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Why Compare What Employers Pay to What Medicare Pays?
Results from a new RAND Corporation study – Nationwide Evaluation of Health Care Prices Paid By Private Health Plans – show commercial payers reimburse hospitals about 2.5-times more than does Medicare. As expected, hospital officials responded, claiming that public payers underpay for medical services and that it is inappropriate to challenge hospitals now as they battle the pandemic. However, the RAND study revealed a very significant finding – there is no relationship between a hospital’s prices charged to commercial payers and its volume of Medicare and Medicaid patients.
There is never a good time to take on hospital prices, but that task is essential if the nation is ever to get a grip on health care costs. Hospitals are large employers and provide an essential service, never more important than during the pandemic, but they also comprise the biggest chunk of health care spending, driving up insurance premiums and out-of-pocket costs.
Additionally, most hospital markets are now consolidated, creating an imbalance in bargaining power and driving up costs. A growing trend in vertical consolidation – when hospital/heath care systems purchase physician practices and other ancillary services – has resulted in increased costs, in part through the addition of facility fees for non-hospital-based services.
Policymakers are often pressured to protect their local hospitals and avoid the much-needed discussion of what is an adequate payment to sustain quality hospital care. The RAND study provides a great place to start that discussion and the first step is understanding just how Medicare sets its rates. The National Academy for State Health Policy (NASHP) offers this overview on Medicare rates and will soon release more tools to help states take on the important policy question of what is an appropriate hospital payment.
How Are Medicare Rates Calculated?
Since the passage of the Social Security Amendments Act of 1983 that created Medicare, the federal health insurance program covering 40 million older and/or disabled adults has primarily reimbursed providers through prospective fee-for-service (FFS) payments. Under the federal Prospective Payment System (PPS), Medicare reimburses each provider a predetermined amount for each service.
Medicare Advantage plans – established in 1997 as privately administered alternatives to traditional Medicare – are a notable exception from the standard FFS system. For these plans, the Centers for Medicare & Medicaid Services (CMS) pays a private health plan a prospective lump sum based on the number of beneficiaries enrolled in the plan. The health plan then uses these funds to reimburse providers and administer benefits to enrollees.
Medicare payments to some plans are negotiated from a benchmark based on a county’s per capita Medicare spending compared to the national average, as well as plan quality indicators. For other plans, the benchmark is a weighted average of the average county rate and the average health plan’s bid. CMS publishes the statutorily derived formulas for these payments.
Under the PPS for inpatient admissions, CMS bases the amount of reimbursement on a patient’s diagnosis-related group (DRG). Each patient’s case is assigned a different DRG code based largely on five main factors, including the type and severity of their illness. Generally, the more resources (e.g., medical supplies) required to treat a patient, the greater the reimbursement. This amount can vary based on local wages and cost of living, and additional payments are made to teaching hospitals and those that treat a high percentage of low-income patients.
Under the PPS for hospital outpatient services, payments are similarly based on resource costs and complexity. Additionally, hospitals can receive payments for using certain new drugs/devices, providing particularly costly services, or if the hospital is a cancer, children’s, and/or rural hospital. To determine these reimbursement rates, CMS receives recommendations from an advisory panel of 16 full-time hospital employees and outpatient PPS providers.
An important recurring factor in CMS’s payment methodology is its consideration of stakeholder recommendations. Under the Resource-Based Relative Value Scale (RBRVS) FFS payment system, CMS considers recommendations from a 31-member physician committee when quantifying the value of each service rendered, based on the following geographically adjusted costs:
- Physician work – the time, skill, and mental/physical effort required to perform the service
- Practice expense – the cost for the service to be rendered at the specific site of care
- Professional liability insurance – the amount a provider spends on malpractice insurance, based on claims data
The Medicare Payment Advisory Commission (MedPAC) – the independent 17-member Congressional advisory commission of health care delivery and finance experts – meets publicly with beneficiary advocates, researchers, and providers to consider their input before submitting an annual report to Congress detailing the payment adequacy in meeting patient care and provider cost needs, in addition to considering any inequities that may result from payments.
According to MedPAC’s March 2020 report, Medicare payments covered 8 percent more than hospitals’ allowed variable costs (costs that can change based on utilization of services), which allows for this additional percentage to contribute to coverage of fixed costs. This method provides incentive for hospitals to lower their costs and encourages them to treat Medicare beneficiaries, as an increase in the number of patients a hospital treats results in an increased contribution to fixed costs while covering variable costs.
Medicare payments are determined in part through these various stakeholder recommendations. However, this input is not the sole means by which Medicare rates are set. CMS also collects quantitative data through the Medicare cost report, which is the primary data collection to assess provider costs.
How Does CMS Collect Provider Cost Data?
The costs that a provider’s PPS reimbursement are based on are collected through a publicly available Medicare cost report (MCR). These annual reports, due five months after a fiscal year ends, are required from all Medicare-reimbursable facilities, including hospitals, skilled nursing homes, home health agencies, home offices, hospices, rural health clinics, federally qualified health centers, and comprehensive outpatient rehabilitation facilities.
Each report includes information on hospital revenues, capacity, discharge volume, charges, and operating costs. To ensure accuracy, an officer or administrator of the hospital must certify the reported data complies with relevant laws and regulations and that the MCR is a “true, correct, and complete statement.” These reports are the only national source for hospital operating costs reported in a uniform manner.
Critics argue that the definition of allowable costs under federal code 42 CFR 413.9(c)(3) is too narrow, classifying what some might say are appropriate costs as non-reimbursable. However, only operating costs related to patient care are reimbursable under the program. If operating costs include amounts for “luxury items or services” (more expensive than those generally considered necessary for the provision of needed health services), such amounts are not allowable.
Physician costs are often the largest “disallowed” appropriate costs, according to critics. However, while some of these costs are disallowed by Medicare through the inpatient/outpatient PPS, this is only because they are reimbursed through other payment methods. The MCR splits physician costs into three buckets:
- Non-reimbursable services: These services, of which research is the most common component, are disallowed as they do not provide patient care and are usually reimbursed by other funding.
- Professional services to individual patients: These costs are disallowed as professional service reimbursement is provided through other channels, such as RBRVS, Medicaid/Medicare fee schedules, and commercial network agreements, etc.
- General services that provide benefit to hospital patients: These costs are allowed and reimbursed under the MCR. General services may include emergency room, intensive care unit, and other areas of general care that are not reimbursed through another channel.
The transparency surrounding these allowed and disallowed costs enables states to use tools such as NASHP’s upcoming Hospital Cost Calculator, which utilizes data from MCRs to provide a comprehensive view of a hospital’s financial status. This can inform a state’s provider reimbursement negotiations and other cost-containment strategies.
Building on the Progress
Medicare rates are based on provider-attested costs while allowing for a transparent, standard payment system that can evolve. For example, the Medicare Access and Children’s Health Insurance Program Reauthorization Act of 2015 (MACRA) reformed Medicare to replace the population growth-rate based spending cap with two pathways – the Merit-based Incentive Payment System and the Advanced Alternative Payment Models – to base providers’ reimbursements on their performance against various quality and cost measures.
The methodology of Medicare rate determination is annually updated, geographically adjusted, and publicly available through the CMS website that also publishes a complete listing of fees used to pay providers/medical equipment suppliers and a regularly updated tool that allows users to estimate PPS payments based on claims data and provider cost reports.
Multiple stakeholder groups have helped Medicare, the largest health care purchaser in the country, promote equity and transparency in covering nearly every service and paying for health system costs rather than charges.
A hospital does not have to abide by any formula or legal requirement for setting its charges nor does it have to disclose mark-ups on hospital-purchased services or medical supplies, and it may change them at any time. As a result, chargemaster rates (what hospitals list as prices for their services) present an inaccurate benchmark for assessing costs and negotiating reimbursements between commercial payers and providers, resulting in costly bills for patients.
However, when the transparent and standardized Medicare rates are used as the benchmark, states can achieve savings while still covering providers’ costs and they can better explore innovative strategies to improve health care affordability.
Delayed Rule Sets 2021 Playbook for Health Insurers and Insurance Marketplaces
The Department of Health and Human Services (HHS) has issued the final Notice of Benefit and Payment Parameters (NBPP) for 2021 — the annual rule governing health insurance plans and health insurance marketplaces. While the final rule contains several changes, it does not significantly alter automatic re-enrollment for individuals who purchase through the health insurance marketplaces, which the federal government had proposed earlier this year.
The annual NBPP is of particular importance to insurers, insurance regulators, and marketplace officials who rely on the rule and its regulations to set the playbook by which health plans will be required to operate in the following year. The rule also sets requirements for system changes that marketplaces may have to implement as soon as the upcoming enrollment season.
The annual rule was issued May 7, 2020, the latest date that this annual rule has ever been released. As a result, the final regulations come very close to – or for some states after – the filing deadlines by which health insurers must submit their planned offerings for 2021. The delay caused health insurers to develop plans while operating under a level of uncertainty of what might be included in the final rule. Once released, insurers had little, if any, time to adjust their proposed filings in accordance with the changes finalized by the regulation.
Acknowledging the tight timeframe for implementing changes before the 2021 plan year, HHS delayed implementation of several of the requirements imposed under this rule until 2022 – including new requirements for medical loss ratio (MLR) calculations and changes to policies related to special enrollment periods (SEPs).
Delayed implementation of changes and deadlines required of insurers and insurance marketplaces is especially pertinent as markets face ongoing uncertainty resulting from the COVID-19 pandemic. As the country works to curb the spread of the disease, many questions remain about the pandemic’s long-term effects on insurance markets.
- How will consumers who lose employer-sponsored coverage and transition to individual plans affect the commercial insurance market?
- What will be the financial impacts of COVID-19 related treatments, including a possible vaccine?
- What will be the cost of consumers’ delaying or foregoing care?
- How will greater utilization of telehealth services impact costs?
Meanwhile, the health insurance marketplaces are operating in a new environment with increased enrollment of new consumers, all while modifying their operations, which include marketing and outreach strategies that comply with enhanced social distancing standards.
Major changes included in the rule are summarized below.
Annual reporting of state-mandated benefits. Federal law requires that health insurance plans sold in the individual and small group markets cover essential health benefits (EHB) and 10 broad health benefit categories, including hospitalizations, emergency services, and prescription drugs. States may impose benefits requirements in addition to the federal EHB requirement. Typically, benefit mandates lead to increased costs for health insurance. To insulate the federal government from increased expenditures on health insurance subsidies, which are calculated based on the cost of insurance premiums, states must defray the cost of any state-mandated benefits issued after Dec. 31, 2011, either by issuing payments to enrollees or insurers to cover the cost of these mandates. State-mandated benefits are also not allowed to be considered as part of federal advance premium tax credit (APTC) calculations or as part of cost-sharing limitations imposed on qualified health plans (QHPs).
Citing concerns that states may not be defraying the costs of state-requirement benefits, beginning in July 2021, states will be required to submit an annual report on state-mandated benefits outside of EHB. In the first year, states are required to include a comprehensive list of all state benefit requirements for QHPs sold in in their individual and small group markets. This will set a baseline – going forward states will only be required to submit an update to the report to include any new, amended, or repealed benefits. If no changes are made during a given year, a state may submit the same report. The report must accurately report information available within 60 days prior to the annual submission deadline. The rule also clarifies that insurers may refer to states to produce any cost analysis associated with additional benefits, rather than perform the calculations themselves.
The new requirement comes despite a majority of comments opposed to increased reporting, noting a lack of evidence that states were not in compliance with defrayal requirements and that such a requirement would be onerous and duplicative of processes already in place to assess the effects of state-mandated benefits. HHS asserts the reporting requirement should be complimentary to work already being conducted by states to assess these benefits and will help promote a uniform approach to assuring compliance with federal requirements across all states. The rule also stipulates that HHS will be providing additional technical assistance to states to address concerns over the lack of clarity about defrayal processes and identification of state-benefits that fall outside of EHBs.
Consideration of pharmacy price concessions and wellness incentives in medical loss ratio (MLR) calculations. Beginning in 2022, insurers will be required to deduct prescription drug price concessions from incurred claims considered as part of MLR calculations. Such concessions may include drug rebates or incentive payments given directly to insurers as well as those secured and retained by entities providing pharmacy benefit management (PBM) services or PBM-like entities. This is a change from previous requirements that only mandated inclusion of concessions received directly by an insurer and aligns with MLR policies already in place under Medicare and Medicaid. The change intends to even the playing field between insurers with PBM contracts and promote a uniform standard for what factors are considered when performing MLR calculations. HHS is considering additional rulemaking to provide precise definitions for prescription drug rebates and price concessions in advance of implementation of the new requirement.
HHS has also finalized changes that individual market insurers may include the cost of certain wellness incentives as quality improvement activities (QIA), which are considered medical care for the purposes of MLR calculations. Wellness incentives include rebates, discounts, waivers of cost-sharing, or other incentives provided as part of participation in a wellness program. This change conforms with how MLR calculations are assessed in the group market.
Inclusion of drug rebates into cost-sharing calculations. The rule permits, but does not require, insurers to count direct support offered by drug manufacturers (e.g., drug rebates, coupons) toward calculation of an enrollee’s cost-sharing responsibility. The rule clarifies that neither HHS nor the departments of Labor or Treasury will take enforcement action against insurers who exclude the value of direct support from cost sharing, even in cases where supports may incentivize take-up of brand-name drugs when generic alternatives area available.
HHS notes advantages to policies that include rebates as part of calculations (e.g., cost protections for consumers who use/need brand-name drugs) as well as policies that mandate exclusion of rebates (e.g., to incentivize use of generics where available). Application of the rule ultimately defers to state law and any restrictions states may impose on how direct supports are included in cost-sharing calculations. Insurers must apply their policies on direct support uniformly across all QHPs. HHS expects that issuers “prominently include” information on websites and other educational collateral explaining how drug manufacturer rebates are included in cost-sharing calculations.
Greater flexibility on plan selection available during a special enrollment period (SEP). Current rules maintain tight restrictions on the types of plans enrollees may select if enrolling during a SEP; usually requiring that consumers enroll in a plan at the same metal tier (of the same value) as previously held coverage. This is to ensure that consumers do not take advantage of SEPs to enroll in more generous plans because of an emerging health care need, as well as to provide greater consistency for insurers operating in the market. However, in a case where a SEP is triggered by an increase in income, the income change may render a consumer ineligible for cost-sharing reductions (CSRs), an additional subsidy given to individuals earning between 100nto 250 percent of the federal poverty level to cover out-of-pocket costs of care.
Loss of CSR eligibility may significantly alter affordability of certain health plans for a consumer. To account for this change, beginning with plan year 2022, consumers who lose CSR eligibility may enroll in a plan at a different metal level. The rule also allows consumers who are newly eligible for coverage to enroll in the same QHP as any dependents who are currently enrolled in QHP coverage through a health insurance marketplace.
Expedited effective dates for coverage obtained during a SEP. Current enrollment policies can lead to significant delays in effectuation of health insurance coverage. For instance, enrollees who enroll in coverage from the day 16 through 31 of any given month typically would not start coverage until the first of the month subsequent to the month that immediately follows their enrollment (e.g., if a person enrolled on June 16, coverage would not begin until Aug. 1).
Recognizing advancements in the time it takes issuers to process enrollments, in plan year 2022 insurers participating in the federally-facilitated marketplace (FFM) will be effectuating coverage on the first of the month following enrollment, regardless of the date the individual enrolled. State that operate their own marketplaces (SBMs) have flexibility to impose their own guidelines on effectuation dates – several have already accelerated the timeline for their issuers.
Limited flexibility for consumers eligible for retroactive coverage. A consumer may be incorrectly determined ineligible for coverage, in which case they can appeal the coverage decision. In some of these cases, the person may ultimately be eligible for coverage retroactive to a certain point before a determination of the eligibility was finalized.
Earlier rules had given consumers some flexibility over the start date at which consumers could retroactively elect coverage – which gave consumers some options in case they were in need of retroactive coverage, yet had concerns about paying premiums owed to cover all the months of retroactive coverage. The new rule eliminates this flexibility, and requires consumers to either begin their coverage retroactive to the entire period for which they should have been eligible for coverage or to begin coverage prospectively. The change is expected to have minimal effect as less than .05 percent of consumers with verification issues opted for retroactive coverage in 2018 and 2019.
SEP timeframe for Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Current rules allow that consumers may qualify for an SEP upon becoming newly eligible for a QSEHRA, a type of health reimbursement arrangement (HRA) whereby employees can use the funds in the HRA to purchase health coverage sold through the health insurance marketplaces (for more information on QSEHRAs, read New Federal Health Reimbursement Proposal Adds New Variables to State Health Insurance Markets). The rule clarifies that the SEP applies even in cases where the QSEHRA’s plan year does follow the calendar year, the typical standard for the coverage year.
Maintains FFM user fee. Health insurers will be assessed at a rate of 3 percent to participate on the FFM, also known as healthcare.gov. For states that use a hybrid marketplace model, known as state-based marketplaces on the federal platform (SBM-FPs), HHS will retain 2.5 percent with 0.5 percent available to states to perform functions related to outreach, marketing, and plan management. Thirty-two states used the FFM in 2020, while six were SBM-FPs. (For more on health insurance marketplace models read Where States Stand on Exchanges.)
Eases process for coverage terminations and verifications. Consumers who are eligible for Minimum Essential Coverage (MEC), including most employer-sponsored coverage, Medicare, and Medicaid – are not eligible to receive federal subsidies to purchase coverage through the health insurance marketplaces. In the case where a marketplace determined that a person was dually enrolled in an exchange plan and MEC, a marketplace was required to redetermine the enrollee’s eligibility for subsidies before terminating that person’s coverage. This rule eliminates the requirement that marketplaces re-determine eligibility before termination, so long as the enrollee has opted in to be automatically terminated from coverage in this circumstance.
The rule clarifies that coverage terminations will be processed retroactive to the date of death in the case of an enrollee who has expired. The rule also clarifies that termination initiated by an enrollee will be effective retroactive to the date that the enrollee first attempted to end coverage, though SBMs are granted flexibility in how to apply this policy.
Finally, currently marketplaces must verify whether consumers are eligible for qualifying employer-coverage as part of determining whether consumers are eligible for marketplace subsidies. In some cases, insufficient data is available to perform this function, in which case marketplaces may use random sampling to verify eligibility. Due to limitations in sampling processes, including availability of adequate data, HHS is continuing its current policy to not enforce action against states that do not conduct random sampling.
Customization of QHP Quality Rating System (QRS) Display. Health insurance marketplaces are required to display quality ratings for insurance plans on their websites. The quality ratings are determined based on the federal QRS, which sets universal standards for the quality of health plans sold across all states. While the rule maintains federal governance over the QRS, it does grant SBM states flexibility in how they choose to display quality data. For example, SBMs may opt to include state-specific information related to quality in addition to QRS data.
Encouraging value-based insurance design. The rule does not explicitly mandate or incentivize adoption of value-based strategies, but does encourage insurer adoption of value-based insurance design principles consistent with policies supported by the University of Michigan Center for Value-Based Insurance Design, including benefit models that offer high-value services to consumers with little to no cost-sharing.
Adjusts factors used for risk adjustment calculations. Under the federal risk adjustment program, the federal government redistributes funds between health insurers that take on lower-risk enrollees, to those with a higher risk mix. Calculations are based on a complicated formula that computes risk based on various disease categories known as Hierarchical Condition Categories (HCCs). The rule updates the HCCs to conform with updated codes used to categorize diseases (a shift from ICD-9 to ICD-10 codes for disease classification). Other changes include a recalibration of how hepatitis C treatments factor into risk calculations and inclusion of pre-exposure prophylaxis (PReP), an HIV-prevention drug, as a preventative service. Collectively, these changes intend to ensure that risk adjustment calculations more accurately reflect current medical diagnoses and practices to ensure better assessment of risk taken on by insurers. The impact of these changes will vary by insurer and enrollee population.
Maryland Passes Nation’s First Prescription Drug Affordability Board Legislation
On April 8, 2019, the Maryland General Assembly passed legislation that which would create the first state Prescription Drug Affordability Board (PDAB) to address the costs of certain high-priced drugs in Maryland. Gov. Larry Hogan has until May 31, 2019, to sign or veto the bill. If he signs the bill or does nothing, the measure will take effect on July 1, 2019.
This effort, initiated during last year’s legislative session, began with the introduction of the National Academy for State Health Policy’s Drug Affordability Review Board Model Legislation. The concept is akin to states’ regulation of consumer payment rates for essential services, such as clean drinking water, safe and consistent electricity, and public transportation. Like prescription drugs, these services are necessary for a safe and healthy life. States act to ensure that these necessary services are affordable to the public without regard to the actual dollar value of their importance to modern life. A prescription drug affordability board looks at valuable drugs and determines at what cost they are affordable – at what cost will everyone who needs the drug be able to afford the drug.
The Maryland legislation that passed is a notable step towards establishing a board that could make informed recommendations to state leadership on future action Maryland may take to address prescription drug costs, even though it represents compromises resulting in changes to the original proposal. As many know, this is how the legislative process typically works. The legislation does create the new Maryland PDAB, which must report to a committee of key legislative leaders for the first several years to get approval to move forward with key phases of its work. The timeline for Maryland’s PDAB activity is as follows:
July 1, 2019: The PDAB is established using state general funds and begins its work.
On or before Dec. 31, 2020, the board must:
- Study the entire pharmaceutical distribution and payment system, as well as policy options used by other states and countries to lower the list price of pharmaceuticals, including:
- Setting upper payment limits;
- Using a reverse auction marketplace; and
- Bulk purchasing of drugs.
Submit findings and make recommendations, as well as provide any legislative language that may be necessary to implement its recommendations, to the state’s Senate Finance and House Health and Government Operations Committees.
- Identify circumstances under which the cost of a prescription drug product may create or has create affordability challenges for the state health care system and patients.
- Promulgate regulations that specify data sources the PDAB will use for its work, including establishing memoranda of understanding (MOU) with states that currently collect data from drug manufacturers and the rest of supply chain, insurers, and PBMs.
- Identify drugs that create affordability challenges in the state by applying the established criteria and deciding whether to do a full review of any of those drugs.
- Produce annual reports for House and Senate committees on drug price trends, the number of drugs subject to PDAB review, and any additional legislation that might be needed to facilitate drug cost containment.
- Make a recommendation for a funding source to sustain the board.
On or before July 1, 2021: If the work of the PDAB in 2020 results in a recommendation that the state pursue imposing upper payment limits to make drugs affordable, the board is required to draft and submit a plan of action to implement upper payment limits for state, local, and county government payers and purchasers to the Legislative Policy Committee of the General Assembly.
On or after Jan. 1, 2022: If the plan of action for upper payment limits is approved, the board may begin to set upper payment limits or establish other approaches to constrain costs of prescription drug products purchased or paid for by state, county, and local governments, including state hospitals, government employee plans, corrections, and Medicaid, etc. The board must also study the impact on availability of drugs subject to the upper payment limit.
On or before Dec. 1, 2023: If the plan of action for upper payment limits was implemented for the drugs purchased or paid for the state, local, and county governments, the board must report to the Assembly its recommendations regarding whether the board’s authority to set upper payment limits should be expanded statewide to all purchases and payer reimbursements.
The legislation also includes appeal and judicial rights for anyone aggrieved by a decision of the PDAB.
One reason for the phase-in of board authority starting with government drug purchases and payments was the concern in Maryland about a possible constitutional challenge after the federal Fourth Circuit Court of Appeals ruled that the state’s 2017 anti-price-gouging drug legislation (HB 631) violated the Dormant Commerce Clause (DCC) of the US Constitution. Although the PDAB is designed specifically to prevail in a DCC challenge, the issue resurfaced during Maryland’s legislative session when the US Supreme Court declined to take up the 2017 case. There are a number of reasons the Supreme Court might not take up a case – including if there is no conflict in opinions among the federal Circuits Courts (which was the situation with anti-price-gouging law, there was only one case and one decision). NASHP and Maryland have documentation and legal analysis of why a PDAB with upper payment limit authority does not violate the DCC.
There may be an advantage to being the first state pursuing an upper payment limit for costly drugs to do so in a phased approach. Maryland’s board will build its analytic capacity to determine the benefit and calculation of the upper payment limit for certain drugs, which is important. The board can apply the process of determining if a specific drug should be reviewed for affordability and then determine whether or not the drug should be subject to a upper payment level and what it should be – even if there is not authority to apply the limit statewide during the first few years.
Using upper payment limits with government-purchased drugs before expanding to all payers may be an appropriate way to pilot the approach in Maryland. However, establishing a PDAB with limited authority and requiring state leadership approval to advance the primary mission of the board is a risk. Another phase-in approach discussed in Maryland before the DCC concerns were raised was to limit PDAB authority to set upper payment limits to a specific number of drugs.
NASHP Note: NASHP will closely follow Maryland’s experience in establishing the PDAB and will receive continued support from the state’s leadership for its mission to implement mechanisms to ensure necessary prescriptions are affordable. For more information, explore NASHP’s Center for Rx Drug Pricing.
Twenty-Eight States Passed 45 Bills to Curb Rising Rx Drug Costs in the Short 2018 Legislative Session
*Updated Oct. 15, 2018
Despite a short legislative season, state lawmakers across the country introduced an unprecedented 174 bills to stem the rising cost of prescription drugs and have enacted 45 into law — with seven state legislatures still in session. Last year, state legislatures introduced 100 Rx cost control bills and passed 27.
Register Now to Attend NASHP’s Summit to Lower Rx Drug Prices
To learn more about state efforts to curb Rx drug costs, attend NASHP’s annual conference, Aug. 15-18, 2018 in Jacksonville, FL, and attend the Summit on State Strategies and Tactics to Lower Rx Prices, for state officials only.
Registration is still open for state officials who wish to attend.
To learn more about state efforts to curb Rx drug costs, attend NASHP’s annual conference, Aug. 15-18, 2018 in Jacksonville, FL, and attend the Summit on State Strategies and Tactics to Lower Rx Prices, for state officials only.
Registration is still open for state officials who wish to attend.
States are pursuing a range of strategies to tackle drug costs and below is a summary of their 2018 action to date.
Pharmacy Benefit Managers (PBMs)
Last year, a handful of states passed PBM bills, including Nevada’s Chapter 592, that defined new standards for PBM business practices. These laws addressed their fiduciary responsibilities and banned PBM gag clauses that prevent pharmacists from sharing lower cost drug options with consumers. This year, 36 states drafted PBM legislation and 31 were enacted. These new generation of PBM bills included requirements for more drug cost transparency and disclosure, as well as increased regulation and licensure requirements. For example, Tennessee enacted H.B. 1857 that requires PBMs to obtain a license to operate from the state’s Department of Commerce and Insurance.
Many state legislatures also sought to improve consumer protections by removing gag clauses in contracts between PBMs and pharmacies and pharmacists. Mississippi enacted H.B. 709 to prevent a PBM from prohibiting or penalizing a pharmacy or pharmacist from informing a patient of a lower cost treatment or payment option, including simply paying cash for the drug. Colorado’s H.B. 1284 goes further by banning gag clauses completely and prohibiting PBMs from charging a copayment that exceeds the total charges submitted by the network pharmacy.
Wholesale Drug Importation from Canada
In 2018, eight states introduced wholesale drug importation legislation and Vermont became the first state in the nation to enact a law authorizing wholesale drug purchasing from Canada. The first wholesale importation bill to gain traction occurred last year when Utah’s legislature considered H.B. 163, which would have created a program and reporting requirements for safely importing certain prescription drugs at lower costs from Canada. Despite passing the House, the bill fell short of the necessary votes in the Senate. However, the bill did gain bi-partisan interest and as a result, legislative leadership requested a study from the Utah Department of Health on how to make drug importation work for the state in advance of the next legislative session.
Vermont passed S175 and has become the first state to enact a wholesale prescription drug importation program to purchase some lower-cost prescription drugs from Canada to benefit all Vermont residents. Vermont’s new law is carefully crafted to meet federal requirements by establishing checks and balances to guarantee it meets the federally mandated cost savings and drug safety requirements. Before the state can implement its importation program, Vermont’s Agency for Human Services must seek approval to do so from the US Secretary of Health and Human Services. The state is currently developing its program and will construct a proposal for federal approval.
Transparency
Twenty-six bills were introduced in 2018 to make prescription drug pricing more transparent and five became law in 2018. Examples include Oregon’s H.B. 4005 and Connecticut’s H.B. 5384, both of which require drug manufacturers to provide additional data justifying price increases over specified thresholds. (Click here for NASHP’s national chart comparing states’ reporting requirements for state transparency laws.) While mandating transparency is a first legislative step to understanding drug pricing , by itself it does little to control prices. NASHP is working with states that enacted transparency laws in 2017 and 2018 to encourage cross-state collaboration and action.
Anti-Price-Gouging and Rate-Setting Legislation
Transparency helps states understand how the pharmaceutical industry sets prices, but anti-price-gouging and rate-setting legislation are two strategies states are exploring to make information gleaned from transparency laws useful in efforts to protect consumers from excessive price increases imposed by pharmaceutical manufacturers. Maryland enacted the nation’s first anti-price-gouging law designed to address excessive price increases and give the state the power to seek civil penalties and fines for unconscionable increases. Though the pharmaceutical industry has challenged Maryland’s law in federal court, across the country states introduced 13 anti-price-gouging bills. Despite strong support, no other state has passed an anti-price-gouging bill to date. Illinois’s version, H.B. 4900, did pass in its House of Representatives, and as of Oct. 15, 2018, the New Jersey state legislation was still considering its anti-price-gouging bill.
A bill in New Jersey was still under consideration as of October 15, 2018.
NASHP’s Rate-Setting Model Legislation goes beyond transparency and anti-price-gouging laws to protect payers from high drug costs by limiting how much payers can pay for a drug. Similar to a public utility commission or hospital rate-setting, a state can establish a payment rate for certain high-cost drugs and require all payers to pay no more than that ceiling. Minnesota and Maryland proposed rate-setting bills this session but were unable to enact them into law. A bill in New Jersey was still under consideration as of July 24, 2018.
NASHP tracks state legislative and executive branch efforts to control prescription drug prices and spending and will continue to develop resources to help states curb rising prescription drug costs. To get a complete overview of newly-enacted laws, visit NASHP’s Center for Rx Drug Pricing website.
An Interview with Drug Cost Control Advocate Richard Gottfried
New York State Assembly Health Committee Chair Richard N. Gottfried
At NASHP’s 30th State Health Policy Conference, state leaders from legislative and executive branches across the nation gathered to talk about what they are doing to manage escalating prescription drug costs in their states. Several states have recently passed or proposed legislation to force more transparency in drug pricing or to try to regulate drug costs.
Richard N. Gottfried, a long-time proponent of drug cost regulation and member of NASHP’s Pharmacy Costs Work Group, took time at the conference to answer questions about the growing number of state legislative initiatives to rein in drug costs. Gottfried of Manhattan was first elected to the NY State Assembly in 1970, and has chaired the Assembly’s Health Committee since 1987, working to expand publicly-funded health coverage and protect patient autonomy. He also serves on NASHP’s Health Care Access and Financing Committee.
How did you get involved in drug cost regulation?
If you’re involved in health policy as I am, you cannot do this work without confronting drug prices. For many years, my own thinking has been heavily shaped by what I’ve learned meeting with people from other states who were working to control drug costs. We need to learn from each other — none of us was born understanding the pharmacy industry.
Is controlling drug prices a liberal, blue state initiative?
It’s easy to be distracted by the fact that Vermont, Oregon, and California are in the lead on some of these issues, but on the other hand, Nevada recently passed drug cost control legislation and there are proposals to control drug prices in Utah and Oklahoma.
It’s really a question of whether you are fed up with the impact of drug prices on consumers and tax payers and employers and are determined to do something about it. There may be some degree of red or blue difference in how it’s done, but certainly there are people on both sides of the aisle working aggressively on this issue. The legislation we’ve been talking about in almost every case has passed with strong bipartisan majorities.
What’s the most significant thing that has happened this year?
There is a growing understanding that state governments are not powerless here, there are things individual states can do to protect their people. This is a long-standing principle of American government, whether it’s about abolition of slavery or women’s right to vote or child labor laws, some of the most important political developments in our government began at the state level.
What do you hope will occur in the next year in terms of drug cost legislation?
I think we’ll see a lot more states sharing ideas and developing new bills to regulate drug prices and getting them enacted. I often say we state lawmakers are in one of the few lines of work where plagiarism is encouraged, and a large part of NASHP’s job is to help states learn about what other approaches states are developing and spreading that information across the country.
Should drug companies be viewed and regulated like public utilities?
I’m not sure Americans are ready to go that far, but the problem is so severe and there’s so much bad behavior in the marketplace that people are fed up and want their elected government to do something for them.
What are the obstacles state lawmakers face in implementing drug regulation?
It’s the political power of drug companies, all the articles you read about how complicated drug pricing and marketing is, the fear raised by drug company propaganda that you will be depriving people from life-saving medication, and the feeling that this is too big for a state to tackle. All of those things are more mental obstacles than real ones. Unions and consumers and hospitals and doctors and employers who pay for most of our health coverage are also pretty powerful.
What would you tell state lawmakers who want to take some action to control drug prices?
It’s complicated, but that just means you have to pay attention and learn and stick to it
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