In order to address rising drug prices, state Medicaid programs have been searching for new and creative means to better control their pharmacy benefit and mitigate the budgetary impact. This has led to an interesting trend reversal in how state Medicaid programs are structuring their management and coverage of pharmacy benefits. Since the passage of the Affordable Care Act (ACA), most states have carved the Medicaid pharmacy benefit into managed care, but recently an increasing number of states are instead choosing to carve-out the pharmacy benefit. This trend reversal may significantly impact various pharmaceutical industry stakeholders, including chain drug stores.
State Medicaid programs have adopted various strategies over time to provide pharmacy benefits to covered members in a cost-effective manner. Historically, because Medicaid managed care organizations (MCOs) were not eligible to receive drug rebates, many states chose to carve out pharmacy benefits, meaning that they would exclude it from the MCO contract and cover the drugs under the state’s Medicaid fee-for-service (FFS) program. However, the ACA extended Medicaid drug rebates beyond FFS to include MCOs. The ACA initially incentivized carving-in the benefit because the law extended Medicaid drug rebates beyond Medicaid FFS to Medicaid managed care organizations MCOs. This incentivized many states to carve in the benefit by assigning risk to the MCO for costs. States viewed carving-in the benefit as beneficial due to the capitated payment structure for MCOs’ service, which encourages cost efficiency.
Despite the long-held belief that Medicaid MCOs are effective in promoting cost savings, in recent years, as Medicaid drug costs have begun to soar, some states have begun to question such belief. Of unique concern to states is the lack of transparency and control that they have over Medicaid MCO pharmacy benefit managers, particularly with regard to PBM spreading pricing, which is the delta between what the Medicaid MCOs pay the PBMs and what the PBMs pay the pharmacies to dispense the drugs. In 2018, the Ohio Auditor of State found that PBMs were charging the state a spread of more than 31% for generic drugs, and that PBMs collected fees as high as 31.4% of the $662.7 million paid by MCOs on generics from 2017 through 2018.
Beyond concerns about Medicaid MCOs and their PBMs, states are struggling to find new means to manage increasing drug spend, which is projected to outpace other Medicaid spending. Under the Medicaid Drug Rebate Program, state Medicaid agencies are required to cover all drugs associated with manufacturers who have entered into rebate agreements with the government. Moreover, state Medicaid programs are generally prohibited from adopting closed formularies, meaning, among other things, that their budgets may take a serious hit from first-to-market blockbuster drugs.