About half of states have transitioned at least some Medicaid beneficiaries away from fee-for-service (FFS) drug programs into drug plans integrated with managed care. Yet, recent legislative initiatives are bucking this trend for political reasons. A bill in the Kentucky legislature, and similar proposals in Ohio and Arkansas, would require the state to manage Medicaid drug benefits on a FSS basis. Indeed, nearly half of states still hang on to outdated FFS programs, mostly for political reasons. The primary reason is to protect or improve the finances of small, rural pharmacies.
One of the goals proponents of Medicaid drug carve-outs hope to achieve is to persuade lawmakers to increase dispensing fees (i.e. counting and bottling the pills). State-run Medicaid FFS programs normally pay higher dispensing fees than managed care plans. Dispensing fees paid by private plans average about $2 for Medicare Part D plans, although it is reportedly just under $1 for Kentucky Medicaid. By contrast, state FFS dispensing fees range from $2 in Arizona to $21.28 in Alaska, for pharmacies not located on a road system. Every $1 increase in the cost of dispensing a Medicaid prescription in Kentucky is estimated to cost federal and state taxpayers approximately $27 million.
Drug benefits behind in managed care integration
Over the past 20 years, states have increasingly moved Medicaid enrollees into private managed care plans. However, states have been slower to integrate drug benefits with Medicaid managed care. Federal regulations require drug makers to rebate a portion of drug costs. Until recently states could only receive rebates if the state administered drug benefits using FSS.
The Affordable Care Act changed this requirement. States can now receive drug rebates (shared with the federal government) whether benefits are administered FFS or integrated with managed care.
Medicaid managed care plans in about half of states work with private firms that manage Medicaid drug benefits, called pharmacy benefit managers (PBMs). PBMs span multiple states and have numerous public and private clients. The objective is cost savings; PBMs possess far more purchasing power and expertise than any one state agency. An April 2015 report found integrating drug benefits with managed care plans lowered the cost of Medicaid branded drug by 17.6% and generic drugs by 15.1% compared to state Medicaid FFS programs. The report also found managed care use of lower-cost generic drugs was about five percentage points higher than FFS plans.