As drug costs soar, states join forces to cut expenses. (On First Reading).

States are teaming up to help defray the soaring costs of prescription medicine for Medicaid patients. Policymakers are looking at two ways to help defuse the medication cost hikes: forming joint purchasing pools and dealing directly with drug companies.

With states facing budgets bleeding red ink, lawmakers have been scrutinizing the state-federal health insurance program for potential savings since Medicaid is one of the largest contributors to budget deficits.

Michigan, South Carolina, Vermont and Wisconsin have announced they will join forces as a bulk purchasing pool, using their combined patient numbers to negotiate lower prices from drug makers. Exactly how much the partnership will save is unknown at this time.

Iowa, Kansas, Ohio, Minnesota, Tennessee and Virginia also have expressed an interest in bulk purchasing. And Texas has a law authorizing bulk purchasing within its borders to allow diverse state agencies covering drugs to combine forces when purchasing medicine.

At least 35 states have changed their Medicaid pharmaceutical policies in the past two years in efforts to get more value for their Medicaid money by altering the mix of drugs prescribed and dispensed.

Total annual spending on medication through Medicaid was more than $24 billion last year, according to the federal Centers on Medicare and Medicaid Services. Wisconsin, which faces a potential $3.2 billion deficit, plans to spend nearly $160 million in state and federal money for prescription drugs for its 615,000 Medicaid patients. Michigan spends more than $1 billion each year on pharmaceuticals for its 1.4 million Medicaid clients; Vermont, $93 million; and South Carolina, $489 million in state and federal funds combined.

Legislators from nine states and the District of Columbia also are developing a nonprofit group to manage pharmaceutical costs and limit drug makers' ability to sell states their most expensive medicines. The nine are Connecticut, Hawaii, Maine, Massachusetts, New Hampshire, New York, Pennsylvania, Rhode Island and Vermont.

The coalition, the National Legislative Association on Prescription Drug Prices, would cut out the middle man by taking the place of for-profit pharmacy benefit managers, which many states use to negotiate prices and manage pharmacy benefits for Medicaid recipients and state employees.

A problem is that benefit managers sometimes pocket payments from drug companies in return for promoting certain drugs, often the most expensive medications, says Jeffrey Lewis, executive director of Heinz Family Philanthropies, which is helping develop the association business plan. He said that a major goal of the new group is to ensure that payments or rebates from drug companies benefit states, not the for-profit middlemen.

The group also would develop a preferred drug list--a list of accepted medications, based on effectiveness and cost--and reap the benefits of rebates from companies whose drugs end up on the list.

Michigan, Florida, Illinois, Minnesota, Mississippi, New Mexico, West Virginia and a few other states already seek discounts or supplemental manufacturer rebates on medications included on a preferred drug list for Medicaid patients.

NCSL's report on bulk purchasing is online at www.ncsl.org/programs/health/bulkrx.htm. The report on Medicaid is at www.ncsl.org/programs/health/medicaidrx.htm.