NCPA - National Center for Policy Analysis

State Reform of Medicaid Drug Programs

May 1, 2012

Drug spending is one of the fastest growing components of the Medicaid program.  Restraining the growth of Medicaid spending is a fiscal imperative for state budgets.  This problem is particularly acute due to the expected increase in Medicaid enrollment as a result of the Patient Protection and Affordable Care Act, says Devon Herrick, a senior fellow with the National Center for Policy Analysis.

There are several effective strategies that states can use to better manage and lower Medicaid drug costs.  Two of the most important are encouraging generic drug use when appropriate and paying competitive market rates for drug dispensing. 

The way state Medicaid drug programs work varies depending on whether drug benefits are administered by state officials or managed by private health plans contracting with pharmacy benefit managers (PBMs).  Medicaid enrollees usually purchase their drugs at local pharmacies that are reimbursed for the cost of each prescription filled, plus a dispensing fee.  Rather than negotiating fees, states often arbitrarily pay pharmacies more than market rates.  In addition, states often allow special interests to influence the makeup of state drug lists and formularies.  By contrast, private plans typically negotiate drug dispensing fees with pharmacies and create cost-effective formularies that meet the needs of patients. 

However, lobbyists for pharmacy trade associations, drug suppliers and other special interests often obstruct the efforts of state Medicaid programs and PBMs to better manage drug benefits.  Special interests lobby legislatures to restrict the ability of pharmacy benefit managers to negotiate better deals.  This diminishes the ability of Medicaid drug plans to operate efficiently.  Consider:

  • Across the country, the average Medicaid dispensing fee is $4.81 per prescription.
  • By contrast, the privately-managed Medicare Part D plans pay pharmacies a fee of about $2 for every prescription they fill, or about $1.90 for a short-term supply of pills and $2.20 for an extended supply of drugs.
  • The average cost of a generic drug prescription in the Medicaid program is $20, compared to about $201 for name-brand medications (including drugs for which there are no generic equivalents).

Other cost-savings strategies include coordinating and tracking drug therapies, establishing reimbursement rates for drug makers similar to what commercial drug plans pay, and empowering patients with control of some of the dollars spent on their drug therapies so that they become better consumers.

Source: Devon M. Herrick, "State Reform of Medicaid Drug Programs," National Center for Policy Analysis, May 1, 2012.

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