In the face of rapidly rising prices, state Medicaid programs are asserting their prescription drug purchasing power through more active oversight of the administration of prescription drug benefits. As major drug purchasers, state Medicaid programs have leverage to lower costs without action from state legislatures. Ohio, Washington, and West Virginia have recently deployed a range of strategies to curb drug costs:
- Ohio requires Medicaid managed care plans to adopt transparent, pass-through payment models with their pharmacy benefit mangers (PBMs).
- To maximize rebate potential and reduce administrative burden, Washington State is implementing a single preferred drug list (PDL) across Medicaid fee-for-service and managed care plans.
- West Virginia carved out the prescription drug benefit from its managed care contracts and now acts as its own PBM to increase oversight of drug purchasing and reduce costs.
Below is a detailed explanation of how these three states have implemented innovative purchasing strategies for their Medicaid pharmacy purchases.
Ohio Requires a Transparent, Pass-Through PBM Payment Model
A 2018 report found that PBMs retained profits of $224 million by creating a “spread” between what Medicaid paid PBMs for pharmacy claims versus what PBMs paid pharmacies. In response, Ohio mandated that managed care plans switch to contracts with transparent, pass-through payment models with the PBMs. With a transparent, pass-through model, states can ensure PBMs do not profit off this spread-pricing practice and pass through drug discounts and rebates to managed care plans. PBMs are instead reimbursed more directly through fees. Wisconsin’s state employee health plan requires a similar, fully transparent, pass-through payment model. Through this change in contract terms, Wisconsin’s per member, per month drug costs were more than 10 percent below industry averages from 2016 to 2018.
Ohio state officials report making significant changes to managed care contracts to increase transparency, reporting, and accountability pertaining to their PBM contracts and drug payments. Through enhanced reporting from managed care plans, officials have been able to confirm the successful implementation of the pass-through model. Ohio’s 2020 budget goes a step farther, requiring all managed care plans to contract with a single PBM, which will be selected by Ohio’s Medicaid department, giving the state more authority over drug purchasing.
Washington State: Implementing a Single, Standard Medicaid PDL Across MCOs
In January 2018, the Washington Healthcare Authority implemented a single PDL – a list that indicates which drugs are “preferred” by the state and do not require prior authorization. Washington’s Medicaid program transitioned from six different PDLs across managed care organizations (MCO) to one. A single PDL provides a number of advantages, including:
- Administrative ease for providers, patients, and pharmacies;
- Rebate maximization by selecting drugs with the lowest cost or maximum rebate potential;
- Rebate transparency for more accurate cost management; and
- Fewer disruptions for patients who may switch between managed care plans.
To transition to a single PDL, Washington submitted two State Plan Amendments – one for the single PDL and one to include managed care plans in its supplemental rebate contracts through a multi-state purchasing pool for drugs on the PDL. Washington also added and amended contracts with a number of vendors to ensure the Medicaid agency and managed care plans had access to the same drug data sources to allow seamless collaboration – an important detail for ensuring care coordination. Officials met with managed care plans weekly to plan and roll out the three phases of implementation, ensuring that drugs added to the PDL were clinically appropriate and cost-effective for the state and the plans. Implementation began with 27 drug classes and is expected to be complete by April 2020 with almost 400 different drug classes included in the PDL.
West Virginia: Carving Prescription Drugs Out of Managed Care
In 2017, West Virginia Medicaid began acting as its own pharmacy benefit administrator under a fee-for-service model, after carving out prescription drug benefits from its managed care contracts. To accomplish the prescription drug carve-out, West Virginia:
- Added an additional pharmacist to its staff;
- Stress-tested its existing claims processing system;
- Increased its capacity for prior authorizations; and
- Educated the public and its help desk staff about the program change.
West Virginia’s Medicaid program now covers over 550,000 enrollees through a fee-for-service model. State officials report they are able to effectively manage the pharmacy benefit and maintain care coordination across MCOs, while obtaining savings for the state. The prescription drug carve-out led to a savings of $54.5 million in 2018. Additionally, changes to the state’s reimbursement methodology during the carve-out process led to an infusion of $122 million in dispensing fees to the state’s pharmacy community.
While West Virginia is acting as its own PBM, California is carving out the prescription drug benefit from its managed care contracts and contracting with a single PBM to leverage the state’s immense purchasing power. California will use strict contracting terms to ensure greater transparency and cost savings with the contracted PBM. Michigan is currently considering a drug carve-out and legislatures in Louisiana and Nevada prompted their Medicaid programs to explore a potential carve-out of prescription drugs from managed care.
As states strengthen their oversight of drug purchasing, the National Academy for State Health Policy (NASHP) has created and will soon release a model PBM contract for states. Informed by Ohio and Minnesota’s contracts, NASHP’s model contract is designed to help states ban spread pricing and better understand rebate arrangements with their PBMs. To learn more about other administrative actions to curb rising drug costs, read the Administrative Action section of NASHP’s Prescription Drug Pricing website.