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.

Christopher Smith

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.

John Linehan

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.

In response to Medicaid drug cost concerns, States are exploring a variety of options, including regulation of spread pricing and the adoption of uniform Medicaid Preferred Drug Lists (PDLs) applicable to both Medicaid FFS and Medicaid MCOs. More and more states are carving out the Medicaid pharmacy benefit, thereby taking more direct control over the benefit. These states hope to generate savings by including them in FFS, where they can exert more direct control, and eliminate spread pricing. One year after West Virginia carved out its benefit, the West Virginia Bureau of Medical Services released a report showing savings of $54.4 million. New York, which is carving out the benefit in 2021, is hoping to address a $6 billion budget gap driven by Medicaid spending.

States are also motivated to ensure more uniformity in drug coverage. Some states are concerned that the impact of certain high-cost drugs may not be spread equally across a state’s MCO plans. For states that carve in some of the pharmacy benefit and carve out the rest, there is risk that drug utilization management requirements differ between MCOs and the FFS program, which could disparately impact beneficiaries. Finally, this trend is driven by the hope that by acting as a single purchaser, the state will have more leverage to negotiate Medicaid supplemental drug rebates than multiple MCOs, and thereby drive down Medicaid spending. This is one of the primary rationales for California Medicaid’s carve-out plan, scheduled to take effect in 2021.

Alan Arville

Presently, only Missouri, Tennessee, West Virginia and Wisconsin have completely carved out their pharmacy benefits. However, California and New York are moving to a carve-out model in 2021. North Dakota is currently a partial carve-out state, but is transitioning to a full carve-out model. Certain other states fall along the continuum between a carve-in and carve-out model. In this group, Nevada and Washington are expanding their carve-outs, while Maryland is expanding its carve-out for some drugs while carving in the remainder. Finally, Michigan had intended to move to a carve-out model in 2020, but ultimately decided against the move.

With populous states like California and New York moving toward a carve-out model, the pharmacy industry should be considering what states might be next, as well as the various consequences of the transition. One of the likely biggest impacts will occur within the 340B program. Within Medicaid FFS, the 340B statute prohibits duplicate discounts such that a 340B drug manufacturer cannot be forced to provide 340B discount pricing and a Medicaid drug rebate on the same drug. Accordingly, 340B covered entities, which include certain categories of hospitals, community health centers and other designated safety net providers, may no longer be able to utilize contract pharmacies to dispense 340B discounted drugs to Medicaid beneficiaries that are transitioned from Medicaid MCO to FFS. Recently, there have been efforts to identify Medicaid managed care drugs to prevent duplicate discounts in the Medicaid managed care context. The pervasiveness of these efforts affects the degree of the impact on 340B stakeholders of a transition to a carve-out model.

Outside of the 340B program, the carve-out model trend impacts pharmacies in various ways. Without MCO network restrictions, presently out-of-network pharmacies will now have access to Medicaid beneficiaries. Despite improved network opportunities, the impact on pharmacy reimbursement is subject to debate. Under Medicaid MCO arrangements, pharmacies negotiate their reimbursement, whereas under Medicaid FFS, pharmacies are often reimbursed based on actual acquisition cost plus a professional dispensing fee. The open question is whether MCO-negotiated reimbursement is better than a model based on drug acquisition cost plus a professional dispensing fee. Carve-out states are predicting that the answer is yes, but there will likely be variation across pharmacies and states.

From a state’s perspective, carving out the pharmacy benefit will allow for more direct control over Medicaid drug costs and increased leverage to negotiate supplemental Medicaid drug rebates. However, many critical questions remain. Will better drug rebates result in lower costs (some data indicates that the two are not necessarily correlated)? Will states be more successful than PBMs in negotiating lower drug ­prices?

As with pharmacies, the impact on beneficiaries may vary. A carve-out state’s drug benefit will be uniform for beneficiaries throughout the state, but uniformity may have its downsides. For example, a centralized Medicaid pharmacy benefit may not adequately account for unique population differences between urban and rural areas, particularly in regard to patient access issues. Furthermore, during the transition from an MCO system to an FFS system, there may be formulary changes, which could result in beneficiary confusion or access issues. Similarly, in carve-out states where the medical benefit remains under managed care, there may be fragmented care and a lack of coordination between the state and the Medicaid MCO.

Finally, in any carve-out state, greater control comes with greater challenges. Carve-out states are stepping into a new role that requires adoption of a large number of responsibilities that extend beyond the mere dispensing of drugs. In fact, California is relying on a vendor to manage the carve-out benefit. The pharmacy benefit includes comprehensive pharmacy services and clinical offerings, including, but not limited to, medication therapy management, disease testing, counseling, prescribing and immunizations. To maximize savings and effectively manage the comprehensive pharmacy benefit, states will need assistance from pharmacies, pharmacists and vendors who specialize in these pharmacy services, and therein lies opportunity. In recognition of the trend toward carving out state Medicaid pharmacy benefits, pharmaceutical stakeholders, particularly chain drug stores, should be keen to explore arrangements with state Medicaid programs seeking to meet their responsibilities under the Medicaid program in a cost-efficient manner.

Christopher Smith ([email protected]) is a senior counsel at Epstein Becker Green. Alan Arville and John Linehan are members of the firm. All three work in the health care and life sciences practice in the firm’s Washington, D.C., office.