As States Carve Out Medicaid Drug Benefits, Managed Care Orgs Push Back

Beginning in April, California and New York will join a growing list of states that have opted to carve out prescription drug benefits from their Medicaid contracts with insurers, wagering that the state can do a better job at negotiating drug prices with manufacturers than managed care organizations and their contracted PBMs.

While it remains hotly debated whether such moves offer a net benefit for states and their Medicaid enrollees, health policy experts tell AIS Health that MCOs should be prepared for the carveout trend to continue.

“I think the pharmacy benefit overall will be something that states are looking at in order to find savings in some way — whether through carveouts or through another policy — just because there are limited levers that the state is going to be able to pull to save money,” says Rachel Dolan, a senior policy analyst with the Kaiser Family Foundation’s Program on Medicaid and the Uninsured. That is especially true during the COVID-19 public health emergency, when states receiving enhanced Medicaid funding are barred from reducing benefits or cutting enrollment, and when reducing provider payments would be untenable because of the ongoing crisis, she suggests.

“The desire to know what a state is paying for and what the outcomes are is a driving force in Medicaid now,” weighs in Carol H. Steckel, a senior health care consultant at Milliman. “So the question becomes, what are states getting for their Medicaid pharmacy expenditures? As VBP [value-based purchasing] becomes more prevalent, the desire to have full transparency in all reimbursement methodologies becomes even more important.”

Dolan points out that the shift toward carving out pharmacy benefits represents an about-face from the carve-in trend that arose after the passage of the Affordable Care Act, as that law increased base rebate amounts for generic and brand drugs under the Medicaid Drug Rebate Program. “So I think what we’re seeing now is kind of a recalibration,” she tells AIS Health.

Spread Pricing Draws State Scrutiny

One catalyst for the carveouts may be the increasing scrutiny on spread pricing, which occurs when PBMs charge payers more for prescription drugs than the amount they reimburse pharmacies and retain the difference. Some states in recent years have conducted audits to quantify how much PBMs earn from spread pricing, which cast a harsh spotlight on the practice. (Ohio, for example, conducted such an audit in 2017 and is soon expected to unveil contract awards for a restructured Medicaid managed care program that tasks a single PBM with managing all Medicaid pharmacy benefits.

Carving out the pharmacy benefit, then, “is one approach to addressing the PBM spread pricing issue,” Dolan says. “It also allows the state more control over their formulary and their payment policy, and it can also help them potentially negotiate more supplemental rebates with manufacturers.”

As of 2019, four states had mostly carved out their pharmacy benefits from their Medicaid managed care programs, according to KFF (see map, p. X). North Dakota implemented a carveout in 2020, and California and New York will do so starting April 1, 2021. And Nevada plans to carve out the prescription drug benefit in fiscal year 2023 when its MCO contracts are renewed. Other states have opted to only carve out certain high-cost drugs.

An actuarial assessment that West Virginia conducted of its pharmacy carveout program in 2018 estimated that the approach saved the state $54.5 million. But the report also noted that “additional analysis could be performed to explain what caused this counterintuitive result, as managed care typically can be expected to result in lower costs than FFS [fee-for-service] arrangements.”

In a statement released in response to the report in March 2019, the National Community Pharmacists Association (NCPA) hailed the results.

“If the prescription drug carve-out works in West Virginia, it can work in other states,” said NCPA CEO B. Douglas Hoey. “As state legislators and Medicaid officials across the country continue considering Medicaid managed care reform, they would be wise to take a look at the West Virginia carve-out as a case study on how to bring transparency, accountability, and fair reimbursements to Medicaid managed care.”

But the reality may be more complicated than that, Steckel suggests. “This follows the old balloon theory of Medicaid budgeting — you squeeze one area and it expands in another,” she tells AIS Health. “This is an issue that must be carefully studied and understood before taking action. It isn’t just the PBMs that are the problem. The issue of ‘black box’ reimbursement methodologies in pharmacy include manufacturer pricing, the reimbursement to pharmacies (spread pricing, rebates, invoice discounts, etc.) and managed care.”

For Medicaid MCOs, there are a host of important considerations when states opt to carve out their pharmacy benefits, notes Brian Anderson, a principal with Milliman. For example, such a move will generally hinder MCOs’ ability to influence prescribing practices, which “have a profound impact on drug utilization and drug mix,” he says. Pharmacy networks are another key issue, as MCOs often use closed networks but some states have any-willing-provider regulations for pharmacy participation in networks — a policy that increases patient access but can hamper the ability to negotiate better contracted terms with pharmacies.

As for PBMs, which typically administer Medicaid drug benefits on behalf of MCOs, Anderson doesn’t see the current carveout trend as a serious problem. “PBMs are still needed in the industry and I do not see an impact to the bottom line,” he tells AIS Health. “There will be winners and losers as the business is consolidated to a fewer number of players.”

Health plan trade associations, however, have vocally opposed the pharmacy carveout trend.

“We think that the carveout is wrong for patients, it’s wrong for providers, and it’s wrong for the state,” Eric Linzer, president and CEO of the New York Health Plan Association, tells AIS Health. To start, Linzer points out that New York safety-net health care providers have expressed concern about the fiscal impact of the state’s impending carveout. “Additionally, it will undercut the ability of health plans to work with providers and patients to ensure that their care is integrated, particularly for individuals with acute and chronic conditions,” he says.

“And third, the fiscal analysis on this — I think it’s an open question as to whether or not this will actually save the state money,” Linzer says, citing an analysis commissioned by his group and the Coalition of New York State Public Health Plans that found a pharmacy carveout “will cost New York an estimated $154 million during the first year of implementation and $1.5 billion over five years.

“But even using the state’s own analysis, it will only generate savings of $87 million,” Linzer adds. “Considering the significant disruption that this is going to have for patients and for safety net providers, particularly in the midst of the pandemic, there are better ways for the state to generate savings in the Medicaid program, rather than carving out the pharmacy benefit.”

On its webpage dedicated to the pharmacy benefit transition, New York says its carveout will improve visibility into the state’s prescription drug costs, centralize negotiation power, provide a single drug formulary with standardized utilization management, and address the growth of the 340B program and reductions in state rebate revenue that growth causes.

California — which initially planned to begin its carveout on Jan. 1 but postponed the rollout until April 1 — shared similar goals for its program.

When California first unveiled plans to carve out its Medicaid pharmacy benefit, the California Association of Health Plans raised concerns about how the move would impact care coordination as well as the “uncertainty about whether it would result in any cost savings.”

While that trade group did not respond to AIS Health’s recent request for comment, Linzer of the New York Health Plan Association says his organization is continuing to lobby the Empire State to rethink its plans — even while collaborating on the transition.

“We and a broad coalition of hospitals, community health centers, FQHCs [federally qualified health centers and] patient advocates continue to advocate to the administration as well as to the legislature the importance of eliminating the carveout or at least delaying it given the challenges and the strain that COVID-19 has placed on all segments of the health care system,” Linzer tells AIS Health.

“The plans have certainly been engaged with the state on regular technical workgroup calls, but there remain a number of open issues,” he adds. “One of them has to do with access to real-time data, which is critical.”

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