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How States Helped Lower Prescription Drug Costs

The sweeping federal bill aimed at cutting drug costs follows years of action at the state level

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Congress’ passage of a sweeping bill that will help millions of Medicare enrollees better afford life-sustaining medications was fueled by a blizzard of recent legislation to make prescription drugs more affordable at the state level. State lawmakers have introduced hundreds of bills aimed at lowering prescription drug costs in the past five years, with more than 230 measures enacted across all 50 states.

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The Inflation Reduction Act of 2022 will allow Medicare to negotiate prices of some high-cost drugs for the first time, put an annual limit on Medicare Part D beneficiaries’ out-of-pocket costs and impose tax penalties on drugmakers that increase prices more than the rate of inflation, among other things.

The move follows decades of advocacy for drug affordability by AARP and others, which until recently yielded progress mostly at the state level. “States are the laboratories of democracy,” says Jonathan Bartholomew, a government affairs director at AARP. “They’ve come up with really creative ideas to dissect, legislate and regulate this complicated and confusing marketplace, and I think that progress has really helped build federal momentum around this issue.”

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Though states are restricted by federal law in how far they can go in directly reducing drug prices, they’ve worked to improve transparency around drug pricing, cap costs for consumers, bolster their drug-purchasing power and more. And collectively, they’ve spotlighted drug affordability as a national issue that calls for federal solutions.

Here are some key state initiatives that advanced prescription drug affordability in recent years.

Increasing price transparency

For states to pinpoint what’s driving price hikes in prescription drugs, it helps to have access to pricing data across a drug’s often long and convoluted supply chain. It’s why 14 states have passed drug price transparency laws that order manufacturers, wholesalers, pharmacy benefit managers (PBMs), insurers and others to share cost information.

What pharmaceutical companies must report about their products differs between states, but common requirements include advance notice and justification of the initial price of a drug and when prices increase above certain thresholds; summaries of the state’s most prescribed and costly drugs; and rebate and reimbursement amounts for PBMs, which health insurers use to manage their prescription drug benefits.

Most of the data collected is made public, which can help doctors, consumers and other health care stakeholders. Advance notice of price hikes gives doctors and patients time to analyze patient care plans and adjust as necessary. Summaries of the most prescribed and costly drugs can show state officials where to focus reforms.

“Any transparency measures that help people understand how this complicated pricing system is working are good,” Bartholomew says. “They’re a first step towards a fix.”

The reporting requirements may have also deterred certain types of price increases. Vermont, which passed the nation’s first drug price transparency law in 2016, reported an almost 80 percent decline in the number of drugs that saw prices increases of 15 percent or more for its Medicaid program between 2016 and 2020. And Oregon’s transparency program found 70 percent fewer reports of price increases over its threshold, which was 10 percent or more for drugs priced at $100 or more, between 2019 — the program’s first year — and 2020.

During that same time frame, Oregon saw a 15 percent increase in the number of drugs hitting its initial price threshold of $670 or more for a 30-day supply. Without the transparency law, that trend may have gone undetected.

Establishing affordability boards

Six states — Colorado, Maine, Maryland, New Hampshire, Oregon and Washington — have enacted laws establishing prescription drug affordability boards. They’re tasked with reviewing the cost of prescription drugs and making recommendations on what to do about drugs deemed unaffordable. The boards often build on a state’s drug transparency laws, using data produced by those laws to conduct their reviews.

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The authority of each board differs, with only Washington and Colorado authorized to set upper payment limits for the state, which are caps on what distributors, pharmacies, hospitals, insurers and consumers pay for certain drugs. Maryland’s board is seeking legislative approval to do so. Although states don’t have the authority to directly set lower drug prices, they can limit what various stakeholders in the state may pay for certain drugs.

Affordability boards with the authority to establish such upper payment limits are “the most promising tool the states have right now to actually bring down drug spending,” says Jennifer Reck, project director of the National Academy for State Health Policy’s Center for State Prescription Drug Pricing. But she says that getting more states to adopt them is “a longer-term effort.”

Caps on out-of-pocket costs

Roughly 20 states have enacted laws capping consumer out-of-pocket costs for insulin. Over a million diabetics who required daily insulin injections faced “catastrophic” levels of spending for the drug in 2017 and 2018, according to new research by Yale University. That means they spent at least 40 percent of their remaining income, after paying for food and housing, on the essential drug.

Insulin price caps vary among states — some cap copays at or below $35 per month, while others have caps in excess of $100 per month. Some states have also introduced out-of-pocket caps on other specialty drugs, such as those used to treat rheumatoid arthritis, hepatitis C, multiple sclerosis, HIV and AIDS.

These caps reduce costs for consumers struggling to afford their medication, but they’re not addressing the burden of rising drug costs for the state health care system as a whole, Reck says. Still, she says they’re an essential tool for improving access to medications in the short term: “Passing some quicker, easier-to-implement stopgap measures can bring some immediate consumer relief while [states] work on broader initiatives, like upper payment limits through prescription drug affordability boards.”

Earlier versions of the Inflation Reduction Act included a provision to cap monthly insulin costs at $35 for both Medicare and privately insured patients nationwide. Only the Medicare caps made it into the final legislation, so many private-insurance beneficiaries will still rely on state caps to afford their insulin.

This federal legislation is going to make a huge difference to American health care, but it’s no silver bullet. State efforts have been tremendous, and they will continue to be to make sure all Americans — in all parts of the health care market — can afford their prescription drugs.

— Jonathan Bartholomew, a government affairs director at AARP

Pursuing drug importation

With studies showing that people in the U.S. pay up to nearly three times more for prescription drugs than do patients in other developed countries, a growing number of states are passing laws to allow them to pursue importation of lower-priced drugs.

So far, Colorado, Florida, Maine, New Hampshire, New Mexico and Vermont have passed laws that establish programs to import drugs from Canada. All except New Hampshire have submitted importation plans to the U.S. Department of Health and Human Services and the U.S. Food and Drug Administration for required approval. Florida Gov. Ron DeSantis, whose state in 2019 was the first to submit its program for federal approval, has said importing could “potentially save the state between $80 to $150 million in the first year alone.”

Federal regulators have not yet made a decision on any of the state plans. State importation strategies are “certainly promising,” says Bartholomew, but “it’s just too soon” to tell what kind of impact they’ll have on driving down drug costs. “We need an approval first,” he says.

Limiting pharmacy benefit managers​​

PBMs are intermediaries that are responsible for administering prescription drug benefits and managing prescription drug costs on behalf of health insurers. PBMs negotiate with drug companies and pharmacies to control drug spending, which can help lower premiums and reduce out-of-pocket costs. While insurers hire PBMs to reduce drug costs, some of their practices have been criticized — mainly by pharmacies, pharmacists and drug companies — as having the opposite effect.​​

For example, drug companies argue that the rebates they pay PBMs as part of the price negotiation process are forcing them to raise list prices for their products. Also, some PBMs would write gag clauses into their contracts with pharmacists to prevent them from sharing lower-cost options with their patients, such as paying out of pocket rather than purchasing through their insurance plan. ​​In total, 47 states have enacted nearly 130 laws to regulate PBM business practices since 2017. “PBM regulation is an area where we’ve seen activity across the largest number of states,” Reck says.​​

But while these laws may have limited some problematic business practices in the drug supply chain, they do not seem to have had any impact on drug prices, says Leigh Purvis, director of health care costs and access for AARP’s Public Policy Institute. “We haven't seen any evidence that the consumers facing high drug prices have directly benefited from this legislation,” she says. “In fact, drug prices are continuing to go up.” Nearly 1,200 drugs have already experienced a price increase in 2022. And launch prices of new brand-name drugs increased by 20 percent every year from 2008 through 2021.

​​“The reality is PBMs have been a bit of a scapegoat for drug companies, who’ve intentionally diverted attention away from them and towards PBMs, saying they’re the ones causing high drug prices,” Purvis says. “But really, drug manufacturers are the only ones who can set and raise drug prices.” ​

Work continues

​​AARP state offices have been a driving force behind many of the state initiatives to drive down prescription drug costs over recent years. And even with the historic Inflation Reduction Act, state efforts to keep reducing costs will continue, Bartholomew says.

“This federal legislation is going to make a huge difference to American health care, but it’s no silver bullet,” he says. “State efforts have been tremendous, and they will continue to be to make sure all Americans — in all parts of the health care market — can afford their prescription drugs.”

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