Reforming Arkansas’ Medicaid Drug Program

Issue Briefs | Health

No. 137
Wednesday, February 19, 2014
by Devon M. Herrick

Arkansas has moved most of its Medicaid enrollees into privately-administered managed care plans. Currently, half a million Arkansas beneficiaries are enrolled in managed care. This is equivalent to nearly 80 percent of the Medicaid population in Arkansas before the state expanded eligibility. However, the state has been very slow to move Medicaid enrollees to managed drug plans.

Virtually all state Medicaid programs distribute some drugs on a fee-for-service (FFS) basis separately from enrollees' health plans. A few states distribute almost all their Medicaid drugs this way; Arkansas is one of them [see Figure I].2 This inefficient practice needs to change.

Reforming Medicaid Drug Programs. State Medicaid programs that carve out drug benefits often ignore drug therapy coordination and management. By contrast, 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 and drug plans in 14 states that currently carve out drug benefits would collectively save nearly $12 billion over a decade.3

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 Medicare 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 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. An IMS Health analysis of Medicaid managed pharmacy benefits in several states found utilization rates for many of these therapies is higher under managed care than fee for service.4

The Role of Medicaid Drug Plan Administrators. 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.5 Private 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. Regardless of how a drug program operates, Medicaid enrollees generally obtain prescriptions at local pharmacies, which are reimbursed for each prescription filled.6

A recent analysis by the Menges Group identified ways in which privately managed Medicaid drug plans are more efficient than state-administered programs.7 Rather than negotiating with pharmacy networks, state fee-for-service Medicaid programs often arbitrarily pay much higher dispensing fees than they would in a competitive market. Utilization of generic drugs is often lower in fee-for-service Medicaid. Moreover, Medicaid programs face political opposition to negotiating exclusive pharmacy network contracts that deliver lower drug prices to taxpayers. As a result:

  • Less than three-fourths (73 percent) of drug prescriptions in Arkansas' fee-for-service Medicaid program are filled with generic drugs, whereas the national average for managed Medicaid drug benefits is about 80 percent.
  • Arkansas Medicaid pays pharmacies $5.51 to dispense a prescription, whereas the average for private Medicare Part D plans is less than one-half as much - about $2.00.
  • The number of prescriptions per Medicaid enrollee is generally higher among enrollees in Medicaid compared to managed care.

According to Menges, integrating drug and health benefits in a statewide managed care program could save Arkansas Medicaid $1 billion over 10 years in federal and state spending.8 Specifically [Figure II]:

  • Nearly one-third (30 percent) of the savings would come from paying market-based, competitive dispensing fees.
  • More than one-quarter (28 percent) would come from use of generic drugs where appropriate.
  • More than one-third (34 percent) would come from negotiating steep discounts with exclusive (limited) networks.

Despite the potential savings, community pharmacists and pharmacy trade associations often oppose moving from fee-for-service Medicaid drug programs to privately managed ones. 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. The pharmacy industry has launched an initiative in recent years to limit the ability of drug plans to audit pharmacies that bill for drug plan member prescriptions.9 If taxpayers are to be protected from fraudulent operators, drug plans must be allowed to audit for compliance.

A few of these barriers to efficient Medicaid drug plans are discussed in greater detail below.

Competitive Dispensing Fees. Many state fee-for-service Medicaid drug programs pay dispensing fees that are more than double the negotiated rates paid by private Medicare Part D drug plans. This is the case in Arkansas. Community pharmacies often specialize in serving Medicaid beneficiaries and depend on Medicaid dispensing fees to boost pharmacy revenue. Small pharmacists cannot compete with PBMs on price and efficiency without cutting profitability, so they fight to maintain the status quo and lobby to keep Medicaid dispensing fees artificially high.

Barriers to Efficient Networks. Many pharmacists are small business owners. Thus, state legislators often view them sympathetically when they lobby for protection from competition. For instance, PBMs and health plans are increasingly experimenting with limited or "narrow" pharmacy networks in order to negotiate lower drug prices and dispensing fees. Pharmacies compete to become one of the exclusive network drug providers.10 Enrollees, insurers and employers share in the resulting savings.11

However, many states allow any willing pharmacy to participate in Medicaid drug programs, preventing the development of exclusive networks. Supporters argue that open pharmacy networks offer enrollees more choices and more convenience, and promote competition. Yet, this is not competition in the traditional sense of what economists consider competition. For instance, pharmacies are not offering lower prices to Medicaid enrollees or even the state Medicaid programs in return for enrollees' business. PBMs and drug plans counter that when pharmacies compete with each other to be included in exclusive networks, they agree to deeper discounts that save taxpayers money.12

Any-willing-provider and freedom-of-choice laws reduce the drug plans' bargaining power negotiate steeper discounts from pharmacies.13 These regulations also prevent health plan sponsors from selectively negotiating and contracting with pharmacies.14 The Federal Trade Commission notes that these laws lead to higher drug prices and higher premiums by protecting less efficient pharmacies from competition.15 Thus, they could be costly to taxpayers, employers and patients.16 The Lewin Group calculated that if government enacted a nationwide any-willing-provider mandate, prescription mail-order pharmacy costs would increase 3 percent.17 Thus, any-willing-provider and freedom-of-choice laws typically benefit local pharmacies rather than consumers.18

Barriers to Mail-Order Pharmacies. Drug plans offer incentives that encourage patients to use mail-order pharmacies for medications to treat chronic conditions, such as diabetes, hypertension and high cholesterol. Many plan sponsors charge higher deductibles for retail purchases, offer lower copayments for mail-order dispensing, or only reimburse patients for mail-order maintenance medications.19 Some plans limit the number of times a prescription may be refilled at a retail pharmacy before patients are required to use mail order.

Unfortunately, lawmakers sometimes pursue unwise policies designed to benefit local constituents. One way is to enact laws limiting drug plans' ability to reward enrollees who use mail order. In 2011, New York State passed Assembly Bill 5502, which allows consumers to fill prescriptions at any pharmacy without incurring additional cost-sharing or fees. The law benefits local community pharmacies - not consumers or taxpayers.

As one consultant described it: "Imagine that your local bookstore owner lobbied your state Senate to pass a law preventing you from buying a book less expensively via You would immediately recognize that the bookstore was trying to protect its business at your expense. This is precisely what has happened for prescription drugs in New York."20 The Federal Trade Commission agreed, stating "By reducing competition between pharmacies, this legislation likely will raise prices for, and reduce access to, prescription drugs...."21

Retail-choice laws may increase convenience for some enrollees, but they drive up costs for all health plan members and their plan sponsors. Maryland passed legislation similar to New York's. If retail choice was required nationwide, mail-order prescription costs would rise more than 5 percent, according to the Lewin Group.22

Clearly, Arkansas 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 that allow outsiders to participate in a drug plan's network reduce the power of managers to negotiate lower prices and unnecessarily facilitate waste, fraud and abuse. For example, 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).

Pharmacy Board Regulation. As in most states, the state insurance commissioner regulates insurance sold in Arkansas, including health and drug plans. However, some pharmacy interests across the nation are lobbying to transfer some regulatory authority over drug plans to the State Board of Pharmacy.23 For instance, House Bill 2100, introduced in the first session of the 54th Arkansas Legislature, would require PBMs to obtain a license from the state pharmacy board. Pharmacists and their allies typically dominate the membership of such boards. For instance, a state law passed in 2011 requires the governor of Arkansas to get the consent of the Arkansas Pharmacy Association for appointments to the Board of Pharmacy.24  State pharmacy board regulation of drug plan managers would allow the board to demand sensitive information on business practices, which could be disclosed to pharmacy trade groups, eroding the drug plans' bargaining power in contract negotiations with the drug plans. Indeed, when the Mississippi House of Representatives debated this issue in 2013, the Federal Trade Commission (FTC) argued that increased regulation would harm consumers - concluding that more restrictive controls would reduce competition and raise costs for consumers.25

Conclusion. Medicaid will best serve Arkansas taxpayers by providing drugs to enrollees at the lowest possible cost. Arkansas has moved most of its Medicaid enrollees into managed care plans. It should also integrate drug benefits into enrollees' health plans. In addition, legislators should avoid the temptation to enact protectionist regulations designed to limit competition among pharmacies participating in the Medicaid program. The state will likely find that drug plan managers will lower costs - if they allow drug plans to use the tools to do so. However, Arkansas legislators will undoubtedly come under political pressure to protect local providers from the competition that could save taxpayers money.

Devon M. Herrick is a senior fellow with the National Center for Policy Analysis.


1. "Medicaid Managed Care Enrollment Report," Summary Statistics, Centers for Medicare and Medicaid Services, July 1, 2011. Available at

2. Joel Menges, "Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates," Menges Group, May 2013. Available at percent20medicaid percent20savings percent20report percent20menges percent20group percent20may percent202013.pdf.

3. Joel Menges et al., "Projected Impacts of Adopting a Pharmacy Carve-In Approach Within Medicaid Capitation Programs," Lewin Group, February 2011. Available at

4. Murray Aitken et al., "Shift from Fee-for-Service to Managed Medicaid: What is the Impact on Patient Care?" Institute for Healthcare Informatics, April 2013.

5. Joel Menges, "Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates."

6. Devon M. Herrick, "Increasing the Cost-Effectiveness of Medicaid Drug Programs," National Center for Policy Analysis, Policy Backgrounder No. 164 by April 29, 2011. Available at

7. Joel Menges, "Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates."

8. Ibid.

9.For example, see Debra Wolfe (APA Director of Governmental Affairs), "2011 Notes From the Hill Retrospective," Arkansas Pharmacy Association, 2011. Available at In 2011 Arkansas passed laws requiring enhanced cost disclosure requirements by drug plans, while placing additional restrictions on the rights of drug plans to audit pharmacy charges.

10. "As Pharmacy Networks Slim Down, Payers Have a Lot to Chew On, Suggests Experts," Drug Benefit News, Vol. 13, No. 12, June 22, 2012.

11. Thomas Gryta, "What Is a 'Pharmacy Benefit Manager'?" Wall Street Journal, July 21, 2011. Available at 24053111903554904576460322664055328.html.

12. Ibid.

13. Alain Enthoven and Kyna Fong, "Medicare: Negotiated Drug Prices May Not Lower Costs," National Center for Policy Analysis, Brief Analysis No. 575, December 18, 2006. Available at

14. Christine Piette Durrance, "The Impact of Pharmacy-Specific Any-Willing-Provider Legislation on Prescription Drug Expenditures," Atlantic Economic Journal, Vol. 37, No. 4, August 2009, pages 409-423.

15. "Improving Health Care: A Dose of Competition," Federal Trade Commission and the U.S. Department of Justice, July 2004. Available at http://

16. Susan S. DeSanti, Joseph Farrell and Richard A. Feinstein, Letter to New York State Senator James L. Seward, U.S. Federal Trade Commission, August 8, 201. Available at

17. Lewin Group, "Mail-Service Pharmacy Savings and the Cost of Proposed Limitations in Medicare and the Commercial Sector," Pharmaceutical Care Management Association, September 2006. Available at

18. Robert L. Ohsfeldt et al., "The Spread of State Any-willing-provider Laws," HSR: Health Service Research, Vol. 35, No. 5, December 1998.

19. "Pharmacy Benefit Managers: Ownership of Mail-Order Pharmacies," U.S. Federal Trade Commission, August 2005.

20. Adam J. Fein, "The Unexpected Losers from New York's Anti-Mail Bill," Drug Channels, June 28, 2011. Available at http://www.drugchannels. net/2011/06/unexpected-losers-from-new-yorks-anti.html.

21. Susan S. DeSanti, Joseph Farrell and Richard A. Feinstein, "letter in response to a request for comments on the likely competitive effects of New York Assembly Bill 5502-B," Office of Policy Planning, U.S. Federal Trade Commission, August 8, 2011. Available at 8/110808healthcarecomment.pdf.

22. This provision also requires PBMs to reimburse for 90-day prescriptions through local pharmacies. See Lewin Group, "Mail-Service Pharmacy Savings and the Cost of Proposed Limitations in Medicare and the Commercial Sector," Pharmaceutical Care Management Association, September 2006. Available at

23. For example, see Staff, "Oklahoma bill would give Board of Pharmacy oversight of PBMs," February 13, 2013.

24. "Arkansas State Board of Pharmacy Law Book, Pharmacy Practice Act July 2011," 17-92-201. Members-Qualifications, Arkansas State Board of Pharmacy, p. 47.

25. See Susan S. DeSanti, Joseph Farrell and Richard A. Feinstein, letter in response to a request for comments on the likely competitive effects of Mississippi Senate Bill 2445, Office of Policy Planning, U.S. Federal Trade Commission, March 22, 2011. Available at

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