Changes in the Effectiveness of State Medicaid Drug Program Cost-Containment Policies Following OBRA 1990

Containment of Medicaid pharmaceutical drug program costs continues to be an important policy problem. Perhaps the most important policy of the past two decades with significant implications for Medicaid pharmaceutical drug programs was the Omnibus Budget Reconciliation Act (OBRA) of 1990. This study analyzes Medicaid drug spending data from 1985 to 1997 to determine how OBRA 1990 influenced the effectiveness of existing drug cost-containment policies and if the Act produced its anticipated cost savings. The descriptive evidence indicates that reductions in drug expenditure growth rates, following the passage of OBRA 1990, resulted from factors that are independent from that Act. Furthermore, the analytical evidence shows that changes in the effectiveness of major cost-containment policies (drug formularies, drug utilization review programs, and reimbursement rates) offset, at least in part, savings from the drug rebate program included in OBRA 1990. *William J. Moore received his doctorate from the University of Texas at Austin. He is currently the Gulf Coast Coca-Cola Distinguished Professor of Economics at Louisiana State University. His primary research areas are health economics and labor economics. He is the author or co-author of numerous articles, including “Drug Formulary Restrictions as a Cost-Cost-Containment Policy in the Medicaid Programs” (with Robert Newman), Journal of Law and Economics (April 1993) and “System-Wide Effects of Medicaid Retrospective Drug Utilization Programs” (with Karen Gutermuth and Etienne Pracht), Journal of Health Politics, Policy and Law (August 2000). Etienne E. Pracht is an Assistant Professor of Economics in the Department of Health Policy and Management at the University of South Florida. His primary research interests are health economics and applied econometrics. He is the author or co-author of several articles, including “Interest Groups and State Medicaid Drug Programs,” Journal of Health Politics, Policy and Law (February 2003). American Journal of Economics and Sociology, Vol. 66, No. 5 (November, 2007). © 2007 American Journal of Economics and Sociology, Inc.