THE IMPACT OF CALIFORNIA'S PHARMACY CARVE OUT

At the beginning of 2019, California's governor signed an executive order instructing DHCS to utilize a fee-for-service model for Medi-Cal. Under the order, The state of California would consolidate its purchasing power and leverage its population size to achieve lower drug costs by purchasing in bulk from pharmaceutical drug companies. Additionally, DHCS has been assigned with the task of producing a list of twenty-five of the most expensive drugs that would be included in the negotiations with manufacturers.

In between 2018 and 2019, spending on pharmacy services reached $8 billion in California and most of pharmacy spending took place under the managed care delivery model. According to the Legislative Analyst's Office (LAO), carving out managed care pharmacy services could lead to hundreds of millions in savings annually. That being said, the savings could come at a cost to stakeholders such as enrollees, pharmacies, providers, and MCO's. Just recently, the LAO released a report that assesses what the move could mean for the state and Medi-Cal's stakeholders.

The LAO's analyses identified the following possible impacts of the carve-out:

IMPACT ON NON-CONSUMER STAKEHOLDERS

Reduction in Retained 340B Earnings for Eligible Providers

"By transitioning Medi-Cal pharmacy services entirely to a FFS benefit, 340B eligible providers would no longer be able to generate earning on any pharmacy dispensed drugs paid for by Medi-Cal. Rather, these earnings would largely convert into state savings in the form of lower prescription drug expenditures."

Decrease in Backing for Medi-Cal Managed Care Plans

"Funding for Medi-Cal managed care plans would likely be reduced by between 15 percent and 20 percent under the carve-out. A portion of the reduction would likely come from existing Medi-Cal managed care plan funding for purposes such as administration, care coordination, reserves, and profits."

Minimal Impact on Pharmaceutical Manufacturing Industry

"The carve out is unlikely to have a major impact on earnings for the drug manufacturing industry overall, both in the state and nationwide. Selected drug manufacturers, however, may pay higher negotiated supplemental rebates to the state in exchange for greater utilization of their drugs in Medi-Cal through placement on a more widely applicable Medi-Cal wide preferred drug list."

Likely Increase in Funding for Pharmacies

"Pharmacies will potentially benefit from increased funding under the carve-out due to (1) (absent any changes) the higher dispensing fees paid by Medi-Cal FFS compared to Medi-Cal managed care plans and (2) the larger network of pharmacies serving Medi-Cal FFS compared to individual Medi-Cal managed care plans. A portion of the increase in funding may be offset by lower reimbursement for the drugs since Medi-Cal FFS, but not Medi-Cal managed care, pays pharmacies at close to pharmacies' costs in acquiring their drugs."

IMPACT ON BENEFICIARY ACCESS AND CARE

Statewide Standardization of the Medi-Cal Pharmacy Services Benefit

"While the standardization of the Medi-Cal drug benefit under the carve-out has potential to improve care from a beneficiary perspective in the long run, the transition to FFS could result in beneficiaries losing ready access to drugs they are currently taking. As such, the Legislature may wish to consider continuity of care protections for beneficiaries currently utilizing prescription drugs."

Expansion of the Pharmacy Network Where Beneficiaries Can Obtain Prescription Drugs

"According to the administration, Medi-Cal's FFS pharmacy network extends to almost all pharmacies throughout the state. Transitioning pharmacy services coverage to a FFS benefit could give Medi-Cal enrollees greater choice in where they obtain their prescription drugs."

Less Timely Prescription Drug Utilization Information for Medi-Cal Managed Care Plans

"While DHCS provides FFS prescription drug utilization data to managed care plans on behalf of their members for currently carved out drugs, it is our understanding is that this data does not arrive from DHCS in a timely enough manner to assist plans' care coordination activities."

Opioid Curtailment Programs

"These initiatives have likely contributed to dramatically reducing the number and potency of opioid prescriptions among Medi-Cal members. Under the carve-out, it is uncertain whether such initiatives by Medi-Cal managed care plans would continue."

At this point, California's administration has not published information on how the order will be carried out and they have yet to release any information on how stakeholders may be impacted. In order to help the state's legislators understand what the carve out could mean for the state, the LAO also specified outstanding details that should be addressed prior to the change. These include:

• Overall Fiscal Estimate
• What New State Resources Are Needed to Administer the Entire Medi-Cal Pharmacy Services Benefit?
• How Would State Information Systems Be Improved to Maintain or Improve Existing Managed Care Plan Care Coordination?
• Managed Care Plans' Continued Role in Coordinating the Medi-Cal Pharmacy Services Benefit in Conjunction With Their Members Overall Health Care

Reducing prescription drug prices is a major concern for states at this point and California's effort is merely one approach. Aside from transitioning to a fee-for-service model, there are also a variety of alternate methods. While the state sorts out the details of its transition, the analyses from the LAO also includes four alternative options that could be used in place of a complete carve out.

1. Universal Medi-Cal Preferred Drug List Spanning FFS and Managed Care.
2. Transfer Savings From 340B Drug Discounts in Medi-Cal to the State
3. Formalize the Use of Cost-Effectiveness Analysis for Preference of Drugs in Medi-Cal
4. Adopt a Medi-Cal Prescription Drug Spending Cap

At the end of the analyses, the report made two specific recommendations to state legislatures due to the uncertainty surrounding the order and its possible impact. First and foremost, the LAO recommended that strong oversight should be in place before the implementation. They also suggested that the state condition resources for implementation based off of key details provided by DHCS.

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LOWERING MEDICAID'S PRESCRIPTION DRUG COSTS

Since state Medicaid programs are responsible for the healthcare of a number of populations, increasing pharmaceutical drug costs have become a major budgetary concern. Currently, health care spending is dominating a number of their budgets and on a per capita basis, inflation-adjusted retail prescription drug spending has increased from $90 in 1960 to $1,025 in 2017.

As a result of the pressure from these rising costs, states are turning to a variety of approaches to rein in costs with the use of legislation and revised purchasing models. While the impact of politics and policy are unclear, both Medicaid enrollment and drug costs continue to rise. For that reason, it will be important for state Medicaid programs to examine every opportunity to improve efficiency.

CALIFORNIA TURNS TO SINGLE PURCHASER MODEL

In California, Medi-Cal alone uses 15% of the state's general funds, and over the last several years, the proportion of the population on Medi-Cal has reached 29%. With nearly one-third of the state's population enrolled in the program, California's Governor, Gavin Newsom, signed an executive order in January to consolidate the state's purchasing power in order to negotiate lower drug prices.

The order is part of the governor's "California For All" agenda and is scheduled for implementation on January 1, 2021. Having said that, in order for the change to go into effect, it will need approval from CMS and it is uncertain as to how they will react to the ambitious proposal.

OHIO: PASS-THROUGH PRICING

In 2018, Ohio announced that its managed care plans could no longer contract with PBMs that employ "spread pricing". The state's Medicaid department objects to the payment model since it lacks transparency and also because PBMs can profit from it by purchasing the medication from a dispenser at a lower rate than what they bill plan providers.

Starting in January, The Ohio Department of Medicaid required that MCOs use "pass-through" payment models to promote transparency and reduce costs. Under the new payment model, Medicaid plans are billed the same amount for pharmaceutical drugs that a PBM purchases them for. PBMs are then paid an administrative fee for each prescription filled.

WEST VIRGINIA: FEE-FOR-SERVICE

In West Virginia, employee health plans were paying 1% more for pharmacy claims than the PBMs paid the dispensing pharmacy. Lawmakers calculated that the 1% cost the state $10 million each year and made a decision to eliminate the use of PBM's completely.

Since then, West Virginia has returned to a fee-for-service model that employs the help of West Virginia University to identify which medications are offered. The Bureau of Medical Service's Office of Pharmacy Services (OPS) then purchases each prescription.

COST SAVINGS FROM IMPROPER PAYMENTS

Even though the state's administrative initiatives could alleviate some pressure, they also need to understand that there is a tremendous amount of opportunity for cost savings in relation to improper payments.

Improper claims payments in the Medicaid program have become a $37 billion dollar problem and a common misconception surrounding these payments is that they are primarily a consequence of fraud and abuse. While fraud and abuse do add to payments made in error, they only account for 43% of improper payments. The majority of these payments actually arise from Third Party Liability (TPL) identification issues.

Improper payments take place in government-funded health care systems for three reasons:

1. The Coordination of Benefits (COB) and identifying TPL is complicated. It requires timely data and the management of several data sources.
2. The Medicaid population has a high rate of churn and is in near-constant flux.
3. Eligibility data is not coordinated among federal and state systems and is often unreliable.

Up until now, there has been no reliable way to identify unreported primary health coverage. For the sole purpose of supporting the TPL needs of Medicaid programs, Syrtis Solutions offers a proactive cost avoidance approach to improper payments. By leveraging e-prescribing, the company has the ability to access active Rx coverage while identifying the corresponding medical coverage as well. This means that Medicaid plans can prospectively cost avoid pharmacy and medical claims accurately and timely. Additionally, their solution can target beneficiaries that are actually generating claims rather than trying to maintain data on each plan member.

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