Reforming Florida’s Medicaid Drug Program

Brief Analyses | Health

No. 789
Thursday, November 14, 2013
by Devon M. Herrick

Florida is moving aggressively to cover Medicaid enrollees in privately-administered managed care plans. The state should also continue to move enrollees to managed drug plans. Virtually all state Medicaid programs distribute some drugs on a fee-for-service (FFS) basis separately from any health plan.

Nearly half of the states carve out and administer drug benefits separately, distributing all Medicaid drugs this way. Nationally, more than half of Medicaid drugs are distributed FFS, slightly less than in Florida.

Reforming Medicaid Drug Programs. Integrating prescription drugs benefits with Medicaid managed care health plans improves quality and increases efficiency. A Lewin Group analysis for Medicaid Health Plans of America, a trade association of managed care providers, found that integrating health plan and drug benefits in 14 states that currently carve out drug benefits would collectively save nearly $12 billion over a decade.

State Medicaid programs that carve out drug benefits often ignore drug therapy coordination and management. When drug benefits are carved out of health benefits, the state essentially takes this responsibility away from health plans. Private health plans that provide medical care to Medicaid enrollees are the logical entities to manage drug benefits. The health plans are paid a set fee per enrollee to provide care; thus, the plans are liable for the cost of nondrug therapies, whereas a drug regime is often a less costly substitute for surgery or other treatment.

Drug therapies also often reduce the need for hospitalization, and avoid expensive emergency room visits and medical complications - especially for such chronic conditions as asthma, diabetes and schizophrenia. IMS Health analyzed Medicaid managed pharmacy benefits in a number of states and found utilization rates for many of these therapies is higher under managed care than fee-for-service. For instance, use of generic versions of antipsychotic medications was 3 percent to 14 percent higher than in fee-for-service Medicaid, on average. Drug utilization for diabetes was also higher.

The Role of Medicaid Drug Plan Administrators. Medicaid managed care plans frequently contract with pharmacy benefit managers (PBMs), private firms that act as third-party prescription drug plan administrators. PBMs process and reimburse claims, and negotiate drug prices and rebates with drug manufacturers. They also negotiate dispensing fees - the amount paid to pharmacies for the service of filling a prescription.

Private health plans use a variety of techniques to control drug costs, including preferred-drug lists (PDL), formularies, required use of mail-order drug suppliers, negotiated prices with drug companies and drug distributors, and contracting with exclusive pharmacy network providers.27 Regardless of how the program is structured, Medicaid enrollees fill many of their prescriptions at local pharmacies that are reimbursed for each prescription filled.28

A recent analysis by the Menges Group, another consultancy, identified ways in which privately managed Medicaid drug programs are more efficient than state-administered Medicaid drug benefits.29 Rather than negotiating with pharmacy networks, state FFS Medicaid programs often arbitrarily pay much higher dispensing fees than they would in a competitive market. Utilization of generic drugs is often lower in state FFS Medicaid and the number of prescriptions per member is higher.

Numerous benefits flow from integrating drug benefits into enrollees' managed care health plans. For instance:

  • About two-thirds (67 percent) of drug prescriptions in Florida's FFS Medicaid are filled with generic drugs, whereas the national average for managed Medicaid drug benefits is about 80 percent.
  • Florida FFS pays pharmacies $3.73 to dispense a prescription, whereas the average for private Medicare Part D plans is just over half as much - about $2.00.
  • The number of prescriptions per Medicaid enrollee is generally higher among enrollees in FFS Medicaid compared to managed care.

According to Menges, integrating drug and health benefits in a statewide managed care program could save Florida Medicaid $5.1 billion over 10 years ($3 billion in lower federal spending and $2.1 billion less in state spending). Specifically [see the figure]:

  • Some 11 percent of the savings would come from paying market-based, competitive dispensing fees.
  • Nearly one-fourth (24 percent) would come from use of generic drugs where appropriate.
  • More than half (59 percent) would come from negotiating steep discounts with exclusive (limited) networks.

Florida should avoid the mistake of allowing any willing pharmacy to participate in the Medicaid drug program rather than authorizing drug plan managers to negotiate lower prices with exclusive pharmacy networks. Any willing pharmacy laws allowing outsiders to participate in a drug plan's network reduce the power of managers to negotiate lower prices and unnecessarily facilitates waste, fraud and abuse. For example, having an unlimited supply of pharmacies allows unscrupulous patients to "shop" for multiple doctors willing to prescribe narcotics - avoiding detection by filling each prescription at a different pharmacy. Requiring Medicaid drug plans to reimburse large networks (with numerous small pharmacies) also makes it more difficult to detect billing fraud by pharmacy operators (or fake pharmacies).

Despite the potential savings, community pharmacists and pharmacy trade associations often oppose moving from FFS Medicaid drug programs to privately-managed Medicaid drugs. Small community pharmacies often specialize in serving Medicaid beneficiaries and depend on Medicaid dispensing fee revenue. Community pharmacists cannot compete on price and efficiency without reducing profitability, so they fight to maintain the status quo. Trade associations for small pharmacies advocate laws to prohibit exclusive Medicaid pharmacy networks. Community pharmacists also lobby lawmakers to discourage cost-efficient, mail-order drug programs commonly found under managed care.

Conclusion. As Florida moves more Medicaid enrollees into managed care, it should also continue to integrate drug benefits into enrollees’ health plans. In addition, Florida legislators should avoid the temptation to enact protectionist regulations designed to limit competition among pharmacies participating in the Medicaid program.

Devon M. Herrick is a senior fellow with the National Center for Policy Analysis. Adapted from Michael Bond, "Florida's Market-Based Medicaid Reform Demonstration: Cost and Quality Issues," National Center for Policy Analysis, Policy Report No. 350, October 2013.


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