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Devon Herrick, PhD, is a health economist and former hospital accountant. He has researched and written about health economics for many years.
About half of states have transitioned at least some Medicaid beneficiaries away from fee-for-service (FFS) drug programs into drug plans integrated with managed care. Our policy analyst shares why he believes more should do so.
About half of states have transitioned at least some Medicaid beneficiaries away from fee-for-service (FFS) drug programs into drug plans integrated with managed care. Yet, recent legislative initiatives are bucking this trend for political reasons. A bill in the Kentucky legislature, and similar proposals in Ohio and Arkansas, would require the state to manage Medicaid drug benefits on a FSS basis. Indeed, nearly half of states still hang on to outdated FFS programs, mostly for political reasons. The primary reason is to protect or improve the finances of small, rural pharmacies.
One of the goals proponents of Medicaid drug carve-outs hope to achieve is to persuade lawmakers to increase dispensing fees (i.e. counting and bottling the pills). State-run Medicaid FFS programs normally pay higher dispensing fees than managed care plans. Dispensing fees paid by private plans average about $2 for Medicare Part D plans, although it is reportedly just under $1 for Kentucky Medicaid. By contrast, state FFS dispensing fees range from $2 in Arizona to $21.28 in Alaska, for pharmacies not located on a road system. Every $1 increase in the cost of dispensing a Medicaid prescription in Kentucky is estimated to cost federal and state taxpayers approximately $27 million.
Over the past 20 years, states have increasingly moved Medicaid enrollees into private managed care plans. However, states have been slower to integrate drug benefits with Medicaid managed care. Federal regulations require drug makers to rebate a portion of drug costs. Until recently states could only receive rebates if the state administered drug benefits using FSS.
The Affordable Care Act changed this requirement. States can now receive drug rebates (shared with the federal government) whether benefits are administered FFS or integrated with managed care.
Medicaid managed care plans in about half of states work with private firms that manage Medicaid drug benefits, called pharmacy benefit managers (PBMs). PBMs span multiple states and have numerous public and private clients. The objective is cost savings; PBMs possess far more purchasing power and expertise than any one state agency. An April 2015 report found integrating drug benefits with managed care plans lowered the cost of Medicaid branded drug by 17.6% and generic drugs by 15.1% compared to state Medicaid FFS programs. The report also found managed care use of lower-cost generic drugs was about five percentage points higher than FFS plans.
Medicaid managed care drug plans outperform state FFS drug programs in a number of ways. For example, FFS drug prices often differ unnecessarily from one pharmacy to the next. State FFS Medicaid programs arbitrarily pay much higher dispensing fees than would occur in a competitive market. State Medicaid FFS drug programs use low-cost, generic drugs less often than managed drug plans. In addition, unnecessary and redundant prescriptions are often higher under state-managed FFS drug programs.
Using private firms to manage drug benefits is standard practice in virtually all other health plans. These are the same private drug plans that manage Medicare Part D drug plans for seniors as well as drug benefits for employee health plans and health insurers. This is important because insurers, employer health plans, and PBMs all have an incentive to hold down costs.
By contrast, some politicians in Kentucky want to increase Medicaid spending by paying pharmacies hundreds of millions of dollars more. The Kentucky governor warned if the state Medicaid agency takes control of managing drugs, federal and state taxpayers’ costs would increase costs by $161 million.
Furthermore, it makes sense that the health plan responsible for medical care should also manage drug therapies. Drugs often substitute for other more expensive medical treatments or lessen the use of hospitalization and emergency rooms. The ultimate goal should be to better manage Medicaid beneficiaries care, not increase pharmacy profits.
Too often public programs like Medicaid are allowed to become state and local economic development programs, whose supporters hope to shift some of the costs to taxpayers in other states. This is a bad deal for both federal and state taxpayers. It is also a bad idea for Medicaid patients.
Devon M. Herrick, PhD, is a health economist and policy advisor to the Heartland Institute.