Evolving Pharmaceutical Benefit Trends and Medicaid Managed Care’s Role

Health Highlights

Editor’s Note: State Medicaid programs continue to balance serving eligible beneficiaries and controlling costs. In an environment sharply focused on the cost of drugs, it is increasingly critical to understand the Medicaid pharmacy benefit and the part health plans play in managing that benefit. In a recent webinar, Manatt Health took an in-depth look at how pharmaceutical benefit trends are evolving—and the role of Medicaid managed care. In part 1 of our article summarizing the webinar (below), we provide an overview of Medicaid pharmaceuticals, including drug coverage under Medicaid and “rules of the road” for states. We also examine Medicaid managed care, including best practices, formulary development and rate setting. Watch for part 2 of our article in January, when we will look ahead to the future of pharmaceuticals in Medicaid. Click here to view the webinar free, on demand—and here to download a free PDF of the presentation.


Drug Coverage Under Medicaid

Prescription drug coverage is an optional benefit under Medicaid, but all states currently provide this coverage. States must follow Section 1927 of the Social Security Act in regard to “covered outpatient drugs,” defined as drugs that are reimbursed separately from all other services. In other words, a drug is a covered outpatient drug if it’s not bundled into a payment that covers other services or items.

The term “covered outpatient drug” is actually a misnomer, because it implies that the drug has to be provided on an outpatient basis—but that is not technically the rule. Generally, covered outpatient drugs are provided in outpatient settings, but there can be circumstances under which a drug provided to a patient in the hospital might be considered an outpatient drug if the payment for that drug is not included in any other payment made to the hospital.

It’s also important to remember that coverage rules can differ depending on whether or not the beneficiary is a child or an adult. For those under age 21, states must cover all necessary medical services, including drugs, under the Early Periodic Screening, Diagnostic and Treatment (EPSDT) benefit. In contrast, adults may be subject to prescription limits.

Section 1927 Imposes Coverage and Reimbursement Requirements

Section 1927 requires states to cover every drug approved by the Food and Drug Administration (FDA), with limited exceptions such as weight loss, fertility and hair loss drugs, as well as vitamins. Moreover, there’s no grace period. States are required to cover a drug immediately after it has been approved by the FDA, and that coverage requirement flows to managed care organizations. In practice, however, states frequently take time to think through the circumstances under which certain drugs are covered, particularly more expensive treatments.

Finally, there are some limitations on use of prior authorization. Although prior authorization is allowed, states cannot use it to deny access to medically accepted indications. There are also rules regarding the timing of prior authorization. The state must respond to a request within 24 hours and must provide at least a 72-hour supply of the drug in an emergency.

In terms of reimbursement, Section 1927 has very detailed requirements regarding the payment of manufacturer rebates. Rebates depend on two key data points. One is the average manufacturer price (AMP), which is essentially the average price the manufacturer receives from other sources, such as wholesalers or pharmacies. The other is the best price—the lowest price available from the manufacturer, subject to some exceptions.

It’s notable that there is no minimum payment rate set by statute under Section 1927. There is, however, a more general requirement that applies to Medicaid overall, which states that rates must be “sufficient to enlist enough providers.” This ensures that Medicaid beneficiaries have the same access as the general population.

Types of Medicaid Drug Rebates

Since there is not much flexibility in how much pharmacies or other providers are paid for providing drugs, states and the federal government can save money by demanding rebate payments from manufacturers. There are four different types of rebates—two mandatory and two voluntary:

  1. Federal Basic Rebate (mandatory), which is required for inclusion in the state Medicaid drug benefit. For fee-for-service (FFS), the pre-Affordable Care Act (ACA) formula was the greater of 15.1% of the AMP or the best price for brand drugs. For both FFS and managed care, the post-ACA formula is the greater of 23.1% of AMP or the best price for brand drugs.
  2. Federal Inflation-Based Rebate (mandatory), which also is required for inclusion in the state Medicaid drug benefit. This is based on a complex formula, but the basic concept is that manufacturers pay a higher rebate the more they increase the price of their drugs. This rebate has focused on brands, but as of 2017 it also applies to generics.
  3. State-Specific Supplemental Rebates (voluntary) , which support inclusion on the state’s preferred drug list, eliminating the need for prior authorization. For these rebates, the state negotiates with the manufacturer for drug utilization under FFS and/or managed care.
  4. Managed Care Rebates (voluntary), which support preferential placement on the managed care formulary and are based on private contract negotiations with Medicaid managed care entities.

Almost all states extract supplemental rebates from manufacturers. Some negotiate on their own, while others join larger groups of states to have more power in the negotiating process.

State Medicaid Programs Use Multiple Strategies to Manage Drug Utilization

States use a variety of strategies to manage drug utilization. Utilization management tools are often specified on formularies and can impact access to products. Managed care organizations (MCOs) use formularies to give preference to some drugs as a way of controlling utilization. MCOs often require supplemental rebates to determine a drug’s tier placement on the formulary.

States also often control utilization by requiring the substitution of a generic product for a prescribed branded drug. Generic dispensing rates are typically high, particularly in managed care.

Overriding a generic substitution requirement can be complex. Most states require a physician to get prior authorization (PA) before a branded drug will be dispensed over an available generic. Drugs that are preferred typically have more favorable PA requirements.

Other utilization management strategies include:

  • Step therapy, requiring patients to try and fail on other medications before gaining access to certain therapies. Many policies, for example, require patients first to try a generic or preferred product.
  • Quantity limits, restricting the number of prescriptions allowed each month, the number of days that can be dispensed at a time (i.e., no more than a 30-day supply) and the number of refills.

Why Are States Shifting to Managed Care?

Managed care is the preferred vehicle that states across the country use to deliver their Medicaid programs. Currently, 38 states and the District of Columbia—which account for 90% of all Medicaid beneficiaries—contract with comprehensive MCOs. Over the past 10 years, we’ve seen states increasingly use managed care to cover comprehensive benefits for complex, harder-to-manage populations, such as those who are dually eligible or who suffer from severe mental illness, HIV/AIDS and/or developmental disabilities.

States are embracing managed care for a number of reasons—chief among them, to gain a greater level of budget certainty and better manage Medicaid costs. Other state goals include:

  • Addressing physical health, behavioral health and long-term care silos
  • Improving quality, consumer experience mechanisms and oversight capacity
  • Transitioning to population health—focusing on the person, not the diagnosis
  • Bending the cost curve

Medicaid Managed Care

It’s important to remember that Medicaid MCO beneficiaries are entitled to the same protections as FFS beneficiaries. All of the Section 1927 rules described above apply to MCOs. For example, MCOs may establish their own formularies, but beneficiaries must have access to the same drugs as FFS beneficiaries. If a drug is not on formulary, the MCO must provide a way for beneficiaries to access that product, either through an exceptions process that the MCO manages or by covering the drug in an FFS program through a carve-out. Assuming a drug is not carved out, MCOs must cover it immediately after FDA approval.

Finally, the Centers for Medicare & Medicaid Services (CMS) allows managed care plans to put prior authorization programs in place, subject to the same restrictions as FFS prior authorization programs, including requiring states to respond within 24 hours to requests and to provide at least a 72-hour supply of the drug.

Most States Require MCOs to Take on the Risk of Covering Drugs in Their Benefits Packages

There are several potential drug coverage strategies that vary across states:

  • Carve-in. States include the prescription drug benefit in managed care contracts. This approach requires the MCO to take on the financial risk of drug coverage.
  • Carve-out. States carve out the prescription drug benefit from managed care contracts and require coverage through the state’s FFS program. This approach requires the state to take on the financial risk of drug coverage.
  • Unified formulary. Executed by several states, unified formularies put the financial risk of prescription drug coverage on MCOs, while requiring MCOs to use the state’s preferred drug list (PDL).
  • Condition-specific. Some states have carved out specific classes of drugs for conditions such as HIV/AIDS, substance abuse, hemophilia, mental health and hepatitis C.

There are ongoing debates over whether carve-ins or carve-outs offer greater cost savings. Most of the literature supports the argument that greater savings are associated with carving in the prescription drug benefit—but it really depends on the state and how well it manages its FFS program. Certainly, we have seen a rise in unified formularies, requiring MCOs to use the state’s PDL to minimize variances across the state. We’ve also seen more states begin to carve out specific drug classes and treat those separately from the overall managed care contracts.

A Range of Approaches in Managing Prior Authorizations/Exceptions

States have taken a range of approaches in managing prior authorizations and exceptions. Generally speaking, states have given managed care plans flexibility in terms of developing their clinical and prior authorization policies, as long as access to drugs is equal to access in FFS programs. One of the benefits of managed care plans is that they are able to develop creative solutions to managing the pharmacy benefit. Florida and Nebraska are good examples of MCOs maintaining flexibility:

  • In Florida, MCOs may adopt the Medicaid prior authorization criteria or develop their own criteria. Prior authorization and step-therapy protocols for PDL drugs may not be more restrictive than those used by the state Medicaid agency.
  • In Nebraska, MCOs may manage utilization of drugs through procedures that may include, but are not limited to, prior authorization and utilization and clinical edits.

Streamlining Medicaid Managed Care Utilization Management (UM) Processes

UM offers an opportunity for simplification approaches that alleviate the burden of providers having to navigate different systems and processes. Approaches states are using include:

  • Developing a common prior authorization form
  • Requiring MCOs to have a dedicated toll-free number for both pharmacy providers and prescribers
  • Requiring MCOs to accept electronic prescribing
  • Requiring MCOs to develop web-based prior authorization processes

Important Drivers in Medicaid Managed Care Organization (MMCO) Rates

The pharmaceutical benefit tends to be the most volatile benefit that managed care plans are managing. If rates aren’t set appropriately, plans could face undue financial pressures. Actuaries in states need to consider a broad range of components in setting rates, including pricing, utilization management, generic dispensing rates, plan-negotiated rates, program changes, co-pays, new brands, transitions to generics, managed care savings and administrative costs.

There also is the added challenge of the high-cost products that have hit the market over the past couple of years and will continue to launch in the years ahead. There are a variety of different tools that states and plans can use to manage the costs and mitigate the risks of these new, high-cost treatments. The most popular among states is setting a prospective trend to the rates that anticipates new products coming to market. Actuaries in the state will generally put a trend on the managed care rates to reflect the market impact of those new products. If there is concern that some plans may get more of the beneficiaries using the high-cost product than others, states create risk pools or risk corridors around particular treatments or classes of drugs to mitigate risk.

Supplemental payments provide another popular approach to dealing with high-cost products. With supplemental payments, states give plans an additional payment, on top of capitation, for high-cost drugs. Some states also are using a reconciliation approach. New York is a good example, with the state reconciling the premium payment with actual utilization for hemophilia drugs.



pursuant to New York DR 2-101(f)

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