Reforms Await Action, State Imposes Tax Hikes Instead

Published May 9, 2015

Alabama’s Medicaid drug program could run more efficiently and help slow the growth of Medicaid spending, according to a commission established by Alabama Gov. Robert Bentley (R), but the state legislature has not acted on the recommendations.

Slowing the rising cost of Medicaid is a fiscal imperative for the state’s taxpayers because Medicaid spending is about double what it was a decade ago, with more than one-third of the general operating fund now being spent on Medicaid.

Instead of reforming Medicaid, the state is in the process of raising taxes to cover the rising costs.

“As the state struggles with a $200 million-plus budget shortfall, the governor has proposed tax increases as the solution; at least $110 million of this new revenue would be dedicated to additional Medicaid funding,” said Katherine Robertson, vice president of the Alabama Policy Institute. “The problem with this approach is that taxes will have to be raised repeatedly to keep pace with the ever-increasing costs of Medicaid.”

The state’s Medicaid program already costs Alabama and federal taxpayers more than $5 billion annually, nearly one-tenth of which is spent on drugs, Robertson says. Medicaid spending is expected to rise further as more people are swept up in enrollment efforts by the Affordable Care Act (ACA). A new generation of very expensive specialty drugs is also driving up the cost of Medicaid drug programs nationwide.

Taming High Costs

The Alabama Medicaid Agency reimburses pharmacies for each prescription filled, called a fee for service (FFS) approach, but doesn’t use many of the techniques private drug plans use to control costs. Pharmacy benefit managers working with managed care plans typically negotiate drug dispensing fees with pharmacies, create cost-effective formularies—a list of prescription drugs, both generic and brand name, that are preferred by your health plan—and assemble preferred networks of qualified specialty drug providers and competitive pharmacies.

About two-thirds of Alabama Medicaid beneficiaries are enrolled in Medicaid managed care plans, but the Alabama Medicaid Agency administers beneficiaries’ drug benefits separately from their health benefits, says Medicaid Health Plans of America (MHPA), a group representing Medicaid health plans. MHPA says integrating drug and health benefits boosts efficiency and results in better drug management.

Jeff M. Myers, president and CEO of MHPA, said, “A FFS system means the state does not realize the savings from robust antifraud programs, increased use of generic substitution, and fair negotiations with pharmacies—all the hallmarks of a managed pharmacy benefit. Medicaid beneficiaries also experience more side effects and lower adherence to therapy under FFS, resulting in worse health outcomes.”

ACA Changed Rules

Before ACA became law, it was common for states to run their own drug programs. At that time, mandatory drug rebates from manufacturers were available only to state-administered fee-for-service drug programs. The ACA changed this practice by allowing rebates for drugs administered through managed care plans, resulting in states increasingly contracting out the administration of Medicaid drug programs to private firms with expertise in managing drug benefits. 

With this in mind, the Alabama Medicaid Pharmacy Study Commission, created by Bentley in 2013, evaluated various methods to boost efficiency of Alabama’s Medicaid drug program. It found establishing what it calls a “Purchasing and Network Management Cooperative” could improve care management, specifically specialty drug management, with annual savings estimated between $9 million and $18 million.

Contracting with pharmacy benefit managers—private firms many state Medicaid agencies and Medicare Part D drug plans use to administer drug benefits—would save an estimated $13 million to $35 million each year. A preferred pharmacy network, such as the one limited to Walmart pharmacies, would save the state $19 million to $30 million annually, the study commission found.

These policy options aren’t mutually exclusive. A pharmacy benefit manager would likely use elements of the other two strategies. 

Alabama’s Medicaid program can dramatically reduce costs by simply applying best practices already used by Medicare and other large payers that offer pharmacy benefits, says Charles Cote, vice president of strategic communications at the Pharmaceutical Care Management Association (PCMA).

“Fortunately, this can be done in a way that protects patient benefits and avoids cutting payments to hospitals and doctors,” said Cote.

Legislature Hasn’t Acted

More than a year has passed since the commission released its report, and the Alabama Legislature has not acted on it yet. When the commission was first announced, Stephanie Azar, acting commissioner of the Alabama Medicaid Agency, said in a prepared statement, “Medicaid is ready to take on this challenge and help the state move forward to create a program that will help support the long-term sustainability of Alabama Medicaid.” 

Robertson says she would like to see the process move forward so Alabama taxpayers can enjoy some tax relief.

“Prescription reform would be a strong step towards a more sustainable Medicaid program for Alabama,” Robertson said.

Devon M. Herrick, Ph.D. ([email protected]) is a health economist and senior fellow at the National Center for Policy Analysis.

Internet Info:

“Report of the Alabama Medicaid Pharmacy Study Commission,” produced by Optumas for Donald E. Williamson, M.D., Chair, Alabama Medicaid Pharmacy Study Commission, December 2013: