Academic journal article The American Journal of Economics and Sociology

Changes in the Effectiveness of State Medicaid Drug Program Cost-Containment Policies Following OBRA 1990

Academic journal article The American Journal of Economics and Sociology

Changes in the Effectiveness of State Medicaid Drug Program Cost-Containment Policies Following OBRA 1990

Article excerpt



NATIONAL HEALTHCARE EXPENDITURES increased dramatically during the past two decades, accounting for 11.9 percent to 14.8 percent of gross domestic product (GDP) in 1990 and 2002, respectively. Overall, the largest components throughout this time period were hospital care ($254-$487b), physician and clinic services ($158-$340b), prescription drugs ($40-$162b), and nursing home services ($53-$103b). (1) While not the largest component, prescription drugs play an important role regarding the trend in healthcare expenditures, exhibiting the largest relative increase as related outlays more than quadrupled between 1990 and 2002. The factors associated with the dramatic rise in health spending include the aging population and advances in expensive technologies, driving both increases in the quantity and the cost per unit consumed. In 2002, the consumer price index for medical services, providing a measure of the relative increase in prices, was 285.6 compared to the all-items index of 179.9. The indices for physician, prescription drugs, and hospital services were, respectively, 260.6, 316.5, and 367.8 in the same year.

Trends in expenditures have been similar in both the public and private sectors. Public health programs, primarily Medicare and Medicaid, accounted for 40.6 percent to 45.9 percent of national expenditures during this time period, indicating overall faster growth in that sector. Since the Medicare prescription drug program did not become fully implemented until 2006, increases in public insurance-covered prescription drugs discussed here largely pertain to the Medicaid program. Within the context of Medicaid, the share of total expenditures claimed by prescription drugs nationally increased from 6.7 percent in 1990 to 11.9 percent in 2002, making it the third-largest service component of the program, following nursing facility (19.3 percent) and inpatient acute care hospital (17.8 percent) services.

The growth in healthcare expenditures has caused significant budget pressures for both the federal and state governments and implies the importance of cost-containment measures. This article examines the government's attempts to control the growth in expenditures pertaining to a single service component (prescription drugs) in one of its most important public health programs, Medicaid. In response to rising prescription drug prices during the 1980s, Congress included provisions in the Omnibus Budget Reconciliation Act (OBRA) of 1990 designed to change how Medicaid programs purchase prescription drugs and to lower the growth rate of drug expenditures. The Act was predicted to save $3.4 billion in total Medicaid expenditures over the first five years (Pollard and Coster 1991). OBRA 1990 contains numerous policies that may be complementary or contradictory in their intended effects, making it extremely difficult to empirically sort out their independent influences and assess the overall impact of the Act.

This study analyzes the adoption of cost-control methods concerning state Medicaid drug programs, with emphasis on the effects of OBRA 1990. The objective is to determine the influence of OBRA 1990 on the effectiveness of cost-containment policies on the relevant components of Medicaid drug programs: the number of drug recipients, the number of prescriptions per recipient, and the average prescription price. First, we discuss the major components of OBRA 1990 that relate to Medicaid pharmaceutical programs, the theoretical implications of the policies, and the empirical findings in the literature. Next, we discuss and analyze the trends in Medicaid pharmaceutical expenditures before and after passage of the Act, using descriptive and multivariate analysis techniques.


OBRA 1990 Drug Cost-Control Policies

OBRA 1990 INCLUDED four major policy changes in the Medicaid drug program pertaining to rebates, formularies, reimbursement rates, and drug utilization. …

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