The proposed Medi-Cal pharmacy carve-out —“Medi-Cal Rx” — will transfer the pharmacy benefit offered by health plans back to the fee-for-service program, where it would be administered by a pharmacy benefit manager (PBM). With pharmacy being the most frequently used benefit for the 13+ million Californians impacted by this proposal, Medi-Cal Rx represents a monumental shift. However, the carve-out concept is not untested. Thirteen other states have experimented with a version of what California is pursuing. As the Menges Group highlights in its report, pharmacy carve-outs did not save money or improve patient care.  While still not known, it’s the details of the pharmacy carve-out that will determine whether California can do it better.  

Evidence indicates that pharmacy carve-outs increase, rather than decrease, pharmacy expenditures
Thirteen states ranging from New York to Texas to Wisconsin all had pharmacy carved out of their Medicaid managed care programs in 2011. Since then, ten states have carved in the Medicaid pharmacy benefit while three others have retained a carve-out. These dynamics allowed the Menges Group to compare Medicaid prescription drug costs between the two groups — states that moved from a pharmacy carve-out to a carve-in and states that have retained a carve-out. Their analysis found that states that switched to a carve-in model have collectively outperformed those that retained a carve-out approach. In fact, the net cost per prescription across states that carved in the pharmacy benefit decreased by 1.3 percent whereas the states retaining a carve-out saw a 14.3 percent net cost increase over the same time period.

A Medi-Cal pharmacy carve-out would increase California’s net pharmacy expenditures by 19.4 percent over five years
In their analysis, the Menges Group modeled the cost impacts of a Medi-Cal pharmacy carve-out based on pharmacy data from the 13 carve-out states. Their modeling indicates that Medi-Cal costs will increase by $149 million, growing to $2.2 billion additional costs over five years. While the state would garner some administrative savings by reducing capitation payments to managed care plans, these savings do not come close to offsetting the additional costs associated with a Medi-Cal pharmacy carve-out. These additional costs are primarily attributable to greater reliance on brand name drugs to secure more manufacturer rebates, higher dispensing fees and decreased ability to promptly make changes to the formulary to address emerging dynamics such as price changes, patent expirations and new drug introductions.

The allure of rebates versus the reality of net costs
While negotiating significant manufacturer rebates is an enticing strategy for states that have a pharmacy carve-out, it has not resulted in lowering net costs. The more significant factors impacting overall pharmacy costs is the drug mix rather than rebates on brand drugs. California estimates it will double its current level of supplemental rebates, securing 12 percent once the carve-out is implemented. The Menges Group does not see a path to this level of supplemental rebates. Tennessee, currently the largest carve-out state, secured supplemental rebates of 6.3 percent in FFY 2018. Likewise, Vermont, the state with the highest overall supplemental rebates, secured 6.9 percent in supplemental rebates during this same time period. It is unlikely California will be able to increase supplemental rebates at all, let alone double the current percentage. This is in large part due to a statutory change in the Affordable Care Act that requires manufacturers to provide rebates to managed care organizations, thus making supplemental rebates a much smaller percentage of overall rebates than they were historically. Additionally, Medi-Cal’s consolidated purchasing power of 13 million Medi-Cal beneficiaries is less than that of the national pharmacy benefit managers that negotiate drug rebates and drug prices on behalf of Medi-Cal managed care plans.

The case for keeping care local
Successful pharmacy benefit administration depends on personal service, support and careful integration with clinical, social and community needs. The pharmacy benefit is an essential component of whole person care and a carve-out would be detrimental to California’s integrated care model. By design, health plans manage the entire spectrum of a patient’s health care needs and have deep operational experience with how medication use should align with and support other care interventions. Utilization management by the plan allows for the most effective resolution of medication access issues to support patient care and avoid unnecessary medical utilization. Health plans partner closely with primary care providers, ensure timely data is accessible across all providers, are available at hospital discharge, provide linkages to community and social supports, deploy community health workers, provide chronic care management services in partnership with their communities, and provide hands-on member and provider support.

Ensuring a robust safety net
Federally Qualified Health Centers (FQHCs), public hospitals and local health plans are the backbone of California’s safety net. Local plans rely on public hospitals and FQHCs to provide the vast majority of primary care services to Medi-Cal enrollees. Removing the pharmacy benefit from managed care will mean that safety net providers participating in the 340B Drug Discount Program will no longer be able to generate savings that are used to expand access to care, provide additional services and develop the local health care workforce. These losses cannot be sustained by the safety net providers without significant impacts to the patients they serve, including reduced hours of operation, elimination of services and closure of pharmacy sites.

See the Menges Group’s full report, Assessment of Medi-Cal Pharmacy Benefits Policy Options, as well as a summary of the report.