The first meeting of the interim Prescription Drug Issues Committee was called to order by Chair Phyllis Heineman at 9:05 a.m., June 25, 2001, in Room 412 of the State Capitol, Pierre, South Dakota.

A quorum was determined with the following members answering the roll call: Senators Kenneth Albers and Ed Olson; and Representatives Julie Bartling, Jarvis Brown, Larry Frost, Tom Hansen, Jim Hundstad, Jean Hunhoff, Frank Kloucek, Claire Konold, Casey Murschel, David Sigdestad, Dale Slaughter, and Phyllis Heineman. Representative Donald Van Etten participated via conference call.

Staff members present included Jacque Storm, Principal Staff Attorney, and Rhonda Purkapile, Senior Legislative Secretary.

A list of guests present during all or part of the meeting is on file with the master minutes.

(NOTE: For sake of continuity, the following minutes are not necessarily in chronological order. Also, all referenced documents are on file with the Master Minutes.)

Ms. Sharon Sonnenschein, Department of Social Services, presented the committee with information on medical coverage for individuals under Medicaid and Medicare (Document #1). Ms. Sonnenschein reported that the following programs include prescription drug coverage: the SSI program, the Long- Term Care Program, the Elderly Waiver Program, the Developmental Disability Waiver Program, the Family Support Waiver Program, the Assistive Daily Living Services Waiver Program, the Medical for Low Income Families Program, Transitional Medical Coverage, Medicaid or Children?s Health Insurance Program, Medical Coverage for Pregnancy, and Automatic Newborn Coverage. Under these programs, adults pay a $2.00 co-pay for each prescription filled or refilled. The Medicare Savings Programs do not provide prescription drug coverage.

Ms. Sonnenschein reported that the average monthly caseload for Medicaid is 80,000 (adults and children). Children account for 52,000 of this total, with the second highest category being individuals with disabilities.

Mr. Damian Prunty, Department of Social Services, testified that the number of eligible recipients fluctuates on a monthly basis. Medicaid is called a point-of-sale program. Medicaid payments to the pharmacists are on a weekly basis. Most drugs are covered under Medicaid. Those that are not covered are those for weight loss, hair loss, fertility treatments, experimental drugs, over-the-counter medications, vitamins, or those deemed less than effective. Smoking cessation medication will be covered with prior approval. Mr. Prunty presented the committee with a list of the top ten drugs by number of prescriptions and the top ten drugs by payment (Document #2).

In response to committee questions, Mr. Prunty indicated that Medicaid laws prohibit a formulary (a list of approved drugs). However, states do have the option of having a preferred list. He noted that prescription drugs are the least problematic of Medicaid programs.

Mr. Prunty presented the committee with a list of prescription drugs ranked by therapeutic class (Document #3) and a list of prescription drug expenditures from state fiscal year 1999 through 2002 (Document #4). The cost of prescription drugs under the Medicaid program averages $38 per prescription. Mr. Prunty noted that the department has a price rate of average wholesale less ten percent. There is also a $4.75 dispensing fee paid to the pharmacist for every prescription drug dispensed through the program.

In response to committee questions, Mr. Prunty indicated that pharmaceutical costs for people in nursing homes are paid the same as other prescriptions. They are not included in the per diem rate. Over-the-counter medications are included in the nursing home cost reports and are included in their per diem rates.

Representative Murschel asked about the increases in utilization. Mr. Mike Jockheck, Department of Social Services, replied that the costs of the drugs have increased, as well as the utilization.

Mr. Jim Ellenbecker, Secretary, Department of Social Services, added that much of the increase in utilization involves an increase in the number of those eligible for services.

Representative Van Etten asked about the use of brand name drugs vs. generic drugs. Mr. Prunty responded that at this point, there is no incentive to choose a generic drug. He noted that Medicaid prescription drug reimbursements are complicated because of the rebates from the pharmaceutical companies. In some instances, it may actually be less costly to the state to use the brand name drug with the rebate than to use the generic drug. He added that in order to receive the rebates from the manufacturers, the department must cover all medications, which is why a formulary is prohibited.

Mr. Jockheck presented the committee with information on the RX Access program (Document #5). This is a program administered by the department to assist elderly individuals to obtain needed prescription medications through patient assistance programs sponsored by various pharmaceutical manufacturers. The current enrollment in the program is 1,081 active clients. The program accepts applications from individuals over the age of 65 who also meet certain financial requirements.

Mr. Jockheck reported that in most instances, the companies will make available a three-month supply of medication at no charge. The program is not advertised--most of the referrals come by word of mouth or from clinics and physicians. Individuals eligible for Medicaid or Veterans Association benefits are not eligible for these programs. Most of the drug companies have their own criteria that must be met.

Representative Murschel asked about the cost of this program. Mr. Jockheck replied that it is fairly minimal--the computer software is about $6,500 per year, $400-$500 for postage, and portions of his salary and clerical staff salaries.

Representative Van Etten asked if the department has done any projections on what it would cost to expand this program to those under the age of 65. Secretary Ellenbecker replied that there is a limit as to how much time one person can spend on this program before additional staff would be needed to handle the volume, noting that the program has grown substantially over the last year. He indicated that as far as they know, South Dakota is the only state performing this service.

Mr. Jockheck noted that the Drug Evaluation and Education Program (DEEP), based on a federal mandate, was instituted to perform drug utilization review (DUR) of Medicaid patients? therapy and make recommendations for change.

Representative Kloucek asked if eliminating the rebate programs nationwide would reduce the costs of drugs. Secretary Ellenbecker replied that this is a federal program, not a state program.

Ms. Doneen Hollingsworth, Secretary, Department of Health, presented the committee with information on the South Dakota State Planning Grant Program (Document #6). Ms. Hollingsworth reported that according to the U.S. Census Bureau, 12.6 percent of all South Dakotans are uninsured. The Department of Health applied for a federal grant to determine who in South Dakota is uninsured and why. The grant was awarded and the department intends to hire a contractor to perform a household survey to gather information specific to South Dakota, as well as a survey of employers, focus groups, and specific vulnerable populations. This data will then be utilized to develop options for insurance coverage. It is anticipated that data collection will begin in July and be completed in September.

Ms. Darla Lyon, Director, Division of Insurance, reported that claim costs are escalating, noting that drug costs are significant, but not the major cost in increasing claims. She noted that insurance premiums are also increasing. The division has become concerned with the availability and accessibility of heath insurance because it has seen from four to five insurance companies pull out of the market, primarily because they cannot make a profit. These companies are for-profit entities and they cannot continue to remain in business if they are no longer making money. Ms. Lyon reported that the number of health insurance carriers in the state is down to eight companies selling individual policies, and twelve selling group policies. There are about 13 large group companies (over 50 employees).

Mr. Randy Moses, Division of Insurance, reported that all the policies that are private policies must be approved by the Division of Insurance before that product can be sold in South Dakota. Group rates are, by and large, not subject to the prior approval form, with the exception of Health Maintenance Organizations (HMOs). Prescription drugs are a component of many policies. The state does not mandate that companies must offer prescription drugs; however, if they do offer prescription drugs, there are certain items that must be covered. Both individual and group policies are subject to a loss ratio standard--for every premium dollar collected, they must pay out 65 cents or 75 cents. Mr. Moses noted that on average, the division has seen rate increases of 20 percent.

In response to committee questions, Mr. Moses indicated that ERISA is a federal law that allows employers to self-insure and they are then exempt from state insurance laws but are subject to federal laws through the US Department of Labor. One reason large employers want to self-insure is that many have locations in several states and by self-insuring they only have to comply with one set of standards (federal) rather than several state standards. Pooling arrangements are also not under the jurisdiction of the Division of Insurance. Federal employees and the Bureau of Indian Affairs are also exempt from division jurisdiction.

Chair Heineman recessed the committee at 11:50 a.m. for lunch and reconvened the committee at 1:05 p.m.

Ms. Janet Griffin, Wellmark/Blue Cross/Blue Shield, spoke from prepared remarks (Document #7). Ms. Griffin testified that Wellmark/Blue Cross/Blue Shield is the largest health insurer in South Dakota. They offer a full range of health insurance products. She noted that spending increased 40 percent on the top 50 drugs prescribed last year, largely due to sales growth in new medicines. Ms. Griffin noted that they cover one in ten South Dakotans with some kind of prescription drug coverage.

Ms. Griffin reported that trends in drug costs indicate that annual cost increases of 15-18 percent are expected, with over one-half of the increases in the areas of cardiovascular and central nervous system medications. The rate of increase is highest among 40- to 55-year-olds with developing chronic problems. The average cost annually for medications is highest among senior citizens. One out of every three seniors across the nation currently has no prescription drug coverage.

Ms. Griffin reported that increased drug costs and usage will raise health insurance premiums, with employers shifting those costs to their employees. She predicted a steeper increase in co-pay tiers to try to create a price-conscious consumer.

Ms. Griffin presented the committee with information on prescription drug expenditures in 2000 (Document #8).

Mr. Dean Krogman, representing the S.D. State Medical Association and DakotaCare, testified that DakotaCare covers small groups and provides a pharmaceutical benefit. Currently, 51,000 individuals are covered under their pharmacy program (93 percent of their group). Mr. Krogman noted that the state employees have their own prescription drug program. Mr. Krogman noted that of their premium dollars, 10 percent is drugs, 30 percent is physicians, and 60 percent is hospital. DakotaCare does not cover long-term care. Finally, he noted that 90 percent of the therapy prescribed by doctors is drug related.

Ms. Marjorie Powell, Pharmaceutical Research and Manufacturers Association (PhRMA), presented information to the committee (Document #9). Ms. Powell testified that as an industry, they invest more than 20 percent of their sales on average each year on research and education. They are the source of new medications. Because they have been successful, people are taking more prescription drugs and health plans are paying more for prescription drugs. She noted that brand name manufacturers must sign the Medicaid rebate agreement in order to have their drugs covered under Medicaid. Rebate percentages to the states will vary depending upon the mix of products being prescribed.

Ms. Powell noted that all PhRMA member companies have patient assistance programs. Each program is separately run by each company. Almost all drugs are available under patient assistance programs. The companies are committed to continuing these programs.

Ms. Kelly Marshall, Pharmacia Corporation, testified that if a company does not have at least $2 billion to put into research and development today, then they cannot be competitive in today?s market and will be subject to mergers with larger companies. She noted that health care has changed tremendously over the last 100 years. Part of this is due to the longer life span and better living conditions. The NIH does basic medical research. This information is then taken by the pharmaceutical industry and they find a drug that will help or cure the problem. The drug discovery process can take anywhere from two to ten years. The patent starts at four years into the clinical trials and the drug may not receive FDA approval until 16 years. Because so much of the patent life is used during research and development stages, the manufacturers sometimes ask to have patents extended to try and recoup some costs of development. Manufacturers expend an average of $850 million for development costs per drug. Only three out of ten drugs produce revenues that match or exceed average research and development costs. She noted that 36 percent of research and development dollars are spent here in the United States.

Ms. Marshall indicated that while drug expenditures have increased, inflationary costs averaged 3.9 percent and volume growth was 10.8 percent. She noted that health care costs in general are increasing, but drugs will help decrease the increasing rate.

Ms. Marshall reported that when a drug patent expires, the drug can go into general production. Generics account for 47 percent of the drug market. Pharmaceuticals account for 8-9 cents of every health care dollar. Ms. Marshall noted that society must step back and look at not just the cost of the drug, but the cost savings of the outcome. The informed consumer has the option of asking the physician for a new drug. The doctor can always say no.

Ms. Powell presented the committee with information on research dollars compared to marketing dollars (Document #10), noting that research and development dollars exceeded marketing dollars by 40 percent. She noted that there will be more and more continuing needs for consumer education as more and more drugs come on the market.

In response to committee questions, Ms. Marshall stated that for Medicaid purposes, the manufacturer pays the state its rebate based on the average manufacturer's price (AMP). The wholesaler marks up the drug two to four percent and sells it to the pharmacy. The pharmacist is reimbursed on the average wholesale price (AWP), which is the manufacturer's catalogue price plus 20 percent. The pharmacists are reimbursed AWP less 10 percent, plus the dispensing fee from the state.

Mr. Bob Coolidge, Director, S.D. Pharmacists Association, testified that Medicaid does not determine the price--it sets the ceiling of what it will pay. The pharmacist bills the traditional price. There is no standard formula for the reimbursement of generic drugs. Oftentimes, the usual and customary price is less than Medicaid reimbursements. Medicaid always reimburses at the lowest rate.

Ms. Powell added that Medicaid gets the best price of any sale to a commercial customer. The Federal Supply Schedule is a schedule established by federal law. A manufacturer must make all drugs available on the federal supply schedule if it wants to participate in the Medicaid program. By statute, the manufacturer must give a 24 percent discount to all the groups who can buy from the federal supply schedule. The Department of Defense, the Coast Guard, Public Health Service, and Indian Health are the only groups that can purchase off the federal supply schedule. Each of these groups has its own criteria of eligibility of who can be served.

Representative Sigdestad asked why people can buy their medications so cheaply in Canada and Mexico. Ms. Powell replied that in Canada, it is primarily due to the difference in the value of the dollar. Also, the United States FDA is much more efficient at approving new drugs than they are in Canada. The process of negotiating prices in Canada also keeps the prices down; however, there are many drugs that are simply not yet available in Canada. Ms. Powell indicated that there is a high percentage of counterfeit products being sold in Mexico--they may have no active ingredient or actually have harmful ingredients.

Representative Brown asked if physicians receive benefits from the manufacturers to promote their products. Ms. Powell replied that they can receive items that will be of benefit in the physician?s practice or items of small value. She noted that this will be coming under review in the future.

Senator Olson stated that he would like to see a schematic of the pricing of drugs.

Representative Kloucek presented the committee with information he had gathered on drug pricing (Document #11). He stated that he would like to invite Mr. Schondelmeyer to appear before the committee. Representative Kloucek stated that drug production cannot continue to keep up with the new strains of diseases and super-diseases. Somehow, things must shift so the manufacturers start to look at prevention instead of the cure.

Senator Albers requested information on models of prescription access.

Representative Bartling requested that the committee hear from the counties.

Chair Heineman set the next meeting date for August 7, subject to change if needed.

Chair Heineman adjourned the meeting at 4:55 p.m.

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