Worried about rising expenditures for prescription drugs, many states are employing preferred lists to encourage doctors to prescribe older, lower-priced drugs and forego the latest, more expensive medicines.

If Congress succeeds in passing a Medicare prescription drug benefit this year, the debate over preferred drug lists - now raging in numerous states - is likely to explode onto the national stage.

The lists - also known as formularies - are, whether we like it or not, a form of rationing. Ask any Canadian.

While some state drug benefit managers claim they are saving money by restricting the availability of newer, more expensive drugs, those claims are belied by real-world experience in jurisdictions outside the United States, where governments historically have been much bigger buyers of prescription drugs than in America.

In fact, preferred drug lists in Canada and a number of European nations have been unsuccessful at saving money even though they’ve ruled out many of today’s most effective drugs as too expensive.

One approach - dubbed reference pricing - has had especially negative results in my home province of British Columbia.

Reference pricing implies that all drugs in a therapeutic class - as defined by a government appointed committee - are pretty much all the same. Starting in late 1995, British Columbia stopped fully subsidizing many new, more expensive drugs in favor of older, less expensive ones in five categories that covered cardiovascular diseases, arthritis, and heartburn.

Except for cases where the provincial government gave special permission for the more expensive, restricted drugs, patients had to pay the full difference between the higher and lower priced medicines.

Nevertheless, in the six years from 1996 through 2001, per capita prescription costs in BC’s program rose 30 percent more than in government drug benefit plans in the rest of Canada. At the same time, private pharmaceutical spending increased 18 percent faster in British Columbia.

Unfortunately, some American states are repeating the errors of British Columbia, which probably will result in increased spending on prescription drugs as well as poor health outcomes for patients subject to government-run drug benefit plans.

Under reference pricing, patients usually had to spend more of their own money if they wanted the more expensive drugs. For patients with heart ailments, private spending doubled and, in some cases, quadrupled.

Of course, patients should be the first to pay a share of their drug costs – but isn’t the point of these programs to help those who cannot pay? Furthermore, the distorting subsidy biased patients against more expensive drugs, which their physicians often judged more effective, and did nothing to manage overuse of less expensive ones.

Furthermore, because it is not true that all medicines in a class are exactly the same, the government had to design a loophole to allow patients who would not respond as well to the older, cheaper drugs to continue to get the newer, more expensive ones.

As well, physicians dislike the program because they have to fax a form to the government to get permission to exempt patients from paying out-of-pocket for the restricted medicines. Un-cooperative doctors can hardly be a good thing for a prescription benefit plan.

Fortunately, patients were not forbidden from paying the difference for the more expensive medicines, which minimized the potentially negative health consequences of the policy.

A case in point: after the government imposed so-called reference pricing for ACE inhibitors - a class of cardiovascular drugs including Vasotec® and Lotensin® - almost half of patients chose to pay the difference and stay on the restricted drugs which their doctors had originally prescribed. A further 30 percent were exempted from paying extra because their doctors received special authority from the government. Less than one fifth switched to a cheaper, older ACE inhibitor.

While British Columbia’s drug benefit plan is a universal entitlement, many seniors earned high enough incomes that they were able to pay the difference and stay on their originally prescribed medicines.

However, drug benefit plans run by American states usually are designed only for poorer residents. What consequences can we expect for those patients who cannot afford to pay the difference for the restricted - especially when their physicians have made a professional judgment that the higher priced medicines are more effective?

In British Columbia, the patients who did not receive the restricted drugs had higher death rates within the first twenty weeks after the government implemented the policy. Furthermore, in the short run, patients who switched ACE inhibitors likely had an increased risk of admission to hospital for surgery related to cardiovascular and other diseases, and revascularization - such as angioplasty and coronary artery bypass grafts.

For cardiovascular patients taking - such as nitroglycerin - reference pricing increased the odds of admission to hospital for revascularization by six to seven times.

This is fiscally irresponsible. If the government is saving some money on prescription drugs, only to have to pay more for very expensive hospital procedures, reference pricing is a sterling case of being penny wise and pound foolish.