State Medicaid Programs Retake Pharmacy Controls

The Affordable Care Act of 2010, for all of the focus on “Medicaid expansion,” contained a very important codicil that changed the face of Medicaid pharmacy administration. Going forward, states would be able to invoice manufacturers for all Medicaid pharmacy utilization regardless of whether it came through a state’s Fee-for-Service (FFS) program or its Medicaid MCOs, whereas states previously could only invoice for FFS utilization. States and their Preferred Drug List (PDL) vendors quickly recognized that states had the additional opportunity to gain supplemental rebates on Medicaid MCO utilization as long as the state could demonstrate control of prescribing options through FFS PDLs. These state PDL designs became known largely as statewide (also called uniform, universal, mirrored, or single) PDLs.  

The variations in statewide PDLs are on display in their scope as well as their development paths.  The first statewide PDL appeared in Texas in 2013, but not before running a gauntlet of opposition.  Texas found it necessary to birth its statewide PDL through legislation, with the state facing off with the Texas Association of Health Plans. This battle would start anew every few years to renew the statewide PDL. Most Medicaid MCOs are in business for profit and the pharmacy benefit can be lucrative. It is no surprise that statewide PDLs have met resistance. However, many states have implemented them without legislative approval and experienced less resistance, if not less grumbling from the Medicaid MCOs. The Medicaid MCOs in a few states were able to retain a measure of control by coming to an agreement with the state to only relinquish PDL control for a select number of classes. These classes are typically those with the highest supplemental rebate potential, though. Examples of states with these statewide PDL limitations include Arizona and Virginia.  

While statewide PDLs represented a new opportunity for states via federal legislation, a more recent trend began as a defensive measure by state Medicaid programs. In 2018, several states published reports detailing the actions of Medicaid MCOs’ pharmacy benefit managers (PBMs) in reimbursements to pharmacies. In particular, the reports focused on “spread pricing,” or the difference between the amount received by the PBM from the payer and the reimbursement paid to the pharmacy. Again, most Medicaid MCOs are for-profit companies, so it is no surprise that they seek to provide healthcare in a cost-effective manner. However, it is not a good look to generate too much revenue off of the Medicaid program. The medical loss ratio (MLR), which limits profits and administrative costs of health insurers, provides some protection. Still, states did not appreciate the PBMs’ use of this practice and pushed back with the statewide PBM model.

Kentucky Medicaid was the first to implement a statewide PBM, followed closely by Ohio and Louisiana. In this model, the state Medicaid program solicits proposals from PBM vendors as it would for a FFS claims processor or other pharmacy services vendor. The PBM function of Medicaid MCOs is essentially “carved out” from MCO services and operated by the state, thereby returning reimbursement controls to the state. It is interesting to note that the three selected PBMs by these states – Gainwell, Magellan, and MedImpact – are prominent Medicaid PBMs. All Medicaid MCOs in these states use the state’s chosen PBM instead of their usual PBM partners. Kentucky implemented this PBM design in 2021, so it is a younger trend than the statewide PDL.

Overall, the trend over the past decade is not Medicaid pharmacy programs moving toward FFS carve-outs, statewide PDLs, or statewide PBMs, but taking back control of the pharmacy benefit by one or more of these methods. All three statewide PBM states also operate a statewide PDL, incidentally, but that should not be a surprise. These designs are scheduled to be implemented in at least two additional states in 2024, so the trend will continue. It is notable to point out that no state that has implemented a statewide PDL or PBM since 2013 has relinquished that control. Yet, there has been no reason, legislative or otherwise, for state Medicaid programs to return pharmacy net cost or reimbursement decisions to Medicaid MCOs. While there are arguments in favor of MCO models for integrated patient care, there is no argument that FFS provides the most advantageous net cost environment for pharmacy pricing.