20 Drugs That Waste Tax Money Because States Don't Buy Generics

Medicaid wastes $329 million a year paying for expensive brand drugs when cheaper generic versions are available, according to a study that calls into question how well managed the federal healthcare program is.

More money is wasted on Johnson & Johnson (JNJ)'s antipsychotic drug Risperdal -- $60 million in 2009 -- than any other therapy, the study says. Massachusetts wastes more money per prescription, $142.73 on average, than any other state.

Alex Brill of the American Enterprise Institute, a conservative think tank, did something simple but interesting with Medicaid's database to get the results: He picked 20 popular brand name drugs for which generic alternatives are available and calculated how much money Medicaid would've saved had it automatically switched all those patients to the cheap equivalent.

The results indicate that Big Pharma could receive a windfall of up to $433 million through 2012 as 10 more famous brands go generic, assuming Medicaid again fails to switch patients to the cheap rival drugs.

Differences in switching rates between the states indicate that Medicaid could be better managed, and states could save millions of dollars, if they were stricter about transferring patients to generic drugs or charging patients more if they insist on the brands. Here are the top 20 drugs unnecessarily draining the taxpayer's treasury chest (click to enlarge):

Notice that Medicaid is already switching 81 percent of patients to generics. The $329 million overspend occurs on the 19 percent of patients who, for some reason, still want Pfizer (PFE)'s* GlaxoSmithKline (GSK)'s Wellbutrin antidepressant over Watson Pharmaceuticals (WPI)'s buproprion.

In all, Medicaid wasted an average of $95 per brand prescription. Now look at the different level of waste by state (click to enlarge):

Massachusetts wastes $142.73 per scrip, the most, but New Mexico somehow only wastes $22.57, and is the thriftiest of the states. This suggests state Medicaid managers ought to look at New Mexico for ideas about how to trim budgets as Medicaid enrollment swells.

Some states have generic substitution laws that require pharmacists to switch patients to the cheapest equivalent products. But even in those states there are loopholes, such as "dispense as written" laws that nix the switch if a doctor specifically requests a brand.

The study also addresses what might happen when 10 more major drugs lose their patents between now and 2012 (Actos, Combivir, Concerta, Lexapro, Lipitor, Plavix, Seroquel, Singulair, Xopenex, and Zyprexa). Total annual overspending could reach $289 millionâ€"$433 million, Brill believes.

It's yet another one of those healthcare areas where the government could save money, spend less, and reduce the tax burden without the need for raising new revenue to get there. (Here are 10 more tax-free ways to reduce government healthcare costs.)

You don't have to ban the use of brands by Medicaid recipients when generics are available. But surely there is a case for asking patients and doctors to pay the difference if they continue to insist on them. Why should the taxpayer pay for your Mercedes when the subway runs just fine?

*Correction: Of course Wellbutrin is not a Pfizer drug. What was I thinking? Thanks for the commenter below who noticed the error.
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