California Carving Out Pharmacy Benefits and Going FFS


A look at the implications for Medicaid plans.

Pill Boxes

The State of California, under a directive from Governor Gavin Newsom, is “carving out” the pharmacy benefit for Medi-Cal beneficiaries from managed-care plans and transitioning to a fee-for-service (FFS) program, moving 13 million Medi-Cal beneficiaries to a new pharmacy program by January 2021.

The California Department of Health Care Services (DHCS) cites that transitioning pharmacy services from managed care to FFS will standardize the Medi-Cal pharmacy benefit statewide; improve access to pharmacy services with a pharmacy network that includes approximately 97% of the state’s pharmacies; and strengthen California’s ability to negotiate state supplemental drug rebates with drug manufacturers.

In November, DHCS awarded a five-year contract to a subsidiary of Magellan Health to manage its pharmacy benefit services statewide, effective Jan. 1, 2021.

Perry Cohen, CEO of consulting service The Pharmacy Group, recently was at the California Association of Health Plans (CAHP) meeting where he was on a panel to address this issue and says the switch to Magellan all at once will be problematic.

“It’s the wrong way to implement it,” he says. “It’s going to be very disruptive to members and their level of service. For instance, there will be two 800-numbers to call-one for health plans and a second for pharmacy-and they’re going to get confused.”

What it all means

Under managed-care plans, DHCS, which administers Medi-Cal, pays managed care plans capitated payments, a portion of which cover the costs of prescription drugs. These payments are determined by the negotiated prices between the managed care plans and the pharmacies. Medi-cal beneficiaries can only obtain prescription drugs within their managed care plans’ pharmacy network.

Anh Nguyen, assistant professor of economics at Carnegie Mellon University’s Tepper School of Business, explains under the fee-for-service program, DHCS will directly reimburse pharmacies at their actual cost of acquiring prescription drugs (plus other predetermined fees). Additionally, Medi-cal beneficiaries will no longer be dependent on the pharmacy network of the managed care plan and can obtain prescription drugs to almost all pharmacies in California.

Jarrod McNaughton, CEO at Inland Empire Health Plan, headquartered in Rancho Cucamonga, California, notes when the state created Medi-Cal Managed Care Plans, its desire was to fashion a system of care that coordinated benefits for members, providing access to quality providers in a cost-effective manner. The emphasis was on preventive and primary care for the now nearly 11 million Medi-Cal beneficiaries in the state.

“This new direction in Medi-Cal is taking out of the plan responsibility for one of the key elements of care, the pharmacy benefit, and moving its function and operation to the state under a centralized pharmacy benefit manager (PBM),” he says. “What is currently a crucial cornerstone in coordinating care by making sure our members and providers have access to local plan team members to call and ask questions regarding the pharmacy benefit will be moved to a centralized function in Sacramento.”

The activities covered by the new program include claims processing for all outpatient drugs; pharmacy network administration; pharmacy drug rebate administration (both federal and state); prior authorization transactions; drug utilization review; customer service; and health plan coordination activities.

Implications on Medicaid plans

As proposed, McNaughton says local interventions that help ensure members receive their medication when they need it, avoid harmful drug interactions, monitor opioid prescriptions to avoid misuse and overprescribing, and ensure patients are utilizing their medications as prescribed will no longer be managed locally.

“Instead, these responsibilities will be outsourced to a private, for-profit PBM that would be hard-pressed to manage the unique needs and challenges of the Medi-Cal members who reside throughout the Inland Empire region,” he says. “Any delay or denial in access to needed medication will pose serious health risks and pressure on local hospital emergency rooms.”

Pros and cons

Christine M. Tomcala, CEO of Santa Clara Family Health Plan, San Jose, California, says the company’s main goal is to ensure timely access to high-quality care for its Medi-Cal beneficiaries and with the pharmacy benefit no longer being managed by the health plan, there will be transitional challenges, such as beneficiaries needing to move to different drugs covered by the new state formulary and reduced ability for the plan to assist beneficiaries in obtaining medically necessary drugs.

Therefore, the health plan feels this plan carries both upside and downside risk.

“On the one hand, this may be an opportunity to get some measure of control over runaway drug costs, which are consuming an ever-increasing share of healthcare spending,” Tomcala says. “On the other hand, we are concerned about the effects of further fragmenting the provision of services, and how it will affect our ability to care for our members.”

Examples include customer service, where members will now be required to call a separate vendor for pharmacy assistance; the risk of the health plan not having real time pharmacy data to inform care management; and the risk of the state vendor not having key beneficiary information to inform approval or denial of prescription drug authorizations.

Ben Johnson, senior fiscal & policy analyst for Sacramento, California-based The Legislative Analyst’s Office, says while he believes the carve out is likely to result in net savings to the state, it is possible that it results in net costs.

Related: Original Medicare Tops Advantage

“Pharmacies are likely to see increased funding under the carve out,” he says. “Other major Medi-Cal stakeholders would likely have their funding reduced under the plan-including Medi-Cal managed care plans and safety-net providers that participate in the 340B program. In addition, the carve out should standardize the Medi-Cal pharmacy benefit on a statewide level but could reduce Medi-Cal managed care plans ability to coordinate their members’ pharmacy and other Medi-Cal benefits.”

McNaughton says some of the pros include centralized drug rebates and uniform benefit, while the chief con is that care coordination is made more difficult due to a separation of the pharmacy and medical benefit, where data, communication, and alignment are challenges in this kind of model.

“Whole person integrated care suffers from this model, and may result in increased medical costs as well as pharmacy costs,” he says. “The one size fits all model also means that certain regions and local specific patient populations will not receive appropriate exceptions and focus. For example, urban, high density populations deal with different drug and access issues compared to rural and desert communities.”

Additionally, he feels the relationships the pharmacy team has with local providers will be replaced by a system that is impersonal and focused on transactions rather than relationships.

“We believe there are very viable alternatives that still meet the Governor’s goal of reducing rising drug costs but continue the vital, local connection to providers and patients,” McNaughton says. “We have shared our specific ideas with the state and hope they will be open to the idea of collaborating to find ways we can meet the local needs of our members while achieving the Governor’s goal.”

Will it work?

Many in the industry are skeptical that this plan will be successful-especially when looking at publically available data and the experience other states that have carved out their Medicaid pharmacy benefit have had.

This model has been tried in 13 states previously, which has led to increased medication costs. In addition, customer service issues have increased with this model.

“This model proposed by DHCS has not successfully decreased medication costs in any other state in which this has been implemented,” McNaughton says. “In fact, with this model, medication costs have increased significantly in other states.”

An analysis of the 13-state data by the Menges Group concluded a change to a pharmacy carve-out would result in a 19.4 percent increase in net Medi-Cal pharmacy expenditures across the five-year timeframe SFY2020 - 2024, increasing state fund costs by $51 million in SFY2020 and $757 million over five years.

“If the goal is to provide better service to members, it seems unlikely that the gains from standardizing pharmacy benefits statewide would outweigh the reduced ability to provide whole-person integrated care through the member’s managed care plan,” Tomcala says.

Cohen says that 10 of these states went back to the original way of integrating because they lost money, and the three that stuck to carving it out are losing money, but won’t carve it back in.

“The state has its mind made up, and there are going to be unintended consequences of their decisions, and down the road, once there becomes a crisis, I believe they will modify things to adapt,” he says.

Keith Loria is an award-winning journalist who has been writing for major newspapers and magazines for close to 20 years.

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