States Use Various Approaches to Manage Drug Spending

A roundup of 2017’s cost-saving efforts highlights a range of policies

drug spending
© The Pew Charitable Trusts

As U.S. prescription drug spending reached $477 billion in 2016,1 states have crafted policy solutions to help manage the costs of these medications.

Last year, many states passed policies with the potential to affect drug spending for states, the federal government, or patients.2 These policies can be categorized by the mechanism used to control costs: Medicaid spending caps; practice reforms for pharmacy benefit managers (PBMs), contractors that manage drug benefits for health plans; out-of-pocket spending limits; utilization management, techniques used to determine the appropriateness of a certain treatment; price transparency; and substitution of biosimilars, essentially the generic version of complex, biologic drugs derived from living cells.

An overview of laws and policies passed in 2017 shows that state legislatures are using multifaceted approaches like the ones above to see what will bring down drug costs. These policies were primarily identified using the National Council for State Legislatures (NCSL) Prescription Drug State Database, a resource that tracks states’ proposed and enacted legislation regarding prescription drugs. The list below represents a sample of notable state policies that seek to address prescription drug spending. 

Medicaid spending cap

Directly limiting state spending on prescription drugs in Medicaid—the public health insurance program jointly administered with the federal government to serve primarily low-income patients—is one approach that states use. Medicaid has built-in cost controls (e.g. mandated rebates from manufacturers in exchange for Medicaid coverage). However, high-cost specialty drugs continue to drive increases in spending.3 States can only charge “nominal” copayments to Medicaid beneficiaries,4 but can limit a patient’s access to drugs through utilization management tools and a state-developed Preferred Drug List (PDL), which designates favored drugs by reducing their copayment amounts and barriers to access.5

  • New York’s Fiscal Year 2018 budget includes a Medicaid drug expenditure cap provision that allows the state Department of Health to set an annual projected spending target for prescription drugs.6 If spending exceeds the cap, the state and its Drug Utilization Review Board, the regulatory body that reviews prescribing practices in Medicaid, can negotiate supplemental rebates with drug manufacturers to lower spending to allowable amounts.

PBM practices

Pharmacy benefit managers (PBMs) are third-party administrators of prescription drug benefits.7 Some policymakers have suggested that PBMs’ intermediary position in the pharmaceutical supply chain may contribute to drug spending, and have sought to limit certain practices.

  • Connecticut,8 Georgia,9 North Carolina,10 and North Dakota passed legislation prohibiting PBMs and/or health plans from placing restrictions on pharmacists discussing the price of a prescription drug with patients (called a “gag rule”), including informing customers about cheaper options to purchase prescription drugs. For example, PBMs can no longer prohibit pharmacists from informing patients that paying the cash price of a drug is cheaper than filling the prescription using their insurance. In addition, the same four states and Texas11 passed legislation prohibiting PBMs from requiring a pharmacy to charge a patient more in cost-sharing than what the PBM pays the pharmacy for the drug or more than the cash price of the drug if the patient filled the prescription without insurance coverage, a practice known as a “clawback.”

Out-of-pocket spending

Depending on the benefit design of a health insurance plan, patients will often pay at least some part of their prescription drug costs. One state and the District of Columbia passed laws addressing a patient’s out-of-pocket spending for certain drugs.

  • The District of Columbia passed legislation prohibiting public and private insurers, with few exceptions, from setting patient out-of-pocket costs (copayments and coinsurance) for specialty drugs12 at more than $150 for a 30-day supply or $300 for a 90-day supply.13
  • California passed legislation prohibiting manufacturers from offering discounts, repayments, product vouchers, or other reductions in an insured patient’s out-of-pocket costs for a prescription drug if a therapeutically equivalent, lower-cost generic drug is available.14 Such discounts reduce the patient’s incentive to choose the lower-cost product.

Utilization management

Some states have moved to regulate how health plans implement utilization management tools to control costs and ensure appropriate prescription drug use.

  • Also called “fail first,” step therapy is a utilization management tool that requires patients try a less expensive drug before insurance will cover a more expensive therapy. Payers use step therapy to encourage the use of lower-cost, equally effective medications. However, Colorado, Delaware, Iowa,15 Maryland,16 Texas,17 and West Virginia passed laws that ban or restrict insurers’ use of step therapy for certain populations, limiting their ability to control costs.
  • Oregon passed a law establishing a Mental Health Clinical Advisory Group in the Oregon Health Authority, which is tasked with developing ‘evidence-based algorithms’ for using prescription drugs to treat mental health disorders in patients receiving medical assistance, including those with Medicaid coverage.18 Based on the cost and clinical efficacy of the drugs, the advisory group will recommend practice guidelines and preferred status to the authority and the Pharmacy and Therapeutics Committee, an advisory committee that determines which drugs should be on a preferred drug list or formulary.

Price transparency and price controls

Some states have taken steps to require pharmaceutical manufacturers to disclose price increases or, in one case, prohibit certain price increases in order to limit costs to the state, patients, and insurers.

  • California now requires prescription drug manufacturers and wholesalers to notify purchasers of price increases above a specified threshold a minimum of 60 days before the planned increase.19 Manufacturers must also submit quarterly public reports to the state providing a justification for the price increases, and must also report prices for new, high-cost drugs. Health insurers and health plans must report to the state the most frequently prescribed drugs, the highest cost drugs, drugs with the largest price increases, and information about how prescription drugs affect premiums.
  • Nevada advanced a law requiring the Nevada Department of Health and Human Services (NDHHS) to create lists of prescription drugs deemed essential for treating diabetes and of these drugs that have seen a significant price increase in the last two years.20 The law requires manufacturers and PBMs to submit annual drug price and sales information to NDHHS, including a manufacturer’s reasons for significant price increases, as well as their payments to sales representatives and nonprofits.
  • Maryland passed a law prohibiting a manufacturer or wholesale distributor from engaging in price gouging in the sale of a medication deemed an essential generic drug.21 The law prohibits any “unconscionable increases” in the price of drugs, which it defined as price increases not justified by the cost of production, or increases that leave patients without a meaningful choice about whether to purchase the drug because it is needed for their health, or because there are no other treatment options.

    The state Medicaid program can notify the attorney general when the wholesale acquisition cost (WAC) increases by more than 50 percent within one year and the drug’s WAC exceeds $80 for either a 30-day supply or full course of treatment. On petition of the attorney general, a circuit court can require manufacturers to refund consumers the increase in the cost of the drug, require manufacturers to sell the drug to Medicaid for one year at its original cost, and impose a civil penalty up to $10,000.

Biologics and biosimilar substitution

Some high-priced biologic drugs have “biosimilar” counterparts that are intended to create price competition, much like generic versions of traditional drugs.22 But unlike generic drugs, the U.S. Food and Drug Administration (FDA) has not yet deemed any biosimilar drug to be “interchangeable” with the reference product—that is, able to be dispensed or administered without a health care provider making a clinical decision.23

Anticipating that FDA is likely to approve interchangeable biosimilars in the future, many states have implemented policies to regulate a pharmacist’s substitution of such products.

  • Iowa, Kansas,24 Maryland,25 Minnesota, Montana, Nebraska, and New Mexico26 passed laws allowing pharmacists to substitute an interchangeable biosimilar for a biologic without prior approval from the prescriber.
  • Iowa, Kansas,27 Maryland,28 Minnesota, Montana, Nebraska, New Mexico,29 and South Carolina passed laws requiring that pharmacists notify prescribers if an interchangeable biosimilar substitution has been made. These same states also passed laws allowing prescribers to prevent interchangeable biosimilar substitutions by including “dispense as written” or similar language on the prescription.30


States continue to seek remedies for rising drug costs. It is unclear whether these legislative approaches will generate significant savings, but stakeholders and policymakers are expected to closely monitor the effects of these laws.


  1. Office of the Assistant Secretary for Planning and Evaluation (ASPE), “Observations on Trends in Prescription Drug Spending,” U.S. Department of Health and Human Services (2016),
  2. Includes only enacted bills; does not include proposed measures or pending legislation. Medicaid State Plan Amendments and waivers (e.g., Section 1115 and Section 1332 waivers) are excluded.
  3. Medicaid and CHIP Payment and Access Commission (MACPAC), “Medicaid Spending for Prescription Drugs” issue brief (2016),
  4. 42 U.S. Code § 1396o(a)(3)
  5. 42 U.S. Code § 1396r-8
  6. New York S.B. 2007B (2017),
  7. PBMs often process pharmacy benefit claims, develop and maintain formularies, and negotiate prescription drug prices with drug manufacturers. In the United States, PBMs manage prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans.
  8. Connecticut S.B. No. 445 (2017),
  9. Georgia S.B. 103 (2017),
  10. North Carolina H.B. 466 (2017),
  11. Texas S.B. 1076 (2017),
  12. The law defines specialty drugs as those 1) prescribed for people with conditions that do not have a cure or are debilitating or fatal if left untreated, affects fewer than 200,000 people in the United States or one in 1,500 people worldwide; 2) costs more than $600 per month for treatment; and 3) has one or more of the following characteristics: is oral, injectable, or an infusible drug; requires unique storage; requires patient education.
  13. Council of the District of Columbia, Committee of the Whole Committee Report, “Report on Bill 21-32: Specialty Drug Copayment Limitation Amendment Act of 2016” (2016),
  14. California A.B. 265 (2017),
  15. Iowa H.F. 233 (2017),
  16. Maryland S.B. 0919 (2017),
  17. Texas S.B. 680 (2017),
  18. Oregon H.B. 2300 (2017),
  19. California S.B. 17 (2017),
  20. Nevada, S.B. 539 (2017),
  21. Maryland S.B. 0415 (2017),
  22. Biosimilars are follow-on versions of biologics already approved by the Food and Drug Administration (FDA). Like generic versions of conventional drugs, biosimilars have no clinically meaningful differences from their reference product, and are intended to reduce prices by creating competition in the marketplace. The FDA can deem a biosimilar interchangeable if it produces the same result with no safety risk or diminished efficacy compared to the biologic. As of October 2017 seven biosimilars have been approved to go on the market, however, no biosimilars have been deemed interchangeable by the FDA.
  23. U.S. Food and Drug Administration, “Purple Book: Lists of Licensed Biological Products With Reference Product Exclusivity and Biosimilarity or Interchangeability Evaluations,” last updated Feb. 16, 2016,
  24. Kansas H.B. 2055 (2017),
  25. Maryland H.B. 1273 (2017),
  26. New Mexico H.B. 260 (2017),
  27. Kansas H.B. 2055 (2017),
  28. Maryland H.B. 1273 (2017),
  29. New Mexico H.B. 260 (2017),
  30. Kansas H.B. 2055 (2017),; Maryland H.B. 1273 (2017),; Mexico H.B. 260 (2017),
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