NEW YORK - Drug companies and other health-care providers should brace for a hit this year as cash-strapped state governments take the ax to Medicaid funds, analysts say.
State governments typically provide half of the funds for Medicaid health insurance programs for the poor, with the federal government making up the difference. But as the economic slump continues, state budgets are shrinking as tax receipts fall.
Although the magnitude of Medicaid cuts will not be determined until state budgets are completed this spring, industry analysts say cuts are unavoidable, given the size of state budget shortfalls.
"Medicaid is a total train wreck," said Thomas Walsh, senior health policy adviser for the Senate Finance Committee, which writes health and tax policy.
In Illinois, the state is looking at an estimated $5 billion budget shortfall. The situation is worse in other states, such as New York, with a projected $10 billion projected budget deficit, or California's $30 billion deficit.
Costs of operating state Medicaid programs, which pay for drugs, hospital stays and medical devices, have jumped more than 25 percent in the past two years because of higher drug prices and greater use of services, analysts say.
"States are in a bleak financial condition," Walsh said at an industry conference here. "They are looking at Washington for help, and that's never a good idea."
Also, because states are unwilling to raise taxes, companies fear Medicaid programs will be an obvious target.
Take health-care giant Johnson & Johnson, which will soon roll out a new, drug-coated stent, a device hailed for its ability to keep blocked heart arteries open long after angioplasty.
Johnson & Johnson worries that hospital clients might not receive adequate reimbursement for the device, which analysts say could crimp sales. Johnson & Johnson would not disclose its price for the new stent, known as Cypher.
The device is awaiting approval from the Food and Drug Administration.
"There are always concerns over reimbursement," said Helen Short, vice president of investor relations for Johnson & Johnson. "Every hospital gets reimbursement at a different rate. Hospitals in some states are comfortable and some hospitals are concerned."
Some drug companies expect an increasing number of states to take a closer look at their preferred-drug lists, known as formularies.
The use of formularies could make it more difficult for Medicaid patients to obtain the latest brand-name drug when state health officials step up measures to encourage the use of cheaper generics.
North Chicago-based Abbott Laboratories said lower Medicaid reimbursement is just one of a growing number of worldwide pressures facing drugmakers as health-care costs escalate.
"We've seen difficult economic conditions in every major Western developed country, and we've seen a lot of analysis on price and the cost of health care. We're certainly seeing that in the U.S. as well," Abbott chief executive Miles White told analysts on a conference call this month. "I don't think we expect those ... conditions to change in the near future."
Bruce Japsen is a reporter for the Chicago Tribune.