Sharon Treat, Legal Project Director

In the midst of this recession, states from arizona to Minnesota to Virginia have announced dramatic cuts to health care and prescription drug coverage. The federal government has responded with recovery funds, enhancing federal payments for Medicaid and waiving payments related to the Medicare Part D “clawback.”

Yet at the same time, the Office of the United States Trade Representative (USTR) is articulating a policy direction that could endanger the future viability of Medicaid prescription drug coverage by limiting the use of preferred drug lists to negotiate rebates. State policy makers need to get educated about trade policy and make their voices heard. If they don’t, these trade initiatives could directly and negatively affect the capacity of states to provide medicines to their residents and cripple states’ ability to expand access to health care in the future.

In early March, the USTR held a hearing to receive comments on its annual report on intellectual property, which identifies countries that lack adequate patent protection or “deny fair and equitable market access to United States persons that rely upon intellectual property protection.” For the first time, states were represented and provided testimony at a trade policy hearing. The Forum on Democracy and Trade, a nonpartisan public policy organization whose mission is to support public officials engaged in global trade debates, and the states of Vermont and Maine provided testimony.

American University law professor Sean Fiis-Flynn, representing the Forum, explained the states’ interest: “Patents on medicines can create a particularly strong form of monopoly leading to extraordinarily high prices. This is because medicines can be basic life necessities that few will do without and because many purchasers are insulated from actual costs by insurance.”

Fiis-Flynn noted that state governments “use a wide variety of regulatory tools and policies to restrain excessive pricing by medicine suppliers.” He added that “these are often the same tools used by foreign governments that the USTR describes as ‘unreasonable’ in the ‘Special 301’ Report* and has sought to restrict or eliminate in recent trade agreements.”

Nowhere is the use of these tools more widespread than in the states’ implementation of Medicaid, the joint state/federal program that provides a comprehensive health insurance safety net to 60 million poor and disabled Americans. Medicaid costs topped $350 billion in 2008; it is the single largest state government expenditure after education.

A key component of Medicaid is the use of preferred drug lists (PDLs). The idea is simple—the best drugs should be preferred, and costs should be in line with effectiveness, not market power. More than 40 states use PDLs for Medicaid and other programs, including state-funded prescription drug benefits for the elderly that “wrap around” Medicare Part D and discount drug programs for the non-elderly who do not qualify for Medicaid but who lack insurance with pharmaceutical coverage.

PDLs really work. Iowa saved $100 million between 2005 and 2009 through its PDL—last year saving 34.7% of its total drug budget. Oregon reports saving 40% per prescription in 2009 due to greater generic uptake resulting from its use of a PDL. According to the January 2003 annual report of the Office of Vermont Health Access, spending on acid reducers, anti-inflammatory drugs, and opiate analgesics dropped from $15.8 million to $12 million within eight months of introducing the Medicaid PDL. In Maine, negotiating supplemental rebates and purchasing drugs through a multistate initiative results in an average drug price that is 50 % of the average wholesale price.

Alarmingly, the USTR’s 2009 “Special 301” Report raised concerns about “price controls and regulatory and other barriers [that] can discourage the development of new drugs” and singled out Japan, Canada, France, Germany, New Zealand, Taiwan, and Poland for administering “unreasonable . . . reference pricing or other potentially unfair reimbursement policies.” These are the very same countries that many states have looked to in adopting their own policies and programs to rein in drug prices.

Without access to these tools, states would simply be unable to provide comprehensive access to medicines in their Medicaid and other health insurance programs. Pharmaceutical costs can account for 10 to 25 percent of the cost of these programs, even with the rebates and pricing tools currently available, and states are already struggling to continue the programs they fund right now.

The Obama Administration has embraced health reform in partnership with the states, with a nod to the best evidence-based practices the states have pioneered. Preferred drug lists are a best practice that illustrates the approach the Administration is seeking to replicate in its national health reform initiative. Indeed, the President’s budget for 2008 specifically noted that Medicaid allows states “to use [such] private sector management techniques to leverage greater discounts through negotiations with drug manufacturers.”

Yet the USTR’s efforts to promote new international standards limiting domestic medicine pricing regulations will significantly increase the cost of public health programs and limit the use of evidencebased tools here in the US—and harm efforts to extend health insurance to all Americans.

Trade policy may appear esoteric and complicated. Few states are truly engaged in understanding how trade agreements are developed and how these agreements affect state policy. What state policymakers don’t know could hurt them—they need to learn about trade policy and get involved so that international agreements do not undermine medical care and access in the US.

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*The “Special 301” Report is an annual review of the global state of intellectual property rights protection and enforcement, conducted by the USTR.

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