints that may affect the design and
implementation strategy of an industry sponsored value-add program.
18
U TILIZATION M ANAGEMENT I NITIATIVES
A. Patient Lock-In Program
An analysis is conducted to identify patients with unexpected utilization patterns such as excessive drug use, excessive use of
multiple providers, frequent ER visits and other increased use of medical services. Patients are then notified of the program’s
concerns and required to select a single prescribing physician and/or a single pharmacy where their services will be covered
by Medicaid. Theoretically, claims from other providers will not be paid. The patient has the opportunity for a fair hearing to
contest this approach, which is often referred to as a “lock-in.” The goal of a lock-in program is to prevent inappropriate
utilization of services and adverse clinical outcomes. The program is typically used to address drug abusers, but may also be
considered for patients who visit multiple doctors and obtain many different prescriptions or otherwise have inappropriate
utilization patterns.
Pros
Expansion of a lock-in program for patients who are high utilizers or who have very complex conditions involving care from
multiple providers can be an effective mechanism to provide management and oversight.
Cons
This program may require claims processing system modifications and fiscal outlays to design and implement the required
edits. Providers may need education on the program goals and the operation of the system edits.
Many states have used lock-ins as a management tool following identification of patients through retrospective and
concurrent analysis, who are engaged in the abuse and misuse of pharmaceuticals and other medical services. This can be an
effective mechanism to control inappropriate utilization of medical and drug services such as reducing polypharmacy and
therapeutic duplication.

• What other related edits, programs, and data should be integrated with the lock-in program? Lock-in program edits
need to be integrated with the prospective and retrospective system edits to maximize efficiency and prevent system errors.
States may consider using both a pharmacy lock-in program in conjunction with a mandatory primary care physician lock-
in program. Patients enrolled in the traditional PCCM programs are typically assigned to one primary care physician for care
coordination, but analysis in various states shows this assignment is not enforced and is contributing to decreased
coordination of care and significantly increased expenses for a small percentage of identified patients. Lock-in programs are
most successful when used in combination with disease/case/care management activities and provider directed incentive
programs.
• What system modifications and related costs should be evaluated during the design and prior to implementation?
Most state systems do not have internal claims processing edits that can cross-check the primary care physician
assignment files to prevent pharmacy claims that have not been authorized by the lock-in physician. And, even if a patient
is locked-in to a single pharmacy, they may be obtaining prescriptions from multiple physicians. It is therefore important for
states to evaluate the system costs required to design and program the various edits needed to implement this procedure.
The implementation of electronic prescribing devices with clinical decision support capabilities can tremendously enhance
the use of a lock-in program and could be used as an enforcement mechanism as well.

States have the ability to expand existing lock-in programs. Additionally, many efforts at the federal level are encouraging
and even mandating that electronic prescribing and enhanced technologies be employed to better coordinate care and
achieve cost and quality improvements in the system. The DRA appropriates $75 million for FY2007 and FY2008 in
transformation grant money to states for developing and implementing programs that enhance quality and coordination of
care. In fact, several states that have applied for the grants plan to use the monies to implement various information
technologies to better coordinate care. 19
B. Fraud/Abuse Detection System/Audit Program
The DRA includes specific appropriations that CMS and the Office of the Inspector General (OIG) can use to fund activities to
support anti-fraud and abuse efforts with states through a combination of oversight and technical assistance. CMS has
developed a comprehensive Medicaid Integrity Plan to strengthen its leadership of state and federal efforts to control fraud,
waste, and abuse in the Medicaid program. Congress has provided funding for CMS fraud and abuse activities: $5 million for
FY2006, $50 million for FY2007 and FY2008, and $75 million in FY2009 and each year after. In addition, the DRA provides OIG
with $25 million each year FY2006 through FY2010 to expand Medicaid fraud activities.43
A good fraud and abuse detection and audit program uses state-of-the-art software systems to detect and prevent patient
and provider fraud and abuse. Previous efforts by Medicaid that relied solely on investigator claims reviews to recognize fraud
and abuse patterns were largely ineffective due to the sheer volume of claims processed. Specially programmed software
relies on advanced logic and relational database design to identify potentially inappropriate claim billing patterns. Software
systems have been used effectively in the private sector to minimize the losses associated with these kinds of problems.
Redesigning pharmacy audit procedures is an effective and necessary activity for states due to the shift of outpatient
prescribed drug usage to expensive, specialized and complex biological therapies. This process also involves reviewing current
pharmacy audit procedures for completeness and effectiveness based on dispensing patterns by practice setting and by type
of drugs. States may need to develop in-house capabilities and/or contract with vendors to implement new audit procedures
and conduct on-site provider audits.
Pros
These systems utilize advanced software systems to identify patterns of provider and recipient fraud and abuse much more
effectively and faster than an investigator is able to review claims. These systems can identify pharmacy, lab and other
medical claims billing anomalies and patterns that can indicate potential fraudulent and inappropriate activities that need
further targeted auditing and investigation. The new appropriations under DRA provide money and support to states in order
to expand their fraud and abuse efforts.
According to the OIG, a state can expect that approximately 10 percent of all claims billed for medical and pharmacy services
are fraudulent or abusive. States can significantly reduce dollars lost to the system by enhancing anti-fraud and abuse efforts.
Cons
Requires vendor research and staff time to develop requests for proposals/invitations to negotiate (RFP/ITN) for bidding by
firms that offer these software systems and auditing firms with pharmaceutical and medical claims experience. However,
under the new DRA provisions states will receive significant assistance with these activities from CMS and their vendors.
Florida, Indiana, Kentucky, North Carolina, and Washington have enhanced fraud and abuse efforts through intensified audits,
software detection systems, and aggressive recovery efforts.44 Additionally, the Florida Supreme Court granted a request by
the Governor in January 2003 to convene a grand jury for one year to investigate prescription fraud activities in South Florida
and indict any wrongdoers.45 In 2002, the jury heard testimony in one such case where the Bureau of Statewide Pharmacy
Services (BSPS) inspectors found prescription labels belonging to ten Medicaid recipients. The cost to Medicaid for the
prescription drugs listed on the labels amounted to over $18,000. Those ten recipients alone had received over $280,000 in
drugs from Medicaid in just the previous six months. Some of the recipients had been selling their medications for years,
making as much as $5,000 a month selling their drugs to wholesalers. Two interim reports have been issued by the grand jury
detailing the findings and recommendations of the investigation.46
20
In 2004, a case arose against 20 dentists in California who were charged with conspiracy to defraud the state’s Medicaid
program of $4.5 million. The dentists are alleged to have billed Medicaid for unnecessary or inappropriate services that placed
patients at risk of pain, infection, loss of teeth, and bodily injury. In 2005, a North Carolina pharmacist was sentenced to 33
months in prison and ordered to pay more than $2 million in restitution for defrauding the Medicaid program by submitting
claims for long-term care patients’ prescriptions that had not been delivered, or even requested by their caregivers. Similarly,
a New York hospital agreed to pay $76.5 million to resolve allegations that it over billed the Medicaid program for services
provided in its clinics.47

• Are the current audit procedures and methodology for conducting fraud and abuse audits and
investigations effective? States should examine their current audit process and procedures to assess cost
effectiveness. States can increase the number of audits as well as develop new in-depth audit procedures and
methodologies to target specialized providers, such as long-term care and infusion providers, dispensing
complex therapies.
• Is the state using any software system analysis tools for identifying patterns of fraud and abuse in
the claims database? Several software companies offer tools to identify aberrant and suspicious billing
patterns within the state claims database. States may need to issue a request for proposal to solicit and
evaluate programs that best meet their needs and the specifications of their claims processing system.
• Does the state have the in-house resources and expertise to conduct audits? States may need to
consider contracting the audit function to a vendor who can facilitate the workload and provide the necessary
expertise of medical, statistical, and pharmacy professionals.

The implementation of new audit procedures may require administrative and statutory changes as well as provider agreement
changes. HIPAA compliance must also be considered. States must evaluate all of these prior to vendor contracting. States
should coordinate their activities with CMS and OIG in light of the new DRA provisions and appropriations. Fraud and abuse
efforts can be significantly enhanced with ongoing cooperation among state, local, and federal law enforcement agencies and
administrative government agencies such as Medicaid and Departments of Health.
C. Co-payments for Prescriptions

A co-payment is a flat fee charged to a patient for each prescription received. Under federal law, states can implement co-
payments for prescribed drugs and other covered Medicaid services. These co-payments are nominal fees that cannot exceed
$3 per prescription under Medicaid provisions. An individual who is unable to pay the co-payment cannot be denied a
prescription drug. Specific groups of patients are excluded from co-payments such as children, pregnant women,
institutionalized patients, hospice and those receiving emergency care or family planning services.
New provisions under the DRA allow states the option of imposing cost sharing up to 5 percent of a beneficiary’s income.
Because cost sharing is tied to income level, states may charge co-payments from 10 to 20 percent of the cost of medical
services. The DRA also allows states to make co-payments “enforceable,” meaning that providers or pharmacists could deny
services or access to drugs if a beneficiary cannot pay the cost sharing amount at the point of service. There are special
provisions allowed for prescription drugs under the DRA. For preferred drugs, nominal amounts still apply and exempt
populations have no cost sharing requirements. However, for non-preferred drugs, cost sharing can be up to 20 percent of
the drug cost for those beneficiaries with incomes exceeding 150 percent of the federal poverty level and exempt populations
can now be subject to nominal cost sharing requirements.
21
Pros
States may realize small savings through the implementation of a co-payment for beneficiaries. The use of a differential co-
payment may encourage prescribing of less expensive drugs, such as generic rather than brand name drugs. For example, a
state may set the co-payment amount for generic drugs at zero and brand name drugs at $3 to encourage beneficiaries to
accept and physicians to prescribe generic drugs more often. Under the new DRA provisions, co-payments are now
enforceable.
Cons
The use of co-payments in the predominately elderly, disabled, and chronically ill Medicaid population may discourage
patients from filling and taking their medications because of the direct cost.48 Patients that don’t take their medications
appropriately often incur added expenses due to adverse medical complications resulting from the lack of medication
compliance. This drives up total system cost and results in poor patient outcomes.
In the National Pharmaceutical Council’s 2005/2006 survey of state Medicaid programs, forty one states reported cost sharing
requirements for prescription drugs. The co-payments for these states range from $0.50 to $3 per prescription with some
states capping the monthly cost sharing amount.49 In most cases, when states impose cost sharing they apply this policy to
all populations eligible for cost sharing, including the elderly, people with disabilities, the medically needy, and adults.50 States
generally report that patients attempt to pay when asked to share in the cost for their prescription drugs. Other states have
not pursued co-payments due to the administrative hassle for providers to collect the fees and the fact that not much
savings results from the initiative. Additionally, states fear that any access barriers may discourage patients from obtaining
medically necessary treatment and may result in increased costs to the system as well as reduced health outcomes. To date,
not many states have chosen to adopt the optional increased DRA cost sharing provisions and only a few have decided to
make co-payments enforceable.51

• How will the state determine the co-pay amounts and what are the goals for the strategy? States can involve
provider and patient advocacy groups in the process of determining the co-pay operational structure and the specific
amounts for different types of products. States will want to consider if the co-pay structure amounts are consistent with
the goals of the policy. For example, if a state wants to encourage use of generics then the co-pay amount set for generics
should be at the lowest level or significantly lower than the co-pay for brand drugs.
• How will providers and patients be affected by the policy? States should determine if providers will be responsible for
the co-pay if the patient is unable to pay and how much that will reduce reimbursement levels to the providers. Patients
may not seek necessary services due to their inability to pay the co-pay and thus cost the system more in other acute care
services.
• Will there be a maximum monthly cap on the co-pay amount for patients needing multiple drugs each month and
if so what will the monthly cap be? States may consider it in the best interest of all parties to cap the patient’s total co-
pay amount to encourage appropriate use of services.

Medicaid programs have had for many years specific regulations that governed the use of co-payments. The DRA now offers
states the option of increasing and enforcing co-payments. Some states will need to make statutory changes to alter the co-
payment provisions under their state law.
22
D. Prior Authorization Programs and Application of Clinical Criteria
Virtually all states have implemented some form of prior authorization (PA) program for specific products. PA programs
should be based only on medical, peer-developed clinical criteria and should be targeted only at products consistently
documented as inappropriately prescribed based on audits, DUR activities, clinical indications, and dosing patterns. Some
examples of drugs targeted for clinically-based PA include growth hormones, blood modifiers, immune system stimulators,
and other specialized drugs specific to each state’s own utilization data. PA criteria should be established with input from
physicians and patient advocates so that coverage for all appropriate uses is not impeded. PA of products not consistent with
documented evidence of inappropriate use through various Medicaid utilization review programs is not warranted and
represents interference in the patient-provider decision making process.
Pros
When based on clinical factors and patterns of inappropriate use, prior authorization programs may be used effectively and
safely to reduce unnecessary and inappropriate use of drugs as well as fraud and abuse by providers and patients.
Cons
PA programs that are not well designed and include large numbers of drugs and many drug classes can create patient access
barriers, increase total health care expenditures, and facilitate poor clinical outcomes. These programs also can create
significant administrative barriers for providers and generate large administrative costs to the Medicaid program. Expansive
PA programs may impede the ability to implement disease/case management for specific populations, and diminish the
capacity of the state to focus on cost-effective outcomes as opposed to line item costs. By denying appropriate care,
immediate short-term drug expenditures will decrease. However, these “savings” can be outweighed by reductions in patient
health status and cost-shifting to other more expensive service areas.
In a 2006 Kaiser Family Foundation survey of states, 37 states responded that they had a prior authorization program in place
for at least some prescription drugs outside of a preferred drug list.52 Many states do not impose PA on certain drug
categories, such as antiretrovirals for HIV/AIDS and mental health drugs, in order to assure that patient access to these
critical products is not unduly impeded. According to the same survey, 13 states expanded prior authorization programs in
2006 and another 8 states plan expansions in 2007.53 Many include drugs such as growth hormones, impotence agents,
topical acne agents, weight loss drugs, and OTC cough/cold agents. Some of these products are optional agents that Medicaid
is not required to cover. Recently, states have focused on select drug classes based solely on high expenditures, such as
gastrointestinal reflux agents and non-steroidal anti-inflammatory agents, with little consideration for the appropriateness of
therapy or costs associated with restricting access to these drugs in Medicaid’s predominantly elderly and disabled
population.

• Has the state conducted an analysis of the population utilizing prescribed drugs, such as the disease, demographic,
and eligibility characteristics of its high utilizers? According to a Congressional Research Service Report to Congress
(Figure 2), the elderly and disabled are the groups responsible for the vast majority of prescribed drug expenditures in all
states; therefore, PA programs would affect these patients the most. Approximately 5.4 million elderly and disabled non-
dual enrollees still remain in the Medicaid population that were not eligible for the Medicare Part D prescription program.54
For this reason, design and policy issues related to a PA program must be carefully evaluated and considered given the
needs of this unique population. Any access that may be hindered or delayed by the PA process could have a profound
impact on (increasing) direct costs and (decreasing) clinical outcomes of such frail patients with multiple diseases. In
addition, most of these patients are on maintenance drugs for chronic conditions and require the continued and
uninterrupted use of multiple agents. The patterns of disease progression, age, and severity commonly necessitate the use
of newer drugs with more favorable side effect profiles. In addition, many elderly patients with multiple diseases have
documented treatment failures on older agents or on agents that are contraindicated in the elderly population.
23
• Has the state conducted a thorough retrospective analysis to approximate the PA approval rates and cost benefit
analysis for the proposed drugs and drug classes? States have reported that greater than 80 to 90 percent of all PA
requests are approved and a published study documented an average PA approval rate in one Medicaid program of 83
percent for four large classes of drugs.55 A comprehensive meta-analysis of all published studies related to Medicaid prior
authorization programs concluded that overall PA programs appear effective at reducing drug-related costs, but there is
little evidence that they have a positive impact on clinical or humanistic outcomes. Additionally, the authors concluded that
none of the published studies had a randomized, controlled design and most of the studies had severe methodological
limitations.56 Very high volumes of PA requests add large administrative costs to the program. If the approval rates are also
very high, then the large administrative costs are arguably unnecessary and negate any anticipated cost savings. This is
particularly evident when applying PA in major therapeutic classes, such as gastrointestinal, antihistamine, anti-
inflammatory, and other widely used drug classes.
• Does the state have the administrative resources and internal or contract staff to handle the volume of requests
for the proposed PA program? Significant time and fiscal resources are required to implement a wide-scale PA program
in major drug classes, and the wide-scale program is likely to result in high approval rates reducing the cost benefit ratio
for the state. In contrast, a specialized PA program, directed at small numbers of patients and providers to identify high
users with complex health conditions requiring drug therapy with high probability for misuse and inappropriate dosing, can
yield a much greater return on investment without undue administrative barriers and costs. Examples of some agents
would include growth hormones, blood modifiers, immune system stimulators, and other agents with narrow indications
and dosing parameters. Some of these agents have been determined to have a high rate of fraud associated with their use
and should be further targeted based on provider auditing and profiling efforts.
• Has the state conducted an estimate of the direct and indirect time and expenses associated with the proposed PA
program? Has the state solicited provider, patient advocate, and fiscal agent involvement in design and policy planning?
The PA process can impact large numbers of providers and patients as well as reduce valuable direct patient care time of
practitioners. An extensive PA program could discourage providers from Medicaid participation and could jeopardize the
quality of patient care. Additionally, the provider community and the fiscal agent should be actively involved in the
development of PA procedures to ensure buy-in and reduce access problems for patients.
• Has the state allocated funds to conduct baseline and future assessments of the health status of those beneficiaries
most impacted by the PA process, specifically across providers and sites of services, to watch for cost-shifting from
the drug line to other medical services? States need to have an independent, experienced party periodically evaluate
their programs to determine whether they are cost-effective, if they are causing cost increases to other parts of the system,
and what their impact is on beneficiary health.
• Has the state budgeted for administrative costs related to compliance with all state and federal laws and guidelines
requiring notification of beneficiaries when PA is denied? States should examine and comply with any requirements for
notification of denial and rights of appeal that may be applicable to the PA program. States should consider administrative
costs and work load factors that may apply to the notification and appeals processes.

Federal law requires that all drugs included in a CMS manufacturer rebate agreement (with a few exceptions) be covered and
that approval be granted for all drugs that are medically necessary. In addition, a state must respond to a prior authorization
request within 24 hours and must grant a 72-hour emergency supply of medication to patients in immediate need.
24
E. Third Party Liability
Third party liability refers to the obligation of another party outside Medicaid to cover costs for enrollees that may have
another source of health care coverage such as private insurance or insurance through an employer. Under federal law,
Medicaid, after any other payer has contributed its share of the costs, is the “payer of last resort”.
States have implemented third party liability edits that involve the implementation of system edits at the point of sale to
block claims – to “cost avoid” - when patients have insurance coverage in addition to Medicaid. These edits can often replace
the “pay and chase” process whereby Medicaid pays the claim then seeks reimbursement from other insurers. In addition,
states can attempt to recoup costs from other third parties after the claim has been paid when it is unknown to Medicaid
that other insurance exists or when other insurance was obtained after qualifying for Medicaid.
A provision of the DRA addresses ongoing efforts by the states to cost avoid as well as recover payments made for third
party covered services. Specifically, the DRA now requires that states have legislation requiring health insurers and other
entities legally responsible for paying health claims to:
1. Provide states with information on coverage and other information,

2. Accept the states’ right of recovery for services and assignment of a Medicaid enrollee’s right to payment by those entities,
3. Respond to questions by the state regarding a claim for payment submitted within three years after the date of service,
and
4. Agree not to deny claims from the state solely because of the date the claim was submitted or the form that was used.
Pros
Significant savings are available to states that choose to implement and enforce a cost avoidance and recovery procedure
without reducing services to qualified beneficiaries.
Cons
Modifications to the system can be difficult and require a dedication of resources to implement new procedures and edits.
Agencies other than Medicaid may be required to change procedures when qualifying beneficiaries for coverage,
consequently requiring better interdepartmental communication and information exchange. Providers may be subject to more
administrative work when claims are rejected due to cost avoidance procedures.
According to the OIG’s 2004 report on cost avoidance waivers, 21 states reported they have cost avoidance pharmacy
waivers.57 Of the $5.5 billion that states reported in third party related savings in FY2004, $4.9 billion was for payments cost
avoided and $524 million for third party recoveries.58

• Does the state utilize a “cost avoidance” or “pay and chase” process for third party pharmacy claims? Many states
obtained a cost avoidance waiver from CMS that allowed them to waive the cost avoidance procedures and policy
implementation.
25
• If the state uses a “pay and chase” process, approximately how much is unrecoverable annually? The U.S. Department
of Health and Human Services (HHS), Office of the Inspector General, released a report in August 2001 that examined state-
reported data on pharmacy claims in FY1999 that were paid by Medicaid and identified for recovery from other liable third
parties. Approximately $440 million was eligible for recovery, while only $73 million (17 percent) was recovered. In
pharmacy claims alone, the total loss to states was approximately $367 million or an average of $11.5 million per state.
Over ten years, the loss in taxpayer money could exceed $5 billion.59 Additionally, a Government Accounting Office report in
September 2006 identified problems states have experienced in regard to verifying coverage and collecting all types of third
party payments. Specifically, 10 states estimated combined annual losses of $54 to $60 million due to problems verifying
coverage and 14 states estimated combined annual losses of $184 to $196 million due to payment collection problems.60
• What changes should be considered to make “cost avoidance” a success and what other agencies or
departments will be affected by a change in policy? The success of a “cost avoidance” system depends on
the accuracy and completeness of information gathered from beneficiaries at the time of Medicaid eligibility
determination. Many states have two or three different departments/agencies involved in the process of
eligibility determination and processing/adjudication of claims. This can further complicate the coordination
of information. Medicaid agencies could check Social Security Administration wage and earnings files, and
files on child support, motor vehicles, and worker’s compensation to determine the existence of other
insurance. In addition, the DRA provisions will assist states with coverage verification via enhanced electronic
data exchange and reporting requirements with other payers.

States are required to use “cost avoidance” for most services unless the state has a waiver allowing it to “pay and chase.”
According to 42 CFR §433.138, CMS regional offices may grant these waivers when states demonstrate that “pay and chase”
is as cost-effective as “cost avoidance.” The State Medicaid Manual requires states to renew their cost avoidance waivers
every three years. New provisions under the DRA address various issues that present obstacles for states in verifying and
collecting third party payments.
F. Prescription Limits
This strategy involves placing limits on the number and/or type of prescriptions a beneficiary may receive, such as limiting
beneficiaries to six total prescriptions per month or three brand name prescriptions per month.
Pros
Limits on the number and/or type of prescriptions can result in immediate reductions in the volume of prescription claims
and their corresponding expenditures.
Cons
Limits are arbitrary, reflect no sensitivity for severity or type of illness, operate on pure financial motivation, and express no
concern about outcomes. Limiting the number of prescriptions is likely to increase costs for emergency room visits and
inpatient care because patients are not getting the necessary medications for outpatient treatment.61 Also, limiting the
number of prescriptions does not ensure the appropriate use of drugs. Instead, it creates a type of clinical roulette:
beneficiaries receive prescriptions written early in the month, and then have to go through extensive PA procedures or go
without those prescriptions written after the limits are reached. This policy creates barriers to access for the beneficiaries who
can least afford them – the elderly, chronically ill and disabled taking the most prescriptions.62 Other alternatives provide
opportunity for more targeted utilization management that also affords improved patient care and outcomes.
26
According to a 2006 Kaiser Family Foundation state survey, only 10 states reported having a policy in place that limits the
number of prescriptions a beneficiary can have at one time before the state requires prior authorization for additional
prescriptions.63 In some states there are exceptions for several classes of drugs, such as antipsychotics and antiretrovirals.
However, there are no other exception criteria relative to disease factors or severity of illness. A process is in place that allows
physicians to request an override due to medical necessity, but as reported by physicians it can be labor and time intensive.64

• Has the state determined the percentage of elderly and disabled patients that will be affected by the policy
implementation? The decision to limit the number of prescriptions in a chronically ill, elderly, and disabled population
should be carefully considered and based on a frequency distribution analysis of the prescribed drug claims database. The
generation of this report can isolate the extreme outliers (e.g., those patients receiving greater than ten prescriptions per
month or exceeding specific standard deviation levels). Once the initial analysis is completed, further analysis of the data
can be performed to develop a plan of action to determine policy feasibility and to identify what parameters/limits should
be set.
• Will some patients and/or drugs be excluded from the limits? A detailed retrospective analysis can identify those
patients meeting defined disease and eligibility criteria that should be excluded such as transplant or cancer patients. It is
also important to determine which drugs and/or drug classes (e.g., chemotherapy, antiretrovirals, antipsychotics, etc.) should
be excluded from the limits.
• Has a method been selected to evaluate the cost and clinical appropriateness of the policy pre- and post-
implementation? An academically rigorous evaluation to examine any changes in clinical outcomes and cost shifting to
other medical service areas as a result of the policy should be completed by an independent academic review team using
reliable and validated statistical methodologies and procedures. It is necessary to recognize that negative clinical outcomes
may not be realized for years, thus shifting costs resulting from prescription limits to future budget cycles.
• Will needed staffing and other system resources be available to monitor the program policies, and how will
provider feedback be addressed? Periodic monitoring on a weekly or monthly basis is warranted during the initial stages
of implementation. When recognized, any necessary policy exceptions should be made immediately. Provider input
regarding the exceptions process is important.
• Is there a method for calculating and defraying provider administrative burdens/costs associated with PA and
prescription limits? States can estimate administrative costs by conducting a retrospective claims analysis to examine the
utilization patterns of patients by drug class or product that would be affected by new policies.

States may need legislative approval to set limits and make changes to benefit design. Additionally, CMS approval via a state
plan amendment is generally required to implement significant changes to the benefit design affecting groups such as
children under the age of 21 and others that may be subject to exemption from the policy.
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G. Drug Therapy Parameters
Drug therapy parameters establish utilization limits according to clinical guidelines for selected drugs by age, diagnosis,
duration of therapy, amount per prescription, frequency of refills, and dosage. These parameters can be established using
prospective drug utilization review (ProDUR) and other drug file edits.
Pros
Automated systems using enhanced edits can prevent inappropriate utilization of drugs, resulting in savings to the state
depending on the volume of pharmacy claims processed. There can also be added savings elsewhere in the health care system
resulting from the prevention of adverse events, fraudulent billings and other inappropriate costs.
Cons
Drug therapy parameters can cause undue interference with providers, an excess number of denied claims, and patient access
delays if not carefully implemented. The drug therapy parameters must be updated routinely and the review process, which
requires a great attention to detail, can be extremely time consuming. Depending on the fiscal agent’s original contract scope,
there can be additional costs for changes to the system edits.
Almost all states have ProDUR programs as mandated by OBRA ’90. State programs vary in the type, number, and clinical
criteria applied to hard and soft edits (e.g., requirements vs. notices that can be overridden) activated in the claims processing
system. Most states use a team of fiscal agent representatives, providers, clinical experts (such as the DUR Board), and other
staff to set criteria for the hard and soft edits for drug therapy parameters.

• What type of edits does the state currently have in place and what changes are needed to prevent excessive denials
and overrides? A state may already have ProDUR edits activated for therapeutic duplication, drug interactions, dosage
limitations, and other criteria. Providers may override these edits if they are programmed as “soft” edits. Changing some of
these edits to “hard” edits that cannot be overridden will require extensive review of various drugs and drug classes to
determine the targeted drugs for inclusion in the parameters.
• What can the state do to facilitate a smooth transition for providers when changes are made to the ProDUR
system? ProDUR tracking reports detailing the overrides can be generated weekly or monthly and can be used to assist
with the development of a phased-in approach to implementing hard edits. To ensure provider acceptance and decrease the
chances of access delay, hard edit categories should be prioritized and phased in over several months to create a smooth
transition. Providers should be given the opportunity to provide input to the process and assist with identifying false
positive edits.
• Did the state purchase a ProDUR system as part of the fiscal agent claims processing contract? ProDUR systems are
usually part of a standard fiscal agent software package and often require much customization and manual review by staff
and DUR board members to eliminate unnecessary and clinically meaningless edits that can desensitize providers to
important edits. States should always inquire about the vendor’s updating process and frequency.

Federal law under OBRA ’90 required states to implement computer-based ProDUR systems during the original phase-in
period. CMS provided a 90 percent federal match to encourage states to complete the requirement in a timely manner. Most
states have complied, but continue to make significant modifications to the vendor programs currently available because the
edits need to be customized in order to be truly effective.
28
O PERATIONAL S YSTEMS I NITIATIVES
A. Decision Support Systems
Decision support systems are designed to analyze, review, and evaluate practice patterns, prescribing trends by drug class
and/or disease, and adherence to treatment guidelines. They can also be used to conduct research as well as perform
assessments of outcome measures and total treatment costs. This relational database analysis system can serve as the
platform for fraud/abuse detection/monitoring activities and as a basis for provider education and disease management. In
addition, these systems can be integrated with electronic prescribing and other provider based technologies.
Pros
Decision support systems are powerful and necessary tools for analysis of claims data, provider practice and billing patterns,
patient characteristics, and other analytical evaluations. The decision support system works dually to support quality
assurance and utilization management approaches to cost reduction. In addition, the system can help states make specific
policy decisions that promote consistent evidence-based care and enhance patient outcomes.
Cons
Decision support systems are complicated and expensive to develop. They require staff training and expertise in various
system relationships and basic program knowledge. Annual budgets must include an allocation for updating the systems
processes and clinical information to reflect current standards of care.
Most states now have invested significant resources in developing decision support systems and are in a position to begin
more rigorous and complicated analysis of their many programs.

• Does the state have a decision support system in development? What costs and resources have been assigned? A
contractor is needed to design and implement a decision support system, which requires a request for proposal process and
vendor evaluations. The costs of a system are usually dependent on the size of the database required to house all the claims
data for multiple years. Contractors should be required to provide staff training for one to two years post implementation
so that as many staff as possible are trained to use the system efficiently.
• Does the state have the personnel and dedicated staff to make use of the system in vital areas? The contractor and
the management information systems department should dedicate significant staff to full time maintenance and operations
of the system.
• What primary departments will utilize the system most and what are their specific design needs? Decision support
systems must be designed with staff input to ensure that all the claim fields, files, and system architecture are optimal for
the type of queries that will be requested.

States should consider HIPAA regulations and requirements to the claims processing standards or formats that may affect the
operational design of the decision support system.
29
B. Reimbursement Policies
States have implemented several strategies to achieve savings by adjusting pharmacy reimbursement policies. States may
periodically consider reevaluating/updating their state maximum allowable cost (MAC) and federal upper payment limit (FUL)
pharmacy rates as well as implementing a “most-favored nations policy” whereby pharmacy providers are required to accept
from Medicaid the same reimbursement amount as the lowest rate accepted by other third parties. States have also redefined
“usual and customary” pricing for pharmacies in order to adjust the standard product reimbursement rate. According to
recent surveys, many states have lowered their reimbursement rates to providers based on average wholesale price (AWP)
discounts.65 Approximately 32 states now have a MAC program in place and 15 states plan to expand their programs in 2006
and 2007.66 Numerous reports have been produced by the OIG and other private auditing firms that support the reduction of
pharmacy product reimbursement.67,68,69
New provisions under the DRA outline reimbursement changes for Medicaid drug programs. Specifically, drug reimbursement
is now based on average manufacturer price (AMP) rather than average wholesale price (AWP) with quarterly reporting
requirements of AMP by the manufacturer. The DRA also modified the federal upper payment limit (FUL) from 150 percent of
the AWP to 250 percent of the AMP for the lowest cost drug.
Pros
Implementing a state MAC list and reducing reimbursement rates can yield substantial pharmacy program
savings for states. Standard MAC drugs (e.g., generics and multi-source brands) are routinely purchased by
providers at discounts significantly below the state’s standard reimbursement amount (AWP-X percent). This has
been documented by Medicaid agencies through internal and external auditing and has resulted in states
setting their own MAC rates lower than federal upper limit (FUL) rates set by CMS and expanding the number of
drugs covered by state MAC lists beyond the limited FUL drug list.
Cons
States should expect provider resistance to any rate decrease, although Medicaid providers have accepted lower rates from all
other third party plans for many years. Medicaid continues to be one of the highest reimbursement third party plan for
pharmacy providers. Programs should also consider that providers may choose to stop serving Medicaid patients in certain
geographic areas which could affect patients’ access to services.
According to the Office of the Inspector General, 24 states reported using a MAC pricing list that sets upper limit pricing on
multi-source (drugs other than those on the FUL list). Seventeen of these states reported actual or projected cost savings
from their MAC programs ranging from one to seven percent of the total drug expenditures per year.70
Numerous states have adjusted their product reimbursement rates due to budget constraints and data produced in various
audits, and based on OIG recommendations resulting in savings ranging from one to 22 percent of total annual
expenditures.71 States such as Arkansas and Texas have contracted with independent auditors to conduct provider audits to
determine true acquisition costs for drugs. Consequently, states have reduced reimbursement rates based on the results of
these audits and now the DRA enforces these findings by altering the pharmacy reimbursement methods.

• Does the state have a MAC list in place and how is the list updated? In addition to the generics on the FUL list, states
can add other generic or multi-source brand drugs that may be appropriate based on provider audits and information on
actual acquisition costs. States should consider updating the state MAC list on at least an annual basis and perhaps more
frequently.
30
• Has the state reevaluated the pharmacy ingredient cost reimbursement formula based on DRA provisions, provider
audits or other sources of information? OIG has produced numerous reports over the years that recommend states
reduce product reimbursement to reflect more accurate pharmacy acquisition rates for drugs. These reports are listed in the
reference section and can be accessed at http://oig.hhs.gov/oei/ oeisearch.html. States will now have to reevaluate and
adjust drug product cost reimbursement rates based on AMP as outlined in the new provisions of the DRA.
• What is the current policy on pharmacy provider drug reimbursement and does it include the
definition of “usual and customary” in the state provider manual or regulations? In the past,
pharmacies had a significant percentage of cash customers and “usual and customary” price has traditionally
been defined as the “price routinely charged to those cash customers.” A new definition may be warranted for
“usual and customary” pricing based on the lowest price charged to the majority of other third parties;
however, this definition change would need to be incorporated into the statutes, reimbursement policy, and
audit procedures for states.

Changes to reimbursement policies usually require state legislative and/or administrative rule changes. New
provisions of the DRA will require states to make statutory changes in order to comply.
C. Preferred Drug Lists (PDLs)

A preferred drug list (PDL) is a list of drugs selected by the Medicaid program that providers may prescribe on a preferred
status. The designation of “preferred” is usually assigned to specific drug products that have significant clinical benefit over
other agents in the same therapeutic class and may also represent good value to the state based on total cost including
manufacturer rebates.
Several useful resources are available for states exploring implementation of a PDL with mandatory prior authorization. One
resource, “A Model Prescription Drug Prior Authorization Process for State Medicaid Programs” developed by the National
Health Law Program and published by the Kaiser Commission on Medicaid and the Uninsured, details appropriate procedures
and policies to assist programs with federal compliance issues and clinically sound principles. The model includes the basics
of implementation and operations, due process procedures, health care provider relations, and monitoring and evaluation of
the program. The model was developed with input from patient advocates, providers and state officials, and includes
references to recent court cases, federal statutes, CMS guidance/communications to states, and other requirements.72
Another resource, “State Medicaid Program Issues: Preferred Drug Lists” published by the National Pharmaceutical Council,
outlines a number of issues states should consider when exploring the implementation of a preferred drug list with prior
authorization and supplemental rebates. These issues include federal plan approval, policies and operational procedures,
regulatory compliance, patient access and safety, provider acceptance, contract negotiations, payment provisions, savings
estimates, and program evaluations which states must address in depth and integrate into the PDL design and
implementation plans in order to ensure both cost efficiency and quality of care.73
Pros
A PDL can offer benefits to the state by communicating to providers which products within a given therapeutic class of
products have significant clinical benefit. They may also provide an indirect indication of the relative cost (net manufacturer
rebates) of the preferred product(s) to other products in the class.
31
Cons
• Impact of Medicare Prescription Drug Act of 2003 (MMA) While almost 40 states have implemented PDLs in their
Medicaid programs, the new Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) significantly
reduces the potential for savings in state budgets from new PDL initiatives. MMA moved responsibility for prescription drug
benefits for dual eligibles from Medicaid to Medicare in January 2006. The current national average percent of drug
expenditures contributed by dual eligibles is approximately 50 percent, with some states as high as 70 percent.74 As a result,
savings for the dually eligible population are no longer available as the numbers of prescriptions from which savings can be
derived are significantly smaller after January 1, 2006. This means that the many fixed costs of PDL implementation and
continued operations are amortized over a much smaller base of savings opportunities.
• Impact on Quality of Care and Indirect Costs

In addition, few states recognize the unintended and the usually un-monitored, indirect costs of PDL implementation. The
mandatory therapeutic interchanges associated with PDLs can result in additional physician visits, lab work for monitoring
and titrating new preferred prescriptions, increased concomitant medications, and more treatment failures.75,76,77,78,79
These indirect costs are shown to have a substantial impact on the true valuation of net PDL savings. States should have an
independent party conduct a detailed cost benefit analysis using their own specific data before moving forward with PDL
development and implementation.
PDLs do not guarantee that providers will prescribe the “preferred” drug in an appropriate manner or that they have
selected the best drug for the patient’s condition and prescribed an accurate dose. For this reason, PDLs cannot be
advocated as the primary tool for enhancing appropriate prescribing practices.
Patient advocacy and provider groups may not be receptive to mandatory PDLs that subject patients and providers to
administrative burdens, hassles and increased liability, and take valuable time from patient care activities.
Additionally, clinical teams such as Pharmacy & Therapeutic Committees, who are responsible for the selection and
evaluation of agents on the PDL, often do not take into account the disproportionate share of minorities and elderly and
disabled with multiple chronic conditions in the Medicaid population80 who will be subject to the prescribing limitations and
how their response to various drugs differs from a relatively healthy population.
As of 2006, approximately 38 state Medicaid fee-for-service programs have obtained legislative approval for a PDL and/or are
in the process of implementing a PDL with expanded PA.81
Florida was the first state to implement a PDL in 2001 based on a minimum supplemental or additional rebate amount of 10
percent of the average manufacturers price (AMP) for each product to be considered for inclusion on the PDL. Florida statute
originally allowed for manufacturers to provide “value-add” programs with guaranteed savings in lieu of supplemental
rebates but that has been reversed by the legislature. Florida also did not have to designate a manufacturer’s drug as
“preferred” even if the minimum supplemental rebate was offered. This provision created a “competitive bid” model between
brand manufacturers for drugs in the same therapeutic classes. Florida appointed a Pharmacy & Therapeutics Committee to
review all major drug classes and recommend “preferred” drugs in each class to the agency. However, net costs (minus
rebates) and guaranteed savings from value-add programs were a major factor in the original selection of “preferred” drugs
by the agency. The complete study by the Kaiser Commission on Medicaid and the Uninsured titled Florida’s Medicaid
Prescription Drug Benefit can be found at http://www.kff.org.82
Michigan created a PDL based on a reference pricing scale, which means drugs in the same class are compared by price and
then designated as preferred agents only if a supplemental rebate is applied. In order to have a drug included on the PDL,
manufacturers must provide a supplemental rebate to the state that results in the drug cost being equal to the lowest cost
drug on the reference scale in that class. In Michigan, multiple source generic drugs and single source brand drugs within
32
specific classes are designated as therapeutically interchangeable by the Pharmacy & Therapeutics Committee and the lowest
priced product then becomes the basis for the reference price. There is much clinical debate regarding the appropriateness of
this reference based pricing structure due to the state’s designation of equal therapeutic value among products that are
significantly different in their mechanism of action, chemical composition, side effects, and FDA approved indications for use.
An evaluation by the Kaiser Commission on Medicaid and the Uninsured documents various issues surrounding the
implementation, operation, and efficiency of Michigan’s PDL program.83

• What impact did the Medicare Modernization Act (MMA) of 2003 have on the state program? Data analysis should
be conducted by a state to determine the utilization impact that resulted from the dually eligible population moving from
Medicaid to Medicare to receive pharmacy benefits as of January 1, 2006. These would include determining the change in
percentage of patients, prescriptions, and expenditures that resulted from the dual population drug coverage shift to
Medicare. The greater the dual population contributed to the pharmacy program expenditures and utilization the less cost
savings available to the state from implementation or continuation of an existing PDL. Nationally, the duals represent
approximately 50 percent of all prescribed drug expenditures.84 However, many states exceed the national average and
therefore must consider this as part of conducting a cost benefit analysis to determine whether to implement a new PDL or
discontinue an existing PDL.
• How does a state conduct a cost benefit analysis of a PDL program? The cost benefit analysis would include
considerations of federal matching funds, internal and external fixed costs, variable costs, and all recurring costs. Provider
costs should be considered as well as the indirect costs that may occur due to increased office visits and labs required to
clinically monitor and re-stabilize patients following drug therapy changes required in order to comply with the PDL. A
number of calculations can be performed using state specific data to estimate costs and savings for a PDL accounting for
the MMA shift impact, expansion of managed care reform efforts and other state specific utilization patterns.85
• What process should states consider when developing a PDL? States should structure a clinically sound approach to the
development of a PDL and consider the disease and utilization characteristics of the elderly, chronically ill and disabled
population that will be subjected to prescribing limitations and policies. For example, states can appoint a Pharmacy &
Therapeutics Committee made up of clinicians with experience in Medicaid/Medicare populations, including experts in the
management of geriatric and disabled patients with complex health care needs. States may also be required to comply with
open access for these meetings and public record laws.
• What issues specific to the Medicaid population should be considered in the decision making process? The
committee should consider the current utilization patterns by drug class and product as well as the disease and co-
morbidity profile of the population using prescribed drug services. The direct and indirect cost of switching a large segment
of the population to an alternative product should be included in the cost benefit analysis. Each class of drugs examined for
the PDL should contain a sufficient number and type of products necessary to meet the needs of an elderly and disabled
patient with complex health problems and significant risk factors.
• Additionally, the demographics of the elderly, chronically ill, and disabled Medicaid population should be considered by the
Pharmacy & Therapeutics Committee, and issues related to drug metabolism and effectiveness in specific age and ethnic
groups should be factored into the decision making process for PDL product selection.
• How will the PDL be implemented? States could consider the process of a voluntary PDL to begin modifying the
prescribing patterns of providers without mandatory claim denials and the administrative expense of operating an
expansive prior authorization program that will require a vendor to perform additional services related to the enforcement
of a PDL. Practice pattern analysis targeting high volume prescribers can be very effective and less costly than modifying
prescribing behaviors through a mandatory PA process. If a state chooses to implement a mandatory PDL, they should
consider a short period of advance notice such as 60–90 days prior to the mandatory compliance with the PDL and a
33
phased-in approach to adding the major therapeutic classes to give providers and patients a chance to evaluate options
and convert to new therapies over time without subjecting patients to multiple drug switches simultaneously. This will
reduce administrative and service costs as well as promote better clinical outcomes. States can also consider grandfathering
current patients and only applying the PDL to new prescriptions. Other options include exempting patients with significant
co-morbidities and disabilities so as not to disrupt their complex drug regimens.
• Does the state have the administrative resources to develop and administer the PDL or will a vendor need to be
acquired? Administrative resources are significant to develop and maintain a PDL. This requires extensive work by staff to
prepare comprehensive materials for Pharmacy and Therapeutic Committee meetings, which involve the review of specific
drug products and entire therapeutic classes as well as examining drug utilization patterns in the population. Most states
have procured outside vendors to review drug monographs, prepare product/indication summaries, and review all the
published medical literature on specific drugs including outcome data and comparative use studies.
• Do the total costs of the program exceed the anticipated savings? The state will need to project the total program
costs which include all administrative direct costs and the expected indirect costs that will be incurred due to additional
office visits, labs, and treatment failures following drug therapy changes. The savings can be estimated by using state
specific data on the current population’s utilization by drug product and the expected number of drug product changes
that will occur to comply with the PDL over a defined time period. Other considerations in the savings estimates include
the state federal medical assistance percentage (FMAP) which ranges from 50-77 percent based on the state income level.
A high FMAP will reduce savings significantly for a state since a larger portion of the savings must be returned to the
federal government. In addition, states should consider any large reform efforts that may move a significant portion of the
population into managed care and eliminate the need for a PDL in the fee-for-service setting.
• Other related costs which should be considered include provider costs incurred to assist patients with drug therapy
changes, PA exceptions, and claim denials. Providers who have patients stabilized on specific products will be required to go
through a PA process to obtain an override to prescribe a non-PDL drug which often involves extracting clinical and lab
information from the chart and forwarding this to the PA vendor. The administrative burden on providers and the
administrative cost to the states will depend on the level of the PDL’s restrictiveness (e.g., how many beneficiaries will be
subject to drug therapy changes, how many override requests, etc.). Administrative costs can be significant in an elderly and
disabled Medicaid population where patients are appropriately using many chronic medications for multiple conditions.

The creation of a preferred drug list using prior authorization procedures to restrict access to drugs not on the PDL would
require a state plan amendment if the state has not already obtained CMS approval to implement a prior authorization
program. Additionally, many states require legislative authority to enact a preferred drug list using prior authorization
procedures for enforcement. The state’s use of a prior authorization program in conjunction with a PDL for the purpose of
extracting supplemental rebates from manufacturers requires that a state plan amendment be presented to CMS and that the
proposed rebate agreement be approved by CMS.86 Even then, legal challenges have been brought to some state programs
(http://www.phrma.org/issues/courts/).
Supplemental rebates are defined as rebates negotiated directly between the state and the manufacturers above and beyond
the federally mandated OBRA ‘90 minimum rebates required for Medicaid drug coverage. Some states may achieve increased
rebates through the negotiation of supplemental rebates on specific drug products; however, the cost for the development
and implementation of a PDL with supplemental rebates can be very high in terms of administrative costs and in light of the
MMA mandated dual population shift that occurred January 1, 2006. These administrative resources are costly and may not
yield an immediate return on investment due to the need for staff, expensive vendor procurement, and lengthy contract
negotiation period.
34
Once supplemental rebates are received, the state must pay the federal government its share based on the state’s FMAP, and
thus loses from 50 to 77 percent of the supplemental rebates received. States need to determine the current rebates for the
top 200 drugs by expenditure and the utilization of these top drugs for the remaining non-dual population. States can then
calculate whether the proposed or existing PDL and supplemental rebates would provide appropriate access for patients and
yield enough savings to justify the program’s administrative costs, provider costs, and cover all the indirect costs incurred
based on the expected number of drug switches that will result in increased physician visits, labs, and treatment failures.
States should also acknowledge the need for confidentiality agreements between states and drug manufacturers, and the
challenges posed by state sunshine and other relevant laws, regulations, and rules which require open access to information.
35
R ESOURCES AVAILABLE F ROM NPC
G ENERAL M EDICAID
• Health Care Budgeting: Tools & Techniques for State Budget Officers, May 2005
• Medicaid 101 Educational Programming, Mary Kay Owens and Linda Schofield, 2006
• State Medicaid Resource Kit: Maintaining Quality and Patient Access To Innovative Pharmaceuticals in Challenging Times,
Mary Kay Owens, 2006
• Pharmaceutical Benefits Under State Medical Assistance Programs, an annual state Medicaid statistical and policy
compilation
M EDICARE D RUG B ENEFIT

• The Impact on States of the Medicare Drug Benefit: Information for State Administrators, Mary Kay Owens and Linda
Schofield, April 2005
PDL S AND F ORMULARIES

• State Medicaid Program Issues: Preferred Drug Lists, prepared by Mary Kay Owens, RPh, CPh, December 2003
• Component Management Fails to Save Health Care System Costs: The Case of Restrictive Formularies, Second Edition, 2000
D ISEASE M ANAGEMENT
• Disease Management for Asthma, 2004
• Disease Management for Chronic Obstructive Pulmonary Disease, 2003
• Disease Management for Depression, 2003
• Disease Management for Diabetes, 2004
• Disease Management for Heart Failure, 2004
• Disease Management for Schizophrenia, 2004
• The Impact of Disease Management on Outcomes and Cost of Care: A Study of Low-Income Asthma Patients, reprinted
from Inquiry, Summer 2000
• Medicaid 101 – Overview of Policies, Expenditures, Current Trends, and Initiatives, 2006
• Medicaid Disease Management Programs: Findings from Three Leading US State Programs, by Jeann Lee Gillespie and Louis
F. Rossiter, reprinted from Disease Management & Health Outcomes, Vol. 11, No. 6, June 2003
37
• The Value of Disease Management: Balancing Cost and Quality in the Treatment of Asthma, by Jeann Gillespie, PharmD, MS,
Disease Management, Vol. 5, No. 4, 2004
• The Value of Disease Management: Balancing Cost and Quality in the Treatment of Congestive Heart Failure, by Jeann
Gillespie, PharmD, Disease Management, Vol. 4, No. 2, 2001
• The Value of Disease Management: Balancing Cost and Quality in the Treatment of Diabetes Mellitus, by Jeann Lee Gillespie,
PharmD, MS, Disease Management, Vol. 5, No. 1, 2002
• The Virginia Health Outcomes Partnership: A Demonstration Project, 1997
D IVERSITY IN R ESPONSE TO M EDICATIONS

• Cultural and Genetic Diversity in America: The Need for Individualized Pharmaceutical Treatment, by Valentine J. Burroughs,
Randall A. Maxey, Lavera M. Crawley and Richard A. Levy, Ph.D., 2002
• Ethnic Disparities in the Burden and Treatment of Asthma, 2005
• Genes, Culture, and Medicines: Bridging the Gaps in Treatment for Hispanic Americans, 2004
• Genetic Variations in Response to Medications: Looking at the Implications for Minority Elders, by Richard Levy & Jean
Polatsek, Healthcare and Aging, Vol. 9, No. 1, Spring 2002
• Pharmaceutical Diversity Served Human Diversity: Medications for Older Adults. By Richard A. Levy, Ph.D., Healthcare and
Aging, Vol. 7, No. 4, Winter 2000
• Pharmaceuticals for Elders: Why Innovation Matters, by Albert Wertheimer, Healthcare and Aging, Vol. 9, No. 1, Spring 2002
• Racial and Ethnic Differences in Response to Medicines: Towards Individualized Pharmaceutical Treatment, by Valentine J.
Burroughs, Randall W. Maxey and Richard A. Levy, Ph.D., reprinted from the Journal of the National Medical Association,
Vol. 94, No. 10 (Suppl.), October 2002
• Toward Individualized Pharmaceutical Care of East Asians, by Alan Morrison, PhD, and Richard A. Levy, PhD,
Pharmacogenomics, Vol. 5, No. 6, September 2004
• Why the Elderly Need Individualized Pharmaceutical Care, by David Nash, MD, MBA, et al., April 2000
D RUG S PENDING
• Explaining Drug Spending Trends: Does Perception Match Reality? reprinted from Health Affairs, March/April 2000
38
V ALUE OF P HARMACEUTICALS
• Assessing the Impact of Pharmaceutical Innovation: A Comprehensive Framework, by Jack A. Meyer, Ph.D., 2002
• Costs and Benefits of Pharmaceuticals: The Value Equation for Older Americans, by Richard Levy, Ph.D., reprinted from Care
Management Journals, Vol. 3, No. 3, Spring 2002
• The Value of Investment in Health Care: Better Care, Better Lives (Executive Summary), 2004
• The Value of Incremental Pharmaceutical Innovation for Older Americans, July 2001
39
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1
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2
ibid
3
Low Medicaid Spending Growth Amid Rebounding State Revenues; Results from a 50-State Medicaid Budget Survey State
Fiscal Years 2006 and 2007. Kaiser Commission on Medicaid and the Uninsured. October 2006.
4
ibid
5
Results for a 50 State Medicaid Budget Survey SFY 2006 and 2007, The Kaiser Commission on Medicaid and the Uninsured,
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6
The Medicare Modernization Act: Tool Kit for State Leaders, Brief 3: Coordinating with the Medicare Prescription Drug
Benefit: Medicaid Best Practices. Council of State Governments. Fall 2005.
7
The Nuts and Bolts of Making Medicaid Policy Changes: An Overview and a Look at the Deficit Reduction Act. Kaiser
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8
ibid
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ibid
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Roland, D. “Challenges Facing the Medicaid Program in the 21St Century” presented to the US House of Representatives
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Medicaid Prescription Drug Spending and Use, Kaiser Commission on Medicaid and the Uninsured, June 2004.
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ibid
17
Dual Eligibles: Medicaid Enrollment and Spending for Medicare Beneficiaries. Kaiser Commission on Medicaid and the
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Reyes, C.; Van de Putte, L.; Falcon, A. P.; and Levy, R. A. Genes, Culture and Medicines: Bridging Gaps in Treatment for
Hispanic Americans. National Alliance for Hispanic Health. Washington, DC. February 2004.
20
Centers for Medicare and Medicaid Services. Office of Research, Development, and Information: MCBS 2001 Access to Care
File.
21
ibid
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Owens, M. K. Textbook of Managed Care Pharmacy. Chapter 11: Medicaid Pharmacy Benefit Management. Aspen Publishers,
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Dubois, et al. Explaining Drug Spending Trends: Does Perception Match Reality? Health Affairs. March/April 2000.
25
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Legislatures. December 2001.
26
ibid
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ibid
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Medicaid Disease Management and Health Outcomes sponsored by the National Pharmaceutical Council.
<http://www.dmnow.org/>.
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Managing Medicaid Costs: A Legislator’s Tool Kit. Forum for State Health Policy Leadership, National Conference of State
Legislatures. December 2001.
30
October 10, 2006.
41
31
Gillespie, J.L. and Rossiter, L.F., Medicaid Disease Management Programs, Findings from Three Leading U.S. State Programs.
Dis Manage Health Outcomes 2003; 11 (6): 345-361.
32
Florida Medicaid Disease Management Overview, Presentation given at House Health Care General Committee. February 9,
2005. <http://www.fdhc.state.fl.us/Medicaid/deputy_secretary/recent_presentations/disease_management_020905.pdf >.
33
The Florida Medicaid Disease Management Experience. Presentation to the House Health Care Committee. January 26, 2005.
<http://www.fdhc.state.fl.us/Medicaid/deputy_secretary/recent_presentations/medicaid_disease_management_house_0126
05.pdf>
34
Medicaid Disease Management Programs. Presentation to the Health and Human Services Appropriations Subcommittee,
Florida Senate. March 17, 2004.
35
ibid
36
Florida Medicaid-Value Added Agreements, A Partnership with Pharmaceutical Manufacturers Fact Sheet. Published by
Florida Medicaid. March 26, 2004.
37
ibid
38
Gillespie, Jeann Lee, Disease Management: Balancing Cost and Quality, from the National Pharmaceutical Council’s 2000
Series, <http://www.npcnow.org/newsroom/factsheets/PDFs/diseasemanagement_factsheet.pdf>.
39
Rossiter, Louis F., et al. The Impact of Disease Management on Outcomes and Cost of Care: A Study of Low-Income Asthma
Patients. Inquiry, Vol. 37, Summer 2000.
40
The West Virginia Health Initiative Project Fact Sheet, National Pharmaceutical Council,
<http://www.npcnow.org/newsroom/factsheets/FSwvhip.asp>
41
Wilhide, Steven D., State-By-State Comparisons Disease Management Programs. American Academy of Family Physicians,
December 2005.
42
State Medicaid letter dated February 25, 2004. SMDL#04-002, <http://www.cms.hhs.gov/states/letters/smd022504.pdf>
43
Comprehensive Medicaid Integrity Plan, July 2006, Centers for Medicare and Medicaid Services, Center for Medicaid an
State Operations, http://www.cms.hhs.gov
44
Medicaid Financial Management: Better Oversight of State Claims for Federal Reimbursement Needed (GAO-02-300).
February 2002.
45
Nolin, R. State Checks Prescription Fraud. Sun-Sentinel. January 16, 2003.
46
First Interim Report of the Seventeenth Statewide Grand Jury. Florida Supreme Court. February 2003.
<ttp://myfloridalegal.com/grandjury17.pdf>. Report on Recipient Fraud in Florida’s Medicaid Program. Florida Supreme
Court Second Interim Report of the Seventeenth Statewide Grand Jury. December 2003.
<http://myfloridalegal.com/interimjury17.pdf>
47
Medicaid Integrity: Implementation of New Program Provides Opportunities for Federal Leadership to Combat Fraud, Waste,
and Abuse, Testimony before the Subcommittee on Federal Financial Management, Government Information, and
International Security, Committee on Homeland Security and Governmental Affairs, U.S. Senate by U.S. Government
Accountability Office, March 28, 2006.
48
Tamblyn, R.; Laprise, R.; Hanley, J. A.; Abrahamowicz, M.; Scott, S.; Mayo, N.; Hurley, J.; Grad, R.; Latimer, E.; Perreault, R.;
McLeod, P.; Huang, A.; Larochelle, P.; and Mallet, L. Adverse Events Associated with Prescription Drug Cost-Sharing Among
Poor and Elderly Persons. JAMA. 2001; Jan. 24-31;285(4):421-9.
49
Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 2005/2006.
50
Medicaid Outpatient Prescription Drug Benefits: Findings from a National Survey, 2003. Kaiser Commission on Medicaid and
the Uninsured. December 2003.
51
October 10, 2006.
52
October 10, 2006.
42
53
ibid
54
Dual Eligibles: Medicaid Enrollment and Spending for Medicare Beneficiaries. Kaiser Commission on Medicaid and the
Uninsured. July 2005.
55
Phillips, et al. Evaluating the Operational Performance and Financial Effects of a Drug Prior Authorization Program. Journal
of Managed Care Pharmacy, 1997;3:699-706.
56
MacKinnon, et al. Prior Authorization Programs: A Critical Review of the Literature. Journal of Managed Care Pharmacy,
2001;7;4297-302.
57
CMS Oversight of Cost-Avoidance Waivers (OEI-03-00-00031). Office of the Inspector General. February 2004.
<http://oig.hhs.gov/oei/reports/oei-03-00-00031pdf>.
58
Medicaid Third Party Liability, Federal Guidance Needed to Help the States Address Continuing Problems, Government
Accountability Office, September 2006. GAO-06-862.
59
Medicaid Recovery of Pharmacy Payments from Liable Third Parties (OEI-03-00-00030). Office of the Inspector General.
August 2001. <http://oig.hhs.gov/oei/reports/oei-03-00-00030pdf>.
60
Medicaid Third Party Liability, Federal Guidance Needed to Help the States Address Continuing Problems, Government
Accountability Office, September 2006. GAO-06-862.
61
Soumerai, S. B.; McLaughlin, T. J.; Ross-Degnan, D.; Casteris, C. S.; and Bollini, P. Effects of Limiting Medicaid Drug-
Reimbursement Benefits on the Use of Psychotropic Agents and Acute Mental Health Services by Patients with
Schizophrenia. New England Journal of Medicine. Number 10, Volume 331:650-655. September 8, 1994.
62
Schulz, R. M.; Lingle, E. W.; Chubon, S. J.; Coster-Schulz, M. A. Drug Use Behavior Under the Constraints of a Medicaid
Prescription Cap. Clin Ther. 1995;Mar-Apr;17(2):330-40.
63
October 10, 2006.
64
Payment Restrictions for Prescription Drugs Under Medicaid. Effects on Therapy, Cost, and Equity. Soumerai, S.; Avorn, J.;
Ross-Degnan, C.; and Gormaker, S. N Engl J Med. 1987;August 27; 317(9):550-6.
65
State Strategies to Contain Medicaid Drug Costs. Health and Human Services Office of the Inspector General Report (OEI-
05-02-00680). October 2003.
66
October 10, 2006.
67
Review of Pharmacy Acquisition Costs for Drugs Reimbursed under the Medicaid Prescription Drug Program: (Selected
States)
Texas: A-06-01-00001: http://oig.hhs.gov/oas/reports/region6/60100001.pdf
Florida: A-06-95-00065: http://oig.hhs.gov/oas/reports/region6/69500065.pdf
Wisconsin: A-06-01-00003: http://oig.hhs.gov/oas/reports/region6/60100003.pdf
Colorado: A-06-01-00004: http://oig.hhs.gov/oas/reports/region6/60100004.pdf
Montana: A-06-95-00068: http://oig.hhs.gov/oas/reports/region6/69500068.pdf
Washington: A-06-01-00006: http:oig.hhs.gov/oas/reports/region6/60100006.pdf
West Virginia: A-06-01-00007: http:oig.hhs.gov/oas/reports/region6/60100007.pdf
68
Medicaid Pharmacy-Actual Acquisition Cost of Brand Name Prescription Drug Products (A-06-00-00023: 8/01).
<http://oig.hhs.gov/oas/reports/region6/60000023.pdf>.
69
Medicaid Pharmacy Actual Acquisition Cost of Generic Prescription Drug Products (A-06-01-00053: 8/01).
<http://oig.hhs.gov/oas/reports/region6/60100053.pdf>
70
State Strategies to Contain Medicaid Drug Costs (OEI-05-02-00680). October 2003. <http://oig.hhs.gov/oei/reports/oei-05-
02-00680.pdf>
71
ibid
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72
A Model Prescription Drug Prior Authorization Process for State Medicaid Programs. Prepared by the National Health Law
Program. Kaiser Commission on Medicaid and the Uninsured. April 2003.
73
Owens, M. K. State Medicaid Program Issues: Preferred Drug Lists. National Pharmaceutical Council. December 2003.
74
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represented 48 percent, or $13 billion, out of a total national spend of $27 billion for prescribed drugs in 2002. Shifting the
Cost of Dual Eligibles: Implications for States and the Federal Government, Table 3. Kaiser Commission on Medicaid and the
Uninsured. November 2003.
75
The Costs of Interrupting Antihypertensive Drug Therapy in a Medicaid Population. McCombs, J. S.; Nichol, M. B.; and
Newman, C. M. Med Care. 1994;32:214-226.
76
Outcomes and Cost Savings of an ACE Inhibitor Therapeutic Interchange. Hilleman, D.; Mohiuddin, S.; et al. Journal of
Managed Care Pharmacy. 1997;3: 219-23.
77
Cost Savings Associated with Therapeutic Interchange in the Treatment of Mild to Moderate Hypertension. Hilleman, D.;
Wadibia, E.; and Lucas, B. Pharmacy and Therapeutics. 1998;23:563-9.
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Smith, G.; Harper, I.; and Stowers, A. A Cost Analysis of Switching Calcium Channel Blockers: A One-Year Post Formulary
Decision Review. Pharmacy and Therapeutics. July 2002;27(7):333-7.
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Formulary. 2000;35:435-442.
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Schore, J.; Brown, R.; and Lavin, B. Racial Disparities in Prescription Drug Use Among Dually Eligible Beneficiaries. Health
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82
Florida’s Medicaid Prescription Drug Benefit: A Case Study. Prepared by Bernasek, C.; Harrington, C.; Ramchand, R.; and
Mendelson, D. of The Health Strategies Consultancy. February 2002.
83
Case Study: Michigan’s Medicaid Prescription Drug Benefit Program. Kaiser Commission on Medicaid and the Uninsured.
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44
NATIONAL PHARMACEUTICAL COUNCIL
1894 Preston White Drive
Reston, VA 20191-5433
Tel. (703) 620-6390
Fax. (703) 476-0904
Web. www.npcnow.org

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STATE MEDICAID RESOURCE KIT:

Maintaining Quality and Patient Access

NATIONAL PHARMACEUTICAL COUNCIL December 2006

and Kathryn Gleason, National Pharmaceutical Council,

for their greatly appreciated assistance with this project.

NATIONAL PHARMACEUTICAL COUNCIL

Recent Changes Impacting Medicaid ....................................................................................3

Factors that Influence Pharmaceutical Spending ..............................................................................7

Medicaid Budget Strategies ..............................................................................................................7

Quality Assurance Initiatives.............................................................................................................9

Utilization Management Initiatives ....................................................................................19

Operational Systems Initiatives ..........................................................................................29

R ECENT C HANGES I MPACTING M EDICAID

Medicare Modernization Act of 2003: Part D Drug Benefit

Deficit Reduction Act of 2005

State Medicaid Reform Initiatives

Percent Beneficiaries and Expenditures by Enrollment Group

Adults 22% Blind/Disabled 44%

Elderly/Blind/Disabled = 23% Enrollees and 68% of Expenditures

*Aged, blind, and disabled account for 82% of drug spending.

M EDICAID B UDGET S TRATEGIES

Florida Medicaid Net Savings Results

Value of Value-Add Programs over Supplemental Rebates

Design and Policy Issues

Federal and State Involvement/Constraints

Federal and State Involvement/Constraints

C. Enhanced Data Analysis with Medical/Drug Review Management

Design and Policy Issues

Federal and State Involvement/Constraints

D. Practice Pattern Analysis

Design and Policy Issues

Federal and State Involvement/Constraints

E. Enhanced Primary Care Case Management (PCCM)

Design and Policy Issues

F. Pharmaceutical Industry Value-Add Programs

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

C. Co-payments for Prescriptions

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

1. Provide states with information on coverage and other information,

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

Design and Policy Issues

Federal and State Involvement/Constraints

C. Preferred Drug Lists (PDLs)

• Impact on Quality of Care and Indirect Costs

Design and Policy Issues

Federal and State Involvement/Constraints

M EDICARE D RUG B ENEFIT

PDL S AND F ORMULARIES