MEDICAID PHARMACY CARVE-OUTS: WI, NY, OH, CA
Wisconsin Pharmacy Benefit Carve-Out
Last year, the Wisconsin Department of Health Services carved out prescription drugs from the Family Care Partnership Program and shifted to a Fee-for-Service (FFS) delivery model. The carve-out ensured compliance with the 2020 Medicaid and CHIP Managed Care Final Rule and eliminated the need for Managed Care Organizations (MCOs) to implement their own drug utilization review program. In addition, Wisconsin believes that the carve-out will reduce Medicaid costs by reducing prescription drug prices. To date, Wisconsin, Tennessee, West Virginia, and Missouri have carved-out their Medicaid pharmacy benefit.
How States Control Medicaid Prescription Drug Costs
Over time, Medicaid's drug spend has skyrocketed, and in 2017 it reached $64 billion. While states are not obligated to include prescription drug benefits in their Medicaid programs, the majority do because it is an important part of modern medicine and improves the coordination of care. Because of Medicaid expansion, surges in enrollment, and the pandemic-driven economic downturn, the problem has only been exacerbated. When states are dealing with fiscal pressure, they usually turn to different payment strategies, utilization controls, benefit delivery models, or reductions in program benefits to reduce costs.
Typically, states will employ one of two different approaches to manage the costs of drugs. The most common approach is for a state to contract with a MCO and PBM to oversee their pharmacy benefits. The alternative is to carve-out drug benefits and manage drugs with a fee-for-service delivery model. Below, we will examine the pros and cons of each model to understand their impact on Medicaid drug costs better.
ACA Drug Rebate Policy Changes
States who opt to carve-out Medicaid prescription drug benefits feel that they will receive lower drug prices by negotiating with pharmaceutical companies directly. This approach has been effective in some situations; having said that, the passage of the Affordable Care Act (ACA) introduced drug rebate policy changes that completely changed state prescription drug plans.
Under the ACA, drug companies were mandated to increase the rebate percentage for states from 15.1 percent to 23.1 percent. Along with the eight-point increase, MCO beneficiaries were also made eligible for these rebates. Prior to the ACA, these rebates were only for enrollees in fee-for-service Medicaid programs.
After the ACA was introduced, The Lewin Group, a premier national health care and human services consulting firm, reviewed the effect of these adjustments. Their study, Projected Impacts of Adopting a Pharmacy Carve-In Approach Within Medicaid Capitation Programs, showed that the ACA eliminated the savings advantage that cave-outs previously had. Furthermore, their report studied carve-outs in fourteen states and concluded that those states could save $12 billion over a ten-year duration by carving-in Rx benefits.
Following the ACA's rebate and eligibility changes, most states contracted with MCOs to deliver care to Medicaid beneficiaries. By 2017, there were 39 states with Medicaid MCO contracts, and 35 had carved-in their Medicaid prescription drug benefits. As of July 2018, 40 states were contracted with risk-based managed care plans, and 5 had carved out prescription drugs.
Carve-Outs and Other Efforts to Reduce Drug Costs
Even though most states have kept RX benefits carved into their managed care contracts, there continues to be carve-out activity and additional efforts to reduce costs.
New York was planning to carve out pharmacy benefits beginning April 1, 2021. Medicaid members enrolled in managed care plans, health and recovery plans, and HIV-special needs plans would begin to receive their prescriptions via a Medicaid FFS pharmacy program rather than their MCO. However, the transition has been postponed two years due to an amendment of the state budget after lobbying efforts. The transition to the new Medicaid FFS model will now go into effect on April 1, 2023.
In 2019, Ohio's legislature mandated the state to select a Single Pharmacy Benefit Manager (SPBM) after growing criticism of how its pharmacy benefits were being administered. Following the order, the state issued a RFP for a SPBM that would contract with Ohio directly to improve transparency and manage its drug program. Ohio's newly designed program is anticipated to take effect at the beginning of 2022.
In 2019, Governor Gavin Newsom authorized an executive order that California would transfer all pharmacy services for Medi-Cal to a FFS model. As a result, California expects to negotiate better drug prices from manufactures by consolidating purchasing power and leveraging the state's population size. According to the Legislative Analyst's Office, carving-out could lead to hundreds of millions in savings each year. However, the move is controversial. There are concerns over its potential impact on MCOs, PBMs, pharmacies and the coordination of care since California's Medicaid pharmacy benefit is currently managed by ten separate PBMs responsible for 90% of the state's Medicaid beneficiaries.
In 2019, Michigan's Department of Health and Human Services published a notice of proposed policy announcing that outpatient drug coverage would no longer be a benefit and the state would move to a FFS model. Michigan anticipated saving around $10 million annually using drug rebates and doing away with associated administrative capitation costs. Critics opposing the policy change claimed that it did not align with MHP's goal of delivering whole-person integrated care. They thought that out of pocket costs would increase and members would not have the appropriate overview of their prescriptions. After considering the carve-out, the state chose to introduce a single Medicaid Preferred Drug List (PDL) instead.
Much Like Michigan, Washington state has also implemented a PDL to decrease costs. The Apple Health Preferred Drug List was introduced in 2018, and all Medicaid MCO plans and fee-for-service plans were mandated to use the PDL.
Although states choose what delivery model they use to coordinate care, MCOs stand behind carving-in Medicaid prescription drug benefits. Whenever a program benefit, like prescription drugs, is carved out it makes the coordination of care difficult and awkward. MCOs believe that when pharmacy benefits are carved-in, program performance is strengthened, quality is improved, and costs are reduced.
In 2015, America's Health Insurance Plans (AHIP) commissioned a report from The Menges Group that evaluated the impact of carving-out prescription drug benefits from MCO benefit packages. According to The Menges Group, "the decision to carve out pharmacy benefits is likely to significantly increase costs for states and the Federal government". The analysis also found that in "28 states using the carve-in model, the net cost per prescription was 14.6 percent lower than the average net cost per prescription in states not carving in pharmacy."
Critics of the managed care model argue that PBMs contribute to the high cost of drugs, as they function like middlemen in getting pharmaceuticals from manufacturers to patients. PBMs obviously disagree with this criticism. Rather, they contend that they are uniquely positioned to help manage the cost of Medicaid Rx benefits. PBMs work to negotiate rebates, manage formularies, provide mail-order options to patients, manage the distribution of drugs among pharmacies, and provide specialty drug services.
Over time pharmacy spend has become a growing expenditure within state budgets. As a result of increased fiscal pressure states are exploring different delivery models, PDLs, and legislation to decrease prescription drug costs. While the majority of states deliver pharmacy benefits through managed care models, a handful have chosen to carve-out prescription drugs and transition to FFS models. In addition to lowering drug costs, states should also seek out cost avoidance opportunities and further efficiency in their Medicaid plans to reduce costs.
