In several states, lawmakers are proposing to use federal Medicaid money to set up state-administered pharmacy benefit programs.
This idea may sound like a reform that would promote federalism, the devolution of power from Washington, D.C. to the states, but would actually serve as federally funded bailouts for pharmacies.
Drug Manufacturer Rebates
Intended to reduce how much Medicaid money is spent on prescription drugs, the Medicaid Drug Rebate Program requires drug manufacturers to rebate a portion of the price of outpatient prescription drugs to states and the federal government.
Before the Affordable Care Act (ACA), state health agencies had to administrate their own Medicaid drug benefits program in order to be eligible for negotiated drug-maker rebates. After ACA’s passage state governments were allowed to receive the rebates for drugs, even if the programs were run by managed-care organizations.
Medicaid beneficiaries have been moved into managed-care organizations, privately-run organizations, paid regular per-member fees by state Medicaid agencies, but the integration of drug benefits with managed care has been slower.
So far, 26 states have integrated their Medicaid prescription drug benefits with Medicaid managed care. The states’ Medicaid managed-care plans usually contract with pharmacy benefit managers (PBMs), private firms hired to administer drug benefits.
Regardless of who actually manages the program, Medicaid enrollees pick up their drugs at local pharmacies. After the prescriptions are filled, Medicaid reimburses for the cost of the drug, plus a dispensing fee. If the state manages its Medicaid enrollees’ drug benefits, the state agency sets fees for drug procurement and reimburses the pharmacies, under a system called fee-for-service (FFS).
PBMs span multiple states and have numerous public and private clients, and thus far more purchasing power and expertise than any single state Medicaid agency.
Cost-Reducing Incentives
Using private firms to manage drug benefits is standard practice in virtually all other government health care plans.
These are the same private drug plans that manage Medicare Part D drug plans for seniors and prescription drug benefits for employee health plans and health insurers. This is important, because insurers, employer plans, and PBMs all have an incentive to hold down costs.
The Menges Group, a private consulting firm focusing on coordinated-care programs for Medicaid and Medicare beneficiaries, published a report in April 2015 examining how combining drug benefits with managed-care plans influences prices. The report found integrating drug benefits with managed care plans lowered the cost of branded drugs by 17.6 percent and reduced the price of generic drugs by 15.1 percent, compared to state Medicaid FFS programs.
Voting for More Spending
By setting up a FFS program, lawmakers are effectively saying they want to increase Medicaid spending by paying pharmacies hundreds of millions of dollars more than necessary.
Increasing dispensing fees—prices paid by the government for counting and bottling the pills—is one of the goals drug company lobbyists hope to achieve.
State-run Medicaid drug programs normally pay dispensing fees far higher than managed care plans pay. Every $1 increase in the cost of dispensing a Medicaid prescription in Kentucky can cost federal and state taxpayers approximately $27 million.
Despite lawmakers’ support for the proposal, the Kentucky Cabinet for Health and Family Services has warned it would put taxpayers on the hook for an additional $161 million if the state takes control of drug management away from PBMs.
Connecting Care to Therapy
Health plans responsible for medical care should include the administration of prescription drugs.
Drugs often substitute for other, more expensive medical treatments or lessen the use of hospitalization and emergency rooms.
State and federal taxpayers fund Medicaid, including, of course, the cost of administering the program. Unfortunately, lawmakers sometimes morph government entitlement programs into economic development programs, as the costs of administration are shifted to taxpayers in other states.
Medicaid prescription drug programs should not be carved out and managed separately by states. The goal of lawmakers should be to increase the efficiency and effectiveness of Medicaid care, not to increase the profits of pharmacies.
Devon Herrick, Ph.D., worked for the National Center for Policy Analysis (NCPA) until it ceased operations in July 2017. He is a policy advisor to The Heartland Institute.
