Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Interim of 2001

State of Hawaii

Sir:

Your Prescription Drugs Working Committee begs leave to report as follows:

Prescription drugs are an increasingly significant component in modern health care, for both therapeutic and preventative purposes. New medications improve health outcomes and quality of life, replace surgery and other invasive treatments, quicken recovery for patients who receive these treatments, and prevent serious and costly hospitalization.

At the same time, prescription drug prices are rising twice as fast as inflation, with annual percentage increases in prescription expenditures surpassing most other aspects of personal health care expenditures in the past decade. As a result, health insurance and Medicaid costs are skyrocketing, for both the State and consumers alike.

Many people, however, have insufficient prescription drug coverage, or have none at all, either because they are uninsured or because their health insurance does not adequately cover prescription drugs.

Among the underinsured population are those segments of our society that need prescription drugs on a regular basis. For example, one in three Medicare recipients, approximately 12 million people nationwide, do not have drug coverage, and uninsured patients are forced to pay exorbitant retail prices for their prescription drugs.

Supplemental coverage provides some assistance with prescription drug costs to two-thirds of Medicare beneficiaries, but that coverage varies widely by income, is often costly, and has an unstable future. The most common supplemental drug plans for Medicare beneficiaries are employer-sponsored retiree plans, directly purchased Medigap policies, and Medicaid.

The problem of insufficient prescription drug coverage is especially acute for the elderly segment of our State's population. Senior citizens consume nearly one-third of all prescription drugs used in this State, and often live on fixed incomes. For senior citizens with insufficient prescription drug coverage, such as those who rely solely on Medicare, the costs of their basic drug needs can be overwhelming.

To compound the problem, Hawaii's elderly population has been growing and is expected to increase dramatically in the near future, with the first baby boomers turning 65 in 2011. If this situation is not addressed, the number of persons with inadequate drug coverage will soon be staggering.

This problem is not limited, however, to Hawaii's elderly population. Many other segments of our community have no prescription drug insurance at all, or have inadequate coverage. Of particular note, persons with disabilities sometimes require consistent prescription drug use, and often have insufficient coverage. Over the past several sessions of the Legislature, numerous bills have been introduced to address this issue, but no long-term solution has been reached. It is in the best interest of both the State and health care consumers to ensure that every resident has sufficient prescription drug coverage.

In response to this pressing problem, the Legislature adopted S.C.R. No. 150, S.D. 1, H.D. 1, which recommended the creation of a Working Committee to discuss legislative changes to provide better drug coverage for Hawaii's residents, specifically Medicare beneficiaries. S.C.R. No. 150 requested the Department of Health to establish the Working Committee to address this issue; however, given that the Legislature has examined this issue several times during recent sessions, all parties agreed that it made more sense to convene a legislative committee, with participation by the Department of Health. This Senate Working Committee was therefore established.

At the same time, the Legislature also adopted H.C.R. No. 129, H.D. 1, S.D. 1, C.D. 1, which requested the Legislative Reference Bureau (LRB) to conduct a study of the feasibility of a state pharmaceutical assistance program. Although these two concurrent resolutions are not cross referenced, the Working Committee is mindful of the work performed by LRB, and has taken their findings into account in preparing this report and attendant legislation.

The Working Committee consisted of representatives from the Attorney General's Office, the Department of Commerce and Consumer Affairs, the Department of Health, the Department of Human Services, the Department of Taxation, the Federal Health Care Financing Administration, Hawaii Medical Services Association (HMSA), Kaiser Permanente, and the American Association of Retired Persons (AARP). In addition, two practicing pharmacists and one practicing physician participated in the Working Committee. The Chair of your Health and Human Services Committee chaired the Working Committee.

The Working Committee met thrice during the interim, on November 13, November 20, and December 19, 2001. Prior to the meetings, each Working Committee member submitted written responses to questions distributed by the Chairman, to help identify the problem and potential solutions.

Following the mandate of S.C.R. No. 150, the Working Committee's goal was to develop a prescription drug access program for eligible Medicare beneficiaries and other underinsured persons in the State. Your Working Committee undertook this task while also searching for ways not to further deplete the financial resources of the State. All members of the Working Committee agreed at the outset that it would be preferable to craft a solution that does not require an appropriation of state funds on an annual basis.

An important issue discussed by the Working Committee initially was to attempt to determine what group of patients should be targeted first with any state sponsored prescription drug plan. The groups for which drug coverage is at issue are primarily the elderly (on Medicare and/or a retirement health plan without benefits), persons with disabilities, and those who are working and have medical insurance without an adequate drug plan.

Many people who are not currently employed are covered under the Medicaid or QUEST programs, which include prescription drug coverage. In any state pharmaceutical assistance plan, there will necessarily be some distinction between those who have no coverage at all, and those whose coverage does not meet their needs.

Many of the target group members are Medicare beneficiaries; by definition, persons covered by Medicare must be at least 65 years old or, if under 65, totally and permanently disabled. Because health problems increase with age, those who are covered by Medicare tend to have greater health care needs than the general population. Nearly 7 in 10 Medicare beneficiaries have two or more chronic conditions, and 8 in 10 Medicare beneficiaries utilize prescription drugs on an ongoing basis.

As noted above, many Medicare beneficiaries live on modest incomes and most rely on Social Security benefits as their main source of income. Between 1996 and 2001, average total per capita drug expenses for the Medicare population increased from $798 to $1,402, while average out-of-pocket spending increased from $390 to $686 per year. Medicare beneficiaries without any supplemental drug coverage tend to have higher annual out-of-pocket drug expenses.

Based on these figures, and the mandate of S.C.R. No. 150, your Working Committee has concluded that the elderly and disabled sectors of our society, who tend to have the greatest need for prescription drugs and who are unlikely to have adequate coverage, present the most urgent need. Among that segment of the population, however, there is also disparity between those with, and those without, supplemental drug coverage.

In addition to deciding what group of consumers most needs the benefits of a pharmaceutical assistance program, your Working Committee also discussed what drugs such a program should cover.

One of the physicians in the Working Committee commented that the autonomy of physicians to determine what drugs are most appropriate for their patients must not be compromised by any state-sponsored drug plan. Your Working Committee agrees.

After much discussion, your Working Committee believes that it may make the most sense to identify certain health conditions that are the costliest and require the most drugs, and to target the program toward those conditions. Preliminarily, cardiovascular disease, hypertension, diabetes, and psychiatric conditions have been identified.

As of January, 2001, 26 states had authorized some type of pharmaceutical assistance program. Drug assistance programs span a wide range in their benefit design, eligibility requirements, funding mechanisms, and cost controls.

Although each state program differs to some extent from all others, there are five broadly distinct groups of pharmaceutical assistance programs:

1. Direct Benefit Programs

2. Insurance Programs

3. Price Reduction Programs

4. Buying Pools

5. Tax Credit Programs

Regardless of what type of prescription drug plan may be implemented in the State, your Working Committee identified several aspects that must be further reviewed and clarified. On the side of the State, in addition to determining what group of patients to cover, what drugs to include, and how to set eligibility requirements, there are also issues of the level of the benefit to be provided, deductibles, and catastrophic costs.

From the consumer standpoint, your Working Committee believes that the program must be administratively simple enough to allow ease of enrollment and understanding by the participants.

Although your Working Committee did not have sufficient time to establish a complete pharmaceutical assistance program, several steps are recommended in the short term to facilitate a lasting solution to this problem.

Your Working Committee believes that the State must be willing to use state funds, at some level, in order to implement a state pharmaceutical assistance plan. At the same time, your Working Committee believes that, during this time of decreased state revenues and recession, it will be difficult to obtain annual appropriations to fund any program.

As a solution, your Working Committee proposes legislation to create a special fund, to be used to implement a pharmaceutical assistance program in Hawaii. Your Working Committee proposes to fund this special account with the State's portion of Medicaid prescription drug rebate moneys.

The Medicaid drug rebate program, administered by the federal Health Care Financing Administration (HFCA), saves the states over $3 billion annually. Under federal enabling legislation, each pharmaceutical manufacturer is contractually obligated to pay each state Medicaid program a quarterly rebate for each covered outpatient drug reimbursed by Medicaid.

Currently, Medicaid rebates received by the State are placed into the general fund. Under legislation proposed by your Working Committee, these rebates would instead be placed into a newly created special fund called the "Medicaid prescription drug rebate special fund."

This special fund, which should continue to grow each quarter, may only be used to implement a pharmaceutical assistance program. According to the Department of Human Services, the State currently has nearly $5 million in rebates that could be used as start up funding for the special fund.

In addition to creation of the special fund, your Working Committee proposes to mandate that the governor convene a blue ribbon panel to further review this issue and to determine the best type of pharmaceutical assistance program for Hawaii.

Your Working Committee anticipates that the blue ribbon panel formed by the governor will contain leading industry experts, from both the private and public sectors, and that the panel will have the expertise necessary to determine the best use of the special fund.

At the same time, your Working Committee also believes that once a special fund has been created, with a consistent source of revenue, the State will receive many proposals, from both the public and private sectors, for the creation of a pharmaceutical assistance program and for use of the special fund. The State will then be able to choose from among the proposals it receives.

Your Working Committee also proposes that legislation be enacted to take advantage of the federal 340B drug pricing program, administered by the Office of Pharmacy Affairs within the U.S. Department of Health and Human Services. Created by the U.S. Congress in 1992, this program provides discounts on outpatient drugs to participating safety-net health providers.

Under the 340B pricing program, participating health centers (those that meet certain federally set criteria) are able to offer prescription drugs at steep discounts, due to the fact that they purchase the drugs from the federal government, which purchases them from the manufacturers in bulk. Participating health centers set their own distribution policy.

At present there are 37 approved 340B clinics and health care facilities in Hawaii.

Several states have enacted laws authorizing expanded use of 340B programs to distribute discounted prescription drugs to a wider segment of the State's population. Your Working Committee recommends that Hawaii explore similar legislation.

Access to adequate health care, including prescription medication, is one of the fundamental rights of our citizens. How the State can ensure that all of its residents have adequate prescription drug coverage is a complex issue with no easy solution.

Your Working Committee believes that the State must act carefully and deliberately in crafting any solution to this issue, so as not to jeopardize the independence of doctors in prescribing the most appropriate drugs for their patients' conditions, and so that a sustainable, economically viable plan is emplaced.

Your Working Committee further believes that its work is a first step toward a long-term solution. Creation of a special fund earmarked for a pharmaceutical assistance program will give the State a source of funding for the program, and will lead to proposals for use of those funds.

Moreover, a dialogue has begun that can be continued during the next regular session and beyond, in conjunction with the blue ribbon panel convened by the Governor. With input from all interested parties, your Working Committee believes that these discussions will soon bear fruit.