Over $250 Million in Medicaid Savings for the Taking
Business + Economy

Over $250 Million in Medicaid Savings for the Taking

A simple switch to generics could save a bundle

Cash-strapped state officials might want to take a second look at how the 45 million people who receive health care through Medicaid purchase prescription drugs. A new study from the American Enterprise Institute suggests many patients are still using pricey brand-name drugs long after comparable generics become available.

The study, which looked at only 20 brand-name pharmaceuticals with generic alternatives, identified more than a quarter-billion dollars in potential savings if all Medicaid patients switched. Those 20 drugs accounted for $1.76 billion of the $21.8 billion that Medicaid spent on drugs in 2009.

The study found the two top underutilized generics were the anti-seizure drug lamotrigine (brand name Lamictal sold by GlaxoSmithKline and the anti-schizophrenia drug risperidone (brand here Risperdal sold by Johnson & Johnson’s Ortho-McNeil-Janssen unit). Overspending on the two branded products, which are frequently prescribed for poor patients for indications not approved by the Food and Drug Administration, totaled nearly $100 million a year.  

It’s not like state Medicaid programs ignore the opportunity to switch poor patients to generics after they come on the market. The average rate of substitution for the 20 drugs was 87 percent. But nine of the 20 drugs had substitution rates below 80 percent. They tended to be the ones where generics had only become available in the past 24 months.

The stakes in more rapid substitution will grow exponentially in the next few years as some of the biggest selling drugs on the market come off patent. Lipitor, the best-selling cholesterol-lowering drug with over $11 billion in annual sales in 2009, loses its patent protection in 2011.

Other big sellers losing patent protection include the allergy pill Singulair in 2012; the anemia drug Aranesp in 2014; and the heartburn drug Nexium in 2014. A recent Bernstein Research report said 18 of the 20 best-selling drugs in the world will lose patent protection in the next five years. With few new blockbusters coming through the drug industry’s research-and-development pipeline, big pharmaceutical firms are likely to ramp up their marketing efforts to keep patients from switching to cheaper alternatives after the generics become available.  

“There’s a ton of brand name products coming off patent in the next few years and a ton more people coming into Medicaid [because of health care reform],” said Alex Brill, a research fellow at AEI who conducted the study. “If states don’t figure out strategies to address this issue, the current level of substitution will seem like the good old days.”

One government program that is benefiting from switching to cheaper generics is the President’s Emergency Plan for AIDS Relief (PEPFAR). Launched in 2003 by President George W. Bush, the program will spend over $5 billion in 16 developing countries, 13 in sub-Saharan Africa, for the prevention and treatment of HIV/AIDS.

Drugs are only a small portion of the program. But spending on medicines for AIDS patients in those countries grew from $117 million to $202 million between 2005 and 2008, according to a new study that appeared last week in the Journal of the American Medical Association.

However, the number of monthly treatment packs (treating AIDS requires a combination of three drugs) nearly quadrupled, from 6.2 million to 22.1 million. The U.S. now buys drugs for about half the estimated 5 million people receiving treatment for AIDS in poor countries.

“The bulk of the purchasing we’re doing now is through Indian generic manufacturers,” said Charles B. Holmes, the chief medical officer for PEPFAR. Even though the dozen companies, nine of them from India, that sell to the program do not sell their drugs in the U.S., they have received FDA certification under a special program set up to ensure that drugs purchased with U.S. taxpayer dollars have the same level of purity and efficacy as generics sold in the U.S. The FDA has approved over 100 drugs for treating HIV/AIDS under the program.

“Generic prices for (AIDS drugs) are continuing to fall,” Holmes said. “In 2005, generics were 28 percent less expensive than their branded equivalent. In 2008, for those same drugs, the generics were 50 percent less than the updated branded price. That demonstrated the gap is growing between generic prices and branded prices.”