NCPA - National Center for Policy Analysis

Reforming Arkansas' Medicaid Drug Program

February 19, 2014

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. This inefficient practice needs to change, says Devon M. Herrick, a senior fellow with the National Center for Policy Analysis.

A recent analysis by the Menges Group identified ways in which privately managed Medicaid drug plans are more efficient than state-administered programs. 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. Specifically:

  • 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.

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.

Source: Devon M. Herrick, "Reforming Arkansas' Medicaid Drug Program," National Center for Policy Analysis, February 19, 2014.


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