Strategies to Decrease Healthcare Costs in Texas

To: Texas State Senator Lois Kolkhorst – Chair of the Senate Committee on Health and Human Services

From: Ian Anderson

Problem Statement

Health care costs in Texas continue to rise at rates that will lead to painful cuts to health care or discretionary spending. These expenditures are costing Texas $42.9 billion per year, around 43% of the state’s budget (Hegar, 2017). Drug costs are among the largest drivers of this increase (TMC, 2018).  What can Senator Kolkhorst do to decrease health care costs in Texas?


Drug prices for state funded health insurance plans are rising at a far greater rate than inflation or population growth (Hegar, 2017). Drug prices are some of the largest drivers of cost increases and in many cases, it is due to a small number of new or specialty drugs (Hegar, 2017).


Option 1 – Implementation of value-based contracts for pharmaceuticals.

Drug prices are having a significant financial impact on health insurance funded by the state. Value-based contracts allow for the state and pharmaceutical companies to negotiate drug prices (Reck, 2018). CMS has approved this plan in Oklahoma (Reck, 2018). While this type of state-wide drug negotiation has not been attempted on a large scale, Texas needs to act to bring down drug prices. This option may be more popular politically at it may lead to cost savings and will not require a narrowing of Medicaid eligibility.

Option 2 –   State and federal drug price coordination.

Other government entities such as the Department of Veterans Affairs and Department of Defense have negotiated lower drug rebates than Medicaid has (Blumenthal, 2016). By obtaining similar rebates for drug prices in Texas, it would lead to significant savings. This will be a politically difficult solution. The pharmaceutical industry will likely mount a strong lobbying campaign to defeat this attempt. A similar attempt in Ohio and California were put to the ballot but was defeated (Young & Garfield, 2018).


Option 1 – Implementation of value-based contracts for pharmaceuticals.

This option has already been approved by CMS for Oklahoma. This should help the approval process for Texas. Using value-based contracts for drug prices will help to bring down costs for the most expensive drugs. The plan also benefits from its limited scope. Adopting this will not lead to immediate or wholesale change to health care services in the state. It will involve careful planning, negotiation, and will only apply, at the early stages, to a few drugs. More contracts can be added if there are cost savings. Conversely, if the contracts are not providing cost savings, they can be terminated or allowed to expire and return to the current system of drug payment.

Federal law limits other drug control strategies such as restricting access to FDA approved drugs. This option gets around that problem by allowing all drugs to be prescribed, but by stating the state’s preference to which should be prescribed. Other drugs may be given but may require approval before prescription. This will help to control costs while still allowing Texas residents to receive the treatment they need.

To: Texas State Senator Lois Kolkhorst – Chair of the Senate Committee on Health and Human Services

From: Ian Anderson

Problem Statement

Health care costs in Texas continue to rise at rates that will lead to painful cuts to health care or discretionary spending. These expenditures are costing Texas $42.9 billion per year, around 43% of the state’s budget (Hegar, 2017). Drug costs are among the largest drivers of this increase (TMC, 2018).  What can Senator Kolkhorst do to decrease health care costs in Texas?


Raising health care costs are not limited to Texas, the United States has experienced unprecedent health care cost growth (TMC, 2018). These costs are increasingly putting a strain on the Texas budget. In state health care costs increased by almost 20% from 2011 to 2015, outstripping population growth and inflation (Hegar, 2017). With 43% of the budget going to fund various health care costs in the state, it accounts for 12% of gross state product (TMC, 2018). This is squeezing the state and limiting its ability to fund other necessary initiatives.

State managed Medicaid coverage accounts for almost 60% of that cost (Hegar, 2017). Significant federal support for Texas health care is provided, but as fixed percentages, it does not reduce Texas’ financial burden. Current Medicaid federal reimbursement to Texas is 58% or around $16 billion. Another $2 billion is provided by the federal government to supplement other programs such as state employees’ health insurance and psychiatric and public health services (Hegar, 2017).

Drug prices are one of the largest drivers of raising health care costs for Texas (Hegar, 2017). A dramatic increase in the use of specialty drugs and price increases on existing drugs by manufacturers has been the largest driver of cost growth (Frakt, 2018). This is occurring while use of generic drugs is around 84%, higher than most other industrialized countries (Papanicolas, Woskie, & Jha, 2018). Federal law currently prohibits states from restricting FDA approved drugs to Medicaid recipients, this limits the state’s ability to reduce drug costs (Young & Garfield, 2018). Systems that do restrict drug access are called closed formularies and are allowed for the Department of Veterans Affairs, but this is unlikely to approved at the state level (Blumenthal, 2016).


Option 1 – Implementation of value-based contracts for pharmaceuticals.

Value-based contracting was recently approved by CMS in Oklahoma to help the state deal with high drug costs (Reck, 2018). This approach works by securing contracts with drug companies for specific drugs. The contract will make the drug a preferred treatment for a condition, in exchange the drug company will guarantee better prices to the state (Reck, 2018). If drug usage costs the state more than anticipated, the company will be required to provide rebates to the state for the exceeded amount (Reck, 2018).

This could have a major impact on state drug costs. This should insulate the state from random price increases such as was seen with Mylan’s Epipen, a drug which experienced a 400% price increase (Lazarus, 2018). This has been occurring regularly even with common drugs as pharmaceutical companies look to increase profit margins. Difficulty with this proposal will stem from the work needed to create a contract and maintain ongoing evaluation. Texas should be in a strong position to negotiate due to the size of its Medicaid population and the possible benefit to the pharmaceutical companies in terms of increased sales.

Political feasibility is good. Any reduction in government spending will be seen by Republican lawmakers as a positive result and continuing access to drugs for Medicaid beneficiaries will be the same for Democratic lawmakers. It will also likely not be met with resistance from state residents. Since the use of these contracts will be limited to some of the least used and expensive drugs and every drug will still be available, the public should see the need for this type of cost saving effort.

Since the use of value-based contracts has only been approved within the last 12 months, there has not been significant research into the possible costs savings with the program. The benefit is that value-based contracting does not become mandatory for all drugs. This can be used on a select number of the costliest drugs with limited impact on the Medicaid population. If a contract costs more than estimated or there are other problems, the contract can be terminated, and the state will return to the current system.

Option 2 – State and federal drug price coordination.

Specialty drugs have been the largest driver of health care costs in Texas (Hegar, 2017). These drugs accounted for 32% of total drug costs for the state while being prescribed less than 1% of the time (Hegar, 2017). Medicaid rules do not allow the banning of drugs so other strategies must be used to better mange how and when it can be prescribed (Young & Garfield, 2018). Luckily the program allows states to have some control of specialty drug utilization.

Currently, each state must negotiate Medicaid drug rebates. This increases each state’s Medicaid bureaucracy while limiting its ability to negotiate rebates. Coordinating with other states or the federal government to negotiate drug rebates would help to lessen the state’s financial burden. Trying to align drug rebates with that of the Department of Veterans Affairs or the Department of Defense would lead to significant reductions in Texas’ drug cost burden. Both of those agencies have negotiated lower drug rebates of 24%, about 0.9% lower than Medicaid (Blumenthal, 2016).

It should be noted that both agencies have significantly different health care goals and populations than the general public and are a fraction of the size. Companies may be more willing to offer these rebates but would hesitate for a larger blanket rebate for Medicaid. Attempts in Ohio and California were put on ballot initiatives in the respective states and were voted down after heavy lobbying (Young & Garfield, 2018). This must be taken into consideration as any attempt to decrease reimbursement rates for drugs will face push back.

The budgetary results would be immediate. Any reduction in drug prices would have a major impact on all parts of state funded health care. Beyond cost saving for Medicaid, it could be applied to other state funded health care such as for state employees, teachers, and retirees (Hegar, 2017).

Politically this is a feasible solution. It would result in drug cost reductions while not excluding any current beneficiaries. It is likely that many residents who have Medicaid would not be aware of the change, as the largest impact will be on the costs paid by the state and not the individual. The largest difficulty will be in partnering with another state or with the federal government to receive the better rebates. This has not been attempted and would likely need the approval of CMS and Congress itself. While this option may provide the most consistent cost saving if fully implemented, it is likely the most difficult to achieve.


Option 1 – Implementation of value-based contracts for pharmaceuticals.

The first option provides an achievable goal of reducing drug prices for the state of Texas. Value-based contracting for drug prices has been approved by CMS in Oklahoma already and there would be little reason to assume that it would not be approved for Texas.

The political outlook for this plan is good. Members of both parties are looking for ways to decrease drug prices and implementation of this would add another tool for Texas HHS. Since approval in mid-2018, Oklahoma has entered into several contracts with drug companies (Reck, 2018). This is a positive sign for the quick implementation in Texas. Since Oklahoma is the first state to begin this process, any positive outcomes in terms of cost savings are unknown. This will be the largest sticking point with lawmakers in getting this approved. These concerns should be dealt with by explaining that approval of value-based contracting will not radically change the Medicaid system.

There will be difficulty in obtaining the contracts once the plan is approved. This will involve protracted negotiations with pharmaceutical companies, which will have to be repeated for every drug that HHS wants a cost reduction on. These contracts will likely also only be for a few years meaning that a permanent contracting department will need to be created. They will be responsible for evaluating and enforcing contract terms to ensure that Texas is being charged or reimbursed correctly. The increase to Texas’ health care bureaucracy will be offset even by small decreases in drug prices.

Another positive of value-based contracting is that it does not exclude drugs that are not under contract. All FDA approved drugs will be available for use but may require pre-authorization (Reck, 2018). The goal is to divert some percentage of Medicaid recipients to these contracted drugs to reduce costs.

Implementation of this policy will help to control prices for the most expensive drugs. As these are the largest drivers of drug costs across all health care funded by the state, targeting even a few of them will be beneficial. As time goes on and more drug contracts are initiated, these cost savings will become apparent. For the impact of this program to be determined, the state must be willing to continue the program for several years.

Failure to implement this or any other drug price control strategy will lead to unmanageable cost increases to the state over the next several years. As health care costs continue to increase either taxes will have to be increased or discretionary spending will have to be reduced. Neither of these are attractive options to the citizens or lawmakers of Texas. With each passing year, it becomes obvious that major changes must be made to Medicare management in the state. Federal law prohibits banning the use of any FDA approved pharmaceutical and cut backs to service would endanger federal reimbursement the state receives (Young & Garfield, 2018).

This program will require careful evaluation. Due to the limited number of states attempting this mode of drug price control, every effort must be made to ensure there are not unintended costs. As a large state with a large Medicaid population, Texas will be in a strong position to negotiate prices with pharmaceutical companies.


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  • Hegar, G. (2017).

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  • Lazarus, D. (2018, June 5).

    Always look on the bright side of life, says CEO who raised EpiPen price by more than 400%

    . Retrieved from Los Angeles Times:
  • Papanicolas, I., Woskie, L. R., & Jha, A. K. (2018, March 13). Health Care Spending in the United States and Other High-Income Countries.

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  • Reck, J. (2018, September 25).

    Oklahoma Signs the Nation’s First State Medicaid Value-Based Contracts for Rx Drugs

    . Retrieved from National Academy for State Health Policy:
  • Texas Comptroller. (2017).

    Texas Comptroller’s Office Releases Health Care Spending Report.

    Austin: Texas Comptroller.
  • TMC. (2018).

    Reducing the Cost of Health Care Current Innovations & Future Possibilities.

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  • Young, K., & Garfield, R. (2018, February 21).

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    . Retrieved from Kaiser Family Foundation:

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