LegiStorm

Summary:

Medicaid is a federal-state entitlement program that pays for health care and related services on behalf of certain low-income individuals. Prescription drugs are an optional Medicaid benefit and all states cover outpatient drugs. States can create formularies, or lists of preferred drugs, but federal rules tend to result in comprehensive coverage, even for beneficiaries enrolled in Medicaid managed care plans. Pharmaceutical manufacturers that voluntarily participate in Medicaid are required to pay rebates to states on covered outpatient drugs, which help Medicaid receive manufacturers' lowest or best price. States then share the rebate they receive from pharmaceutical manufacturers with the federal government. In determining the amount of rebate, Medicaid law distinguishes between the following two drug types: (1) single source drugs (brand-name drugs) and innovator multiple source drugs (brand-name drugs that now have generic competition); and (2) all other, non-innovator, multiple source (generic) drugs. Rebates for the first category of drugs—drugs still under patent or those once covered by patents—have two components: a basic rebate and an additional rebate. In addition to basic and additional rebates, most states negotiate supplemental rebates with drug manufacturers, by offering to encourage use of a manufacturer's product in exchange for a price concession (rebate). States, through retail pharmacies, purchase drugs on behalf of Medicaid beneficiaries. Medicaid pharmacy reimbursement has two components: a payment to cover the cost of the pharmacy buying the drug (ingredient cost) and a payment for the pharmacist's services in filling a prescription (dispensing fee). States set reimbursement for both ingredient costs and dispensing fees. In FY2005, Medicaid fee-for-service (FFS) drug expenditures were approximately $43.1 billion, but by FY2013 had decreased to $19.8 billion. Over the same period, Medicaid FFS drug rebate collections were at about the same level ($12.4 billion), but managed care rebate collections increased substantially to about $4.8 billion in FY2013. The decreases in Medicaid FFS drug expenditures and the increases in rebate collections were mostly offset by at least the following other factors or trends: (1) Beginning January 1, 2006, prescription drug coverage of individuals eligible for both Medicare and Medicaid (dual eligibles) was moved from Medicaid to Medicare Part D, which resulted in substantially reduced Medicaid FFS drug spending. Due to maintenance of effort requirements, state Medicaid programs continue to pay the vast majority of dual eligible drug costs, even though those expenditures are not counted as drug spending. (2) Statutory changes helped to increased rebate collections by extending rebates to Medicaid enrollees covered by managed care plans and increasing the amount of rebates owed by drug companies. (3) The loss of patent protection for a number of commonly prescribed drugs further contributed to decreasing Medicaid drug expenditures. And (4) the rapid shift in enrollment of beneficiaries to managed care plans that cover prescription drugs. In December 2013, Sovaldi®, a new brand-name drug, was approved by the Food and Drug Administration for treatment of hepatitis virus C (HVC) infections. Sovaldi is estimated to cost $1,000 per pill, and total treatment cost estimates range from $84,000 to more than $168,000. The rebates states and the federal government receive will help reduce Medicaid's Sovaldi expenditures, but until other equivalent drugs are available to increase competition, states may have limited leverage to negotiate additional manufacturer price concessions. Medicaid rebates, however, while buffering the cost of prescription drugs, might also contribute to drug manufacturers setting increasingly higher launch prices. The current Medicaid drug pricing and policy infrastructure was designed for FFS, and may not work as well with significant managed care enrollment. Under managed care contracts, states generally delegate some or all of drug utilization review and individual drug claim oversight to plans, including program integrity. With managed care and pharmaceutical benefit managers (PBMs) responsible for these activities, states have responsibility for ensuring plans uphold their contract obligations. States' prescription drug monitoring is tailored to FFS drug claims. It is unclear how much oversight of managed care claims states will be able to provide. If states and the federal government currently procure drugs for Medicaid beneficiaries at some of the lowest prices, will it be possible for managed care plans to further reduce costs without imposing barriers to Medicaid beneficiaries in obtaining covered drugs?