NCPA - National Center for Policy Analysis

Increasing the Cost-Effectiveness of Medicaid Drug Programs

April 29, 2011

Restraining the growth of Medicaid spending is a fiscal imperative for state budgets.  A good place for states to start looking for ways to control spending is in their Medicaid drug benefits.  There are billions of dollars in potential savings that could be realized without reducing access to needed care for any Medicaid enrollees, says Devon M. Herrick, a senior fellow with the National Center for Policy Analysis.

  • The federal government requires drug manufacturers to rebate to state Medicaid programs at least 23.1 percent of the average manufacturer's (wholesale) price for brand drugs and 13 percent for generic drugs.
  • States often negotiate additional rebates so total Medicaid rebates average nearly 40 percent.

Prior to the Patient Protection and Affordable Care Act (ACA), the rebates were only available for drugs in the separate programs administered by state Medicaid agencies.  The drug rebates were not available to drug plans operated by private health plans under contracts with state Medicaid programs.  Thus, in order to receive the rebates, many states chose to separate (or "carve-out") drug benefits and administer them separately from the integrated health plans operated by private contractors.

There are several effective strategies that states can use to better manage and lower Medicaid drug costs, according to the Lewin Group and other researchers.  Five important ones are:

  • Encouraging generic drug use when appropriate.
  • Paying competitive market rates for drug dispensing.
  • Coordinating and tracking drug therapies.
  • Establishing reimbursement rates for drug makers similar to what commercial drug plans pay.
  • Empowering patients with control of some of the dollars spent on their drug therapies so that they become better consumers.

The Lewin Group estimates that the state and federal governments could save $32.7 billion over 10 years by improving the efficiency of their Medicaid drug programs without detriment to enrollees' health.  Ideally, coordinated care would improve the quality of health care received by Medicaid enrollees, says Herrick.

Source: Devon M. Herrick, "Increasing the Cost-Effectiveness of Medicaid Drug Programs," National Center for Policy Analysis, April 29, 2011.

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