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How Does New York's New Prescription Drug Spending Cap Work?

State Medicaid director Jason Helgerson, left, and Dr. Howard Zucker, commissioner for the New York State Department of Health, listen to a question during a joint legislative budget hearing on health and Medicaid on Monday, Jan. 25, 2016, in Albany, N.Y. (AP Photo/Mike Groll)

New York has a new plan to control the prices of prescription drugs under its Medicaid program. Medicaid is a government-funded health insurance plan for people who elderly, disabled, children or poor adults.

New York generally covers the cost of drugs under Medicaid, but prices have been rising, lately

"There really has been, in recent years, a number of pretty egregious examples of manufacturers attempting to generate windfall profits out of really high drug prices," said Jason Helgerson, New York’s Medicaid Director. "We really, sort of, struggled, along with states all across the country, to try to reign in some of those bad practices."

New York already limits how much it spends for all services under Medicaid. The limit goes up each year, but Helgerson said any new spending is largely eaten up by galloping drug costs. 

To counter that, the state is specifically capping how much the Medicaid program can increase spending on prescription drugs each year. The drug spending limit is based - in part - on the medical portion of the Consumer Price Index, a measure of inflation. Medical CPI, plus five percent, equals the state's limit on prescription drug spending under Medicaid. At the moment, the limit would be between eight and nine percent spending growth.

If the state is projected to go over that limit, Helgerson said the new law gives New York "enhanced powers" to negotiate with drug companies. 

How the negotiation works

The negotiation has a few steps.

First, the state will look at which drugs are driving the spending and simply ask for a discount.

If the company doesn’t give a discount, Helgerson said a state panel, the Drug Utilization Review Board (DURB), will review the drug and name a rebate amount that the company should give the Medicaid program.

If that doesn’t work, the state could classify the drug as "non-preferred" for fee-for-service patients (commonly called "straight Medicaid") and "non-covered" for Medicaid Managed Care (MMC) patients.

The MMC company can make its own decision about what drugs are covered, but the NYS Department of Health said in an email that the state "would adjust their managed care rates" if an MMC company were to pay the original price for a prescription drug that had been subject to the state's review. Consequently, the MMC company would have a financial reason to adjust to what the state wants.

Patients will continue to have the ability to appeal such decisions. 

Which drugs will this affect?

Helgerson said the cap on the growth in drug spending will only affect a small percentage of drugs.

"Usually what happens is, you have a manufacturer who has a patent for a drug, meaning they’re the only ones who make it. They have a period of time where [because] it’s the only drug on the market, the only game in town, they have an ability to set the price," he said. "Some manufacturers - not all - have used that window of opportunity to really drive up prices."

There has also been increased attention on generic drug makers for price gouging.

The risks

Might a company say, 'okay, you’re trying to set my price, so I’ll pack up and leave?' 

Helgerson doesn't think it's likely. He said, over the years, that's been in a concern, but "that fear has not ever presented itself."

He pointed to the sheer size of New York State's Medicaid program as a protection against companies protesting the law by pulling out. There are just too many customers in New York to walk away from it.

So, if drug companies stay, might they try to make up for lower Medicaid payouts by raising prices on people with employer-based insurance?

Here's what Helgerson said about the DURB process:

"That process will be a public process. So other payers, other purchasers, other insurance companies, will be able to see exactly what it is we’ve done, they’ll be able to see the drugs that we’ve identified."

In other words, private insurance companies can see what kind of deal the state gets from the drug companies and use that information in their own negotiations.