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IN THIS ISSUE OF PolicyMatters

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

PolicyMatters
A Journal of the Goldman School of Public Policy UNIvE rSITy O f CALIf OrN I A, B ErkELEy
volume 9 Number 1 fall 210 - Spring 2011

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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I appreciate the excellent contributions and contagious energy of our students and contributing authors. Their hard work continues to propel an excellent student-run policy journal. More than that, they foster a continuous conversation of rarely covered issues and people who speak truth to power around the world - the mission of the Goldman School at its 40th Anniversary. I cannot think of a better venue for that mission. The students also dedicate a great deal of their canvas in this issue to highlighting the accomplishments of impressive women in politics. These devoted public servants include the first female Governor of Michigan Jennifer Granholm, who discusses how her experience in establishing a new foundation for Michigans economy holds lessons for other states. We are proud to welcome Gov. Granholm to the Goldman School and Berkeley Law faculty. The first female California Senate Majority Leader Gloria Romero discusses her continued efforts to improve the effectiveness and equity of Californias education system. And our very own Jennifer West, first-year masters student at the Goldman School and Vice Mayor of Emeryville, promotes constituent engagement in policymaking. These conversations illustrate Sarah Anzias research finding that women provide high value in legislative productivity. Sarah Anzia will also join our faculty.

Foreword

I hope you continue the conversation on the Journals website www.PolicyMatters.net where you can find each of these articles, comment fields, and blog posts. Sincerely,

DO WE HAVE A SIG FILE?


Henry Brady Dean, Goldman School of Public Policy & Faculty Advisory Board Member We, the staff of PolicyMatters Journal, hope you find our 2010-2011 issue as intriguing and worthwhile to read as we found it challenging and rewarding to publish. With an unprecedented number of submissions, we proudly put forth the work of contributing authors who present well-researched and thought-provoking policy analysis. They contribute to the discourse with originality and innovation. The academic contributions start with the winners of the PolicyMatters Outstanding Student Article Award. John Erickson and Greg Leventiss discuss the pros and cons of a proposed revenue decoupling policy in Californias massive regulated water market. The discussion switches gears to Noor Darwood highlighting how the US refugee resettlement program could reduce the poverty of skilled refugees. Teal Brown moves the conversation forward showing how the US could reduce the shortage of primary care physicians under health care reform while Leah Krieger explores alternatives to prior authorizations of prescriptions that could reap health cost savings. Finally, Dries Bergman presents research on a floating gasoline tax that, he argues, could simultaneously mitigate climate change, government revenue shortfalls, and market unpredictability. The PolicyMatters team is deeply indebted to the previous leadership team, to our Faculty Advisors, and to Assistant Dean of Student Affairs Martha Chavez. The Editorial Board relies heavily on the dedication of our adept editors and the creativity of our associate publishers. I look forward to another fulfilling semester and opportunity to serve the faculty, staff, and students of the Goldman School, and policy analysts and practitioners around the world. Sincerely,

Danny Yost, Jr., Editor in Chief

PolicyMatters
is the student journal of the Goldman School of Public Policy University of California, Berkeley

Copyright 2011 by the University of California Regents. All rights reserved. No part of this publication may be reproduced in any form or by any meanselectronic, photocopy, or otherwisewithout written permission from PolicyMatters.

Policy Matters
EdITOrIal BOard
Editor in Chief Danny yost, Jr. Executive Editor Laura Morsch-Babu Senior Editor Hope richardson Business Manager Enrique ruacho Associate Publisher, Layout & Design Stanley Ellicott

VolUMe 9 NUMBeR 1 FAll 2010 - SPRiNG 2011

PHARmACEuTICALS

Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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PHARmACEuTICALS

FacUlTy advISOry BOard


Dean Henry Brady Professor Jack Glaser Professor David kirp Professor Larry rosenthal

Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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PHARmACEuTICALS

EdITOrS
Carolyn Chu John Erickson kasandra Griffin rashi kesarwani Stephanie McLeod Pilar Mendoza Mark reinardy Josh Smith

Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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PUBlISHINg aSSOcIaTES
Miranda Dietz kathy Wilson

Are Mexicos Conditional Cash Transfers Missing the Target? Jennifer Tucker

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PolicyMatters Journal

Prescription for Prior Authorizations: A Better Way


LEAH KrIEGEr
EDITED BY KASAnDRA GRIFFIn, RASHI KESARWAnI AnD PILAR MEnDozA

COmmENTARY

Under traditional regulation, water utilities profit by increasing their sales and thus have a disincentive to promote conservation. Severing the connection between water utilities revenues and the quantity of water they sell, a system known as revenue decoupling, offers opportunities to solve this problem. However, revenue decoupling has limitations and raises some concerns. First, decoupling by itself is not a conservation program, and must be supplemented with additional conservation efforts such as appropriate Increasing Block Rate (IBR) pricing structures. Second, decoupling alters the risks that both utilities and ratepayers face. Third, water users may perceive a conservation penalty if their rates increase when their consumption decreases. Despite these and other challenges, revenue decoupling is a powerful tool to promote conservation and should be expanded. Regulators should also study the long-term conservation incentives that the policy creates.
Prescription drug spending constitutes a significant proportion of health care costs in the U.S. To manage these costs, the government and private sectors utilize independent corporations known as Prescription Benefit Managers (PBMs) to administer prescription drug benefit programs for employers or health plans. Under this current system, PBMs require that certain drugs receive Prior Authorization (PA) before distribution, creating negative externalities for both health care providers and consumers. This paper explores three alternative ways of reducing spending and inefficiencies present in the current system. The first alternative places a cap on the number of PAs allowed; the second alternative looks at reform through federal regulation; and the third analyzes an instant prescription drug approval model that reduces the role of PBMs. Spending on drugs, as a component of health care costs, has become increasingly important in recent years, as more illnesses are managed by drugs and the number of prescriptions continues to increase . In 2009, $2.5 trillion was spent on health care, including hospital care, physician and clinical services, retail prescription drugs, research, and infrastructure; $249.9 billion of this was spent on prescription drugs. Prescription drug spending accounted for 12% of 2009 total personal health expenditures, excluding health insurance costs, government administrative costs, public health activities, research, and structures and equipment . These costs are shared by government (Medicare/Medicaid), the private sector (out-of-pocket expenditures), and private health insurance . To combat rising drug costs, government entities and private insurers have turned to Prescription Benefit Managers www.policymatters.net (PBMs) to reduce spending. PBMs are independent corporations that administer the prescription drug benefit program for employers or health plans. The three largest PBMs are Medco, Caremark and Express Scripts. One of the tools used by PBMs to manage prescription costs is requiring that certain drugs receive Prior Authorization (PA) from the PBM before dispensing. Usually, a plan has a formulary with a list of preferred drugs and any drug not on the list requires special approval. Some drugs have a step therapy requirement in which the drugs may not be approved unless a cheaper drug is tried first and proven to be ineffective or not tolerated by the patient. This paper will show that while PA requirements do help to control costs, they incur consequences not adequately quantified in the market, and it will explore alternatives to the use of this tool. The question is not whether costs need to be controlled, but whether the PA is the optimal tool for managing these costs and whether PAs provide quality care as defined by a balance of efficiency and efficacy. Good management, according to the Academy of Managed Care Pharmacy (AMCP), means one of these measures: 1. better health at the same or lower cost, 2. equal health at lower cost or 3. much better health at slightly higher cost . It is not clear that PAs satisfy any of these criteria. The goal is to find alternate ways of reducing drug spending without the negative externalities to patients, physicians and pharmacists and the increased risk of abandoned prescriptions. With the passage of the Health Care Reform Act, this goal is even more important as more Americans will have access to private health insurance coverage that use fall 2010 - Spring 2011

Prescription for Prior Authorizations: A Better Way


PBMs to manage drug costs. Shortcomings of the Prior Authorization System In a perfect world, both physicians and patients would know what drugs are on the plans formulary and physicians would prescribe accordingly. In reality, this does not occur. In a typical scenario, the consumer will find that a drug requires a Prior Authorization (PA) only at the point of sale in the pharmacy. Even when the prior authorization process works efficiently, the consumer will experience a delay because the pharmacist must reach out to the physician for an alternate script that will be covered by the plan. It is difficult for the consumer to ascertain whether a particular drug will be covered prior to the denial . Attempts have been made to solve this issue, but they are insufficient. Medicare, for example, has a web site in which one can search for a drug and determine if it is on a plans formulary. However, formularies can change after the enrollment period. Lopert and Rosenbaum state that an objectively sensible and rational choice of plan can prove to be a costly mistake as prices rise throughout the year, new drugs are prescribed, or formularies are varied . If the physician agrees to the substitution recommended by the Prescription Benefit Manager (PBM), the pharmacist will fill the prescription with the cheaper drug and PBM has achieved lower costs . There are negative externalities, however. Both the pharmacist and the prescriber have spent extra unreimbursed time on the prescription and the patient has experienced delay. Alternatively, the physician may conclude that substitution is not appropriate and request a Prior Authorization. This is more costly as the physician pulls up the patients records and contacts the PBM or HMO via phone or fax. If the initial request is denied, the process may be reiterated as the physician supplies additional medical information until the script is approved or the denial is final. This process is onerous for the physicians staff. According to Terry, it can add five to ten hours of staff time per week in a small practice, and may require a medium-sized practice to hire an extra medical assistant . Pharmacists also report increased time processing the prescriptionsan online survey of pharmacists reports that they spend an average of 4.6 hours a week processing PAs and that the time impact is increasing . Physicians will sometimes agree to the substitute drug even when not clinically ideal because they do not want to undertake the task of requesting the PA . As the PA process unfolds, the patient has not received any medication. This delay may have a medical impact or the patient may be in pain. Filling the script may necessitate additional trips to the pharmacy, difficult for a sick person, or an additional burden on the caregiver . The physically handicapped find the PA process especially challengingin the attempt to alleviate complicated conditions, they use more drugs and are more likely to use off label drugs than the general population . www.policymatters.net If the PA is denied, there are still several options open to the consumer: 1. Pay for the prescription out-of-pocket. In this case, the consumer pays in a market distorted by large players and will not pay a competitive-market price for the drug. In addition, Medicare and other insurers do not count these expenses toward the deductible or for any reimbursement . 2. Appeal. Most drug care plans have an appeals process but these vary in ease of use and incur further delays. The Medicare appeals process is especially difficult to traverse as it can require substantial scientific documentation from the physician including journal articles and has both time limits for the different levels of appeal and notices that are difficult for patients to understand . 3. Abandon the prescription. In recent years, abandonment of prescriptions has increased. Together, healthplan denials and abandoned scripts leave more than 14% of scripts unfilled and are factors in the problem of non-adherence to prescribed therapy; drug related morbidity which includes both sub-optimal prescribing and poor adherence to prescribed drug regimens has an estimated cost of $289 billion per year or about 13% of health care costs . The PA system assumes a motivated patient with the competence to follow though and track the PA. Unfortunately, that is not always truea prescription for Lipitor denied might mean no cholesterol-lowering drug taken at all. The problem is especially marked with respect to psychotropic medication; one PA program in Maine resulted in a drop of 32% in initiation of treatment for bi-polar disorder . Despite PBMs promotion of evidence-based medicine, there has actually been scant study of the effect of prior authorizations on medical outcomes and there appears to be a large gap in studying the impact of drug management programs . Another cause for abandonment is that a patient may not be aware of the denial or the need for a PA. This is common when patients have numerous prescriptions. A patient may assume that a drug is no longer required if it no longer appears in their bag from the pharmacy . Prescription Benefit Managers and the Prescription Drug Market PBMs manage drug costs in a market where drugs can be extremely expensive as consumers are cushioned from the real cost of drugs and normal market forces do not keep prices down. Prescribers, as well, have little incentive to prescribe cost-effective drugs. PBMs, due to their buying power, can negotiate better prices and rebates for drugs in exchange for the agreement to keep these drugs on the formulary; the corollary is that other drugs are not included in the formulary for non-medical economic reasons. There is an inherent problem in this broad use of PBMs. Government entities and private plans hire PBMs to manage drug spending, but PBMs, as private entities, have their own profit motivethey have an incentive to add drugs to formularies based on manufacturers rebates that increase fall 2010 - Spring 2011

PolicyMatters Journal profits. In fact, the Medicare prescription drug benefit assumes that this profit motive will encourage PBMs to seek cheaper sources of drugs and/or rebates, which, in turn, will keep down the cost of drugs to the government. There is no countervailing incentive to deter formulary changes that reflects the true social cost of the changing formularies. Full Costs of the Prior Authorization System Lennertz & Wertheimer found that PAs reduce medication costs but note that administrative costs for PAs are high . one study estimates costs for each PA as $20 for the PBM and $17 for the physicians office . Pharmacist cost can be estimated as follows: A survey of pharmacists found median time spent on PAs per week about 4 hours for an average of 1417 prescriptions a week . As PBMs control about 75% of the prescription market and about 5% of drugs require PA, pharmacists spent 4 hours on 53 PAs or 4.5 minutes per PA; at an hourly rate of $50 this equals to $3.75 . Total administrative cost per PA is provider cost ($17) + PBM cost ($20) + pharmacist cost ($3.75) or $40.75. These figures do not include any negative health outcomes,which have significant additional costs. A study of psychotherapeutics among Texas Medicaid Providers found a moderate burden on patient care outcomes . Another found increased hospitalizations and emergency care among psychiatric patients whose drugs were switched for non-clinical reasons . Another study called switching drugs medically risky for patients in long-term care facilities who had hypertension, heart disease, diabetes, HIV, and bipolar disorder . Anecdotal evidence points to increased health care costs as well. It seems clear that the problem is greater for psychiatric drugs because patients are less compliant and because reactions to drugs is more variable. Terry gives the example of a patient stable on zyprexa, an expensive but effective psychiatric drug that is often taken when everything else has failed. When the patient needed a refill, the Medicare plan required a PA, creating an obstacle for this mentally ill patient . The risk in this case of the substituted drug not being effective is substantial and, clearly, the resultant loss in both quality of life and potential future costs is great. Three alternatives to Prior Authorizations in managing drug spending As explained above, there is no controversy about whether costs need to be controlled, only about whether Prior Authorizations are the best way to do it. Below are several proposals of ways to reduce prescription spending while also reducing the negative externalities of the current PA system. Alternative 1. Allow physicians a fixed number of pre-authorized PAs. United Health Care recently announced a new pilot in which it intends to pay oncologists a fixed price to cover total cost of treatment per cancer patient rather than making payments per drug infusion. This change removes the personal financial incentive for the doctor to do additional treatments. However, it also introduces a danger that oncolowww.policymatters.net gists will provide lower levels of care if they are not paid incrementally. United Health Care plans to monitor outcomes and adjust the payment schedule based on the outcomes to minimize this potential risk . It is possible to apply a similar approach to other aspects of drug spending, targeting high-cost drugs and creating pilot programs for them. One idea is to give physicians a fixed number of PAs to use at their discretion before a formal PA is needed. The number would be based on the number of patients they treat that are managed by the PBM and by the number of PAs that were approved the previous year. This could be adjusted monthly based on the current patient load. Doctors could then prioritize the highest needs for off-formulary drugs among their patients. If the initial allotment is used, the usual PA process might apply, or some other exception procedure could be instituted that would include disincentives. This idea has major advantages: Systems for tracking the number of fills per prescriber as well as a way for physicians to check their usage of PAs will be needed. But investment is minimal as PBMs already have prescriber databases that associate each script with the prescriber. THE ADMInISTRATIvE ovERHEAD RELATED To PAS, WHICH IS SUBSTAnTIAL FoR PBMS , WILL BE REDUCED AnD WILL oFFSET THE CoSTS FoR nEW SySTEMS NEEDED. PHYSICIAnS WILL BE EMPoWERED To TREAT PATIEnTS MEDICALLY WITHoUT BEInG SEConD-GUESSED BY PBMS, BUT WILL HAvE An InCEnTIvE To AvoID THE ADMInISTRATIvE BURDEn ASSoCIATED WITH ExCESSIvE PAS So ARE LIKELY To USE THEIR ALLoTMEnT SPARInGLY, THUS nATURALLY REDUCInG DRUG CoSTS. PATIEnTS WILL noT SUFFER THE HEALTH CARE DAnGERS oR InConvEnIEnCE oF THE PA PRoCESS AS FREqUEnTLY THUS IMPRovInG HEALTH CARE qUALITY. PHARMACISTS WILL noT InCUR THE CoSTS oF PA PRoCESSInG AS OFTEN. THIS PLAn CAn BE IMPLEMEnTED USInG MEDICAL KnoWLEDGE AVAILABLE TODAy, IN THE SAME WAy THAT PAS ARE USED ToDAY. AS MoRE fall 2010 - Spring 2011

COmmENTARY

Prescription for Prior Authorizations: A Better Way


RESEARCH BECoMES AvAILABLE, ALLoTMEnTS CAn BE ADJUSTED oR FoRMULARIES FINE-TUNED. THE ExISTInG PA PRoCESS WILL STILL BE AVAILABLE, THOUGH ITS USE WILL BE DISCoURAGED. A challenge to the implementation of this system will be possible physician resistance to tracking of their PAs. Physicians will need to be educated in the benefits of the plan. There is also a possibility that physicians may not allocate the limited number of PAs equitably. Alternative 2: Increase Federal Regulation Different government entities have recognized the need for controls in the implementation of PAs and reforms have been implemented in some states Medicaid policies . None of these tools would work alone to solve the problem, but they are each incremental improvements to the existing system. Some of these reforms could be implemented on the federal level, such as: once a formulary has been marketed to the public, no change should be permitted until the next open-enrollment period. The problem of information transparency will be reduced, though not totally solved, because consumers cannot know ahead of time which drugs they will require. It will, however, reduce the confusion that providers and consumers experience due to rapidly changing formularies and will be more equitable. An exception to this rule should be made in the case where an on-formulary drug is shown by new medical evidence to be significantly inferior to an off-formulary drug. Patients with serious illnesses, stable on their current medications, should be grandfathered in; Minnesota requires a 180-day transition period . Pharmacists should be paid an increased professional fee for scripts that require a PA. Thus the cost will be shifted to the plan, where it rightly belongs. This will not impact the total cost of the PA but will eliminate the unfair burden to pharmacists who have no control over the prescribing process. The federal government should fund studies on the impact of PAs on total health costs vs. total drug costs. Although PAs have been widely implemented, there has been very little research on the impact on health outcomes and health costs. These proposals, combined, would eliminate the worst abuses of the PA process and mitigate some of the unreimbursed costs. Equity will increase as consumers know which drugs are on the formulary when selecting a plan, and physicians know which drugs to prescribe. quality will increase as seriously ill patients will not suffer the risk of a drug switch and there will be fewer gaps in care due to unexpected PAs. However, this comes with a cost, as PBMs will be less www.policymatters.net nimble and less able to react quickly to changed drug prices. Once these costs are factored in, the PA process will become more expensive, less attractive to PBMs, and less effective at reducing drug spending. However, some of the increased drug spending will be mitigated by reduced total health care costs due to the negative impact of patients switching drugs or abandoning therapy. The regulatory approach is a compromise between the need to cut costs and the need to be equitable to consumers. Neither goal is totally met, but the worst problems are mitigated. Alternative 3. Instant Approval. In 2007, a north Carolina Medicaid program introduced modified PAs for proton-pump inhibitors (drugs like Prilosec that treat gastroesophageal reflux disease) with two-fold goals: (1) to generate drug cost savings and (2) to avoid some of the unintended consequences of traditional PA programs such as increased gaps in therapy and clinician dissatisfaction . In order to accomplish this, physicians had the option of requesting the PA directly with the prescription and the PA was automatically approved. The program proved to be very effective. Despite the ease of use, physicians did not use instant approvals at a higher rate and switched to the plans preferred drug at the same rate as when traditional PAs were required. However, the gaps between medicine fillsa measure of qualitywere cut in half for the instant PAs as compared to traditional PAs. For a certain subset of regularly filling patients, the gaps were cut even more, to of their prior levels . Furthermore, about of physicians surveyed indicated that they liked the instant PAs better than traditional PAs. This program illustrates that providers working with the benefit manager can contain costs without the negative externalities resulting from adversarial relationships; physicians using the Instant Approvals generally did not abuse the process. The method used for Instant Approval (IA) in North Carolina was simple: the physician wrote the medical criteria and requested the IA on the prescription pad. There were no back-and-forth communication between the physicians office and the plan administrator, thus saving the average practice about $17 per PA. In addition, the cost to PBM of administering a traditional PA of about $20 per PA was also eliminated as was the cost to the pharmacists of processing the PA, which we calculated to be $3.75, above. Costs for Instant Approval The costfor educating the physicians is estimated to be about $1 per PA. Administrative costs are estimated at no more than $2 per PA. This process can be automated and forms downloaded from the plans website. If the total cost of $3 is subtracted from $40.75, Instant Approvals save an estimated $37.75 per PA. The pilot project in north Carolina found that physicians did not abuse the Instant Approvals and drugs were switched to lower-cost drugs at the same rate as traditional PAs. Therefore, there is no impact anticipated to the total cost of the drugs. Some advantages of the Instant Approval are: fall 2010 - Spring 2011