Modernizing Medicaid pharmacy could save states $33 billion

by Chris Anderson

Source: Healthcare IT News 

A new study by the National Center for Policy Analysis shows that states and the federal government could save $33 billion in prescription medication costs by switching to similar prescription benefits models used by Medicare and other private payers.

“Drug therapies often substitute for more expensive and less effective surgical treatment and can reduce the need for hospitalization. Americans see their doctors more than 890 million times each year, and two-thirds of office visits to physicians result in prescription drug therapy,” noted report author Devon M. Herrick, senior fellow with NCPA. “Even though they appear to provide better value for money than other forms of therapy, drug expenditures are one of the fastest growing components of the Medicaid program.”

The report “Increasing the Cost-Effectiveness of Medicaid Drug Programs” identified a number of areas states could change to save money, including increased use of generic drugs; negotiating competitive rates for drug dispensing; coordinating and tracking drug therapies; establishing reimbursement rates similar to what private plans pay; and empowering consumers with some control of the money they spend on medications.

Currently, many states pay for Medicaid prescription drugs on a fee-for-service model and are lobbied on the local level to negotiate higher dispensing fees paid to pharmacies. The average state dispensing fee is $4.82 per prescription, with Alabama ($10.64) and Texas ($7.50) having the two highest rates in the country. By comparison, Medicare Part Dpays an average dispensing rate of $2.

In Texas, Gov. Rick Perry is proposing the state’s prescription benefits be managed like those in the private sector, a move the state has estimated will save $84 million the first year alone.

“This latest research confirms that Governor Perry and Texas policymakers are on the right track. Medicaid shouldn’t pay more for drug benefits than private insurers and Medicare,” said Mark Merritt, president and CEO of the Pharmaceutical Care Management Association, a national organization representing pharmacy benefit managers. “Currently, the program uses fewer generic drugs and pays drugstores more than triple the fees that Medicare or private insurers pay. By modernizing Medicaid drug benefits, Texas will save $3.8 billion over the next decade without cutting benefits to those in need.”

According to a February 2011 report from the Lewis Group, a health-care policy research and management consulting firm, states could achieve more than $25 billion in savings over ten years by focusing on lowering dispensing fees ($10 billion) and increasing generic use ($15.3 billion).

While generic drugs make up more than two-thirds of all medications spent for Medicaid, they account for less than one-quarter of total spending, providing an opportunity for additional saving through wider use of generics. Further, the average price for a generic drug prescription in the Medicaid program is $20.61, compared to the $195.54 average for name brand medications (including drugs for which there are no generic equivalents).

The NCPA report also noted that efforts to lower dispensing fees to resemble Medicare and private plan benefits face a stumbling block based on federal law. Most private plans “carve in” prescription medication benefits and then negotiate dispense rates on a board basis either by the health plan itself or through a third-party pharmacy benefits manager (PBM). Most state Medicaid programs “carve out” the prescription benefits based on federal requirements for drug companies to provide rebates of up to 23.1 percent of the average manufacturer’s wholesale price for brand drugs and 13 percent for generic drugs. Since these rebates were not available to private plans administering pharmacy benefits, most states run their prescription programs at the state level.

“State Medicaid programs that carve-out drug benefits often do not pay sufficient attention to coordination and management of drug therapies. This responsibility is essentially taken away from health plans and taken over by the state,” the NCPA report noted.

By allowing states to operate more like Medicare Part D or private plans without jeopardizing rebates from the pharmaceutical companies, lowering dispensing fees from the average of $4.81 to near the Medicare average of $2 would save significant money.

“Many pharmacies can survive on $2 dispensing fees from the PBMS that manage private drug plans. Some chain drug store and big box retail pharmacies succeed on $4 generic prescriptions they fill for consumers without a drug plan,” the report stated. “This suggests Medicaid fee-for-service dispensing fees are arbitrarily set too high in many jurisdictions.”

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