A Neutral POV on Medicaid Drug Savings

The battle over Medicaid pharmaceutical spending is getting uglier.

Both the NCPA and NACDS challenged some of HHS Secretary Kathleen Sebelius’ suggestions on how states can better manage Medicaid pharmacy spending. Over the weekend, Steve Anderson, President and CEO of NACDS, went further by quoting Winston Churchill and calling on the pharmacy industry to “fight for victory” on reimbursement issues at the federal and state levels. Meanwhile, the PCMA coyly cites a need to Focus on Patients, Not Profits, in Medicaid Pharmacy.

I invited Mike Winkelman, the principal of Winkelman Management Consulting, to write the guest editorial below because he offers a frank assessment of today’s reality from a non-partisan, objective perspective. He recently delivered an intriguing presentation to the National Legislative Association on Prescription Drug Prices (NLARX): Medicaid Pharmacy Reimbursement Reform: Trends and Recommendations.

Mike argues that states can and should take the initiative to reduce excessive pharmacy reimbursements in the Medicaid program. His conclusions echo the findings of a recent Lewin Group study that I highlight in How to Stop Medicaid from Overpaying for Drugs.

Many comments on the original Drug Channels post criticized Lewin’s conclusions because the study was funded by the PCMA, which represents PBMs. In contrast, Mike often finds himself conducting audits of PBMs on behalf of his plan sponsor clients. However, he concurs with Lewin's general message about savings opportunities.

THE POTENTIAL FOR SIGNIFICANT SAVINGS ON MEDICAID PRESCRIPTION DRUG COSTS
By Mike Winkleman, Winkelman Management Consulting

States are struggling to manage their Medicaid budgets since the recession has sharply cut into their revenues. In addition, Medicaid costs keep rising due to increases in the cost of care and the growing number of people who now qualify for this government program.

Our studies have identified the potential for savings in the range of 5 to 10% on Medicaid drug costs. Simply put, Medicaid fee-for-service pays much more to pharmacies for prescription drugs than do the private health plans.

Our firm draws three conclusions from the current situation:

• State Medicaid programs pay more for drugs than private sector plans.
• State budgets are underwater and desperate to find savings wherever possible.
• As a result, Medicaid reimbursements to pharmacies will be reduced.

As we see it, reimbursement reform can increase transparency and lower costs. Medicaid should not pay more than commercial payers and Medicare Part D. Pharmacies can still make a profit without hiding it from sight.

Mindful of the pressure on state budgets, we feel that efforts to reduce Medicaid drug costs will have considerable traction among the states. As all of this happens, retailers will make less money.

THE MEDICAID DRUG BENEFIT PROBLEM

Title XIX of the Social Security Act, which created Medicaid, was enacted in 1965. It is a unique program in many ways.

• Costs are shared between the states and the Federal Government. It is truly an ‘entitlement’ program, with robust benefits. Medicaid consumes a huge share of every state’s budget.
• Some health care services, such as prescription drug benefits are optional, but Rxs are presently covered by all state Medicaid agencies.
• Under federal rules (OBRA90), state Medicaid plans are guaranteed rebates from drug manufacturers, which reduce costs substantially.
• Many states assign some or most Medicaid patients to Managed Care Organizations (MCOs), which get per patient capitation fees to manage their care, on an at-risk basis. Most states do not put the MCOs at risk for the drug benefit; it is ‘carved-in.’

HOW DID WE GET HERE

Many years ago, as prescription claims processing evolved from batch to on-line, the Medicaid programs were among the last adopters of this more advanced technology, and, since batch processing was slow and error prone, pharmacies had every right to expect – and get – higher levels of reimbursement. But Medicaid processing has been real time for nearly a generation and the rates were never equalized.

In addition, PBMs continue to reduce network reimbursement rates in the private sector. As a generality, the retail pharmacy community is powerless to fight back and their margins for private sector claims continue their relentless downhill slide.

Conversely, the drug retailers do have some clout with Medicaid, and – again as a generality – NACDS, NCPA and state pharmacy associations have been successful in lobbying the states to maintain the higher Medicaid rates. This has resulted in today’s disparity.

State Medicaid programs do a good job of encouraging the use of generics, but most are paying too much for these drugs. PBMs are very efficient at maintaining low Maximum Allowable Cost (MAC) pricing for generics. Unfortunately, CMS and the states are not nearly as adept.

The Federal Upper Limit (FUL) pricing, which is a ceiling for the states on generic reimbursement rates, is an outdated anachronism and, on an item-by-item basis results in much higher costs as compared to PBM MAC prices. To overcome this disparity, almost all states have implemented their own MAC pricing. But most of these state MAC prices are much higher than private sector MACs. That’s good news for retailers, but states are leaving too much money on the table.

COMPARING THE LEWIN AND WINKELMAN REPORTS

While it should be noted that our analysis is simply based on the arithmetic and theirs is an advocacy piece, on behalf of a client, both come to the same conclusion: Medicaid pays too much for drugs and should reduce rates post-haste. Here are our estimated savings for 12 states:

Note that both studies show estimated savings. Actual savings will differ, but the conclusions as to the savings potential are rock-solid. The Lewin Study suggests that those states that can move the drug risk to MCOs should do so. They are right. The change will reduce Rx costs.

But not all of those states will make that switch and most states are not able to do so in the near term. They all need to embark on a plan to get to market rates as soon as possible. And, while consultants such as my firm can readily facilitate this effort, states can and should take the initiative to so themselves.