MEDI-CAL: GROWTH, EXPANSION, AND IMPACT

 

Over the past three decades, Medi-Cal, California's Medicaid program, has undergone considerable changes and expansion. By 2016, the program provided coverage to more than one in three Californians, and as of January 2024, eligibility has been extended to include all residents with incomes below certain thresholds.

In 1990, Medi-Cal served about one in eight Californians, with eligibility limited to specific low-income groups like children, parents or caretakers of dependent children, and people with disabilities. Enrollment increased gradually throughout the 1990s and 2000s, influenced by economic shifts and minor expansions in eligibility for children and pregnant women. The ACA brought a significant change in 2014, allowing states to extend Medicaid coverage to most low-income adults without children or disabilities, with the federal government covering the majority of the costs. This brought about a more than 60% increase in Medi-Cal enrollment by 2016, adding over 5 million Californians to the program. At present, 46% of Medi-Cal enrollees are children and their caregivers, 34% are adults who gained coverage through the ACA, and around 15% are seniors and individuals with disabilities. Since the ACA expansion, the number of uninsured Californians has been reduced by half, with improvements noted in various health and economic areas. However, nearly 3 million state residents remain without comprehensive health insurance, many of whom are noncitizens excluded by federal policies. California has taken steps to address this gap.

As the state with the largest immigrant population, California has worked to close eligibility gaps created by federal restrictions and requirements on Medicaid access for some immigrants. When welfare reform in the 1990s separated Medi-Cal from cash assistance and limited eligibility to documented immigrants with green cards for at least five years, California chose to cover these individuals before they reached the five-year mark. Also, California extended coverage to several groups of low-income immigrants, including those with Deferred Action for Childhood Arrivals (DACA) status.

In the last few years, California has steadily expanded Medi-Cal eligibility, beginning with undocumented children. This was followed by expansions to include undocumented young adults, older adults, and, as of January 2024, all remaining adults who meet the income criteria.

Medi-Cal's massive expansion has made it the largest single expenditure in California's state budget, with total costs projected to approach $160 billion this fiscal year. This includes $98 billion in federal funds, $36 billion from the state General Fund, and $25 billion from other sources, including local governments and provider taxes such as the Managed Care Organization (MCO) Tax. The MCO tax was increased in both 2023 and 2024, with some of the revenue intended to raise payment rates for Medi-Cal providers to enhance access to care-- an ongoing priority for healthcare stakeholders. However, concerns about the state budget have put this plan in jeopardy. In November, voters will decide whether the revenue from the MCO tax should be committed to increasing provider rates or if more of it should be used to balance the state budget.

Medi-Cal has been at the forefront of Medicaid expansion, and research indicates that this growth has resulted in better insurance coverage, improved health outcomes, and a reduction in poverty. As the program continues to be a lifeline for millions, preserving and responsibly managing its resources is necessary. One effective approach is for plans administering the program to make use of modern technology solutions to enhance the coordination of care, improving efficiency and reducing costs. By maintaining and strengthening this vital program, California can continue to provide critical healthcare services to its most vulnerable residents.

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CA RFP FOR FFS RX BENEFIT MANAGEMENT

In January, California's newly appointed Governor  Governor Gavin Newsom authorized an executive order to significantly reform health care in the state. Executive Order N-01-19 introduced a number of actions and budget proposals to decrease the cost of prescription drugs and health care. One proposal, specifically, shifts all pharmacy services for Medi-Cal managed care to a fee-for-service (FFS) model.

Pharmaceutical drugs are one of the key drivers of growing health care costs. Last year the state's individual market experienced a 10% increase in health care costs and reports suggested the drug manufacturers planned to increase pricing in 2019.

FFS RX BENEFIT

At the moment, Medi-Cal acquires drugs with the aid of public and private purchasers that negotiate with manufactures independently. Under the FFS model, California would become the largest single payer of pharmaceutical drugs and the state would have increased bargaining power to negotiate prices with manufacturers.

Governor Newsom stated, "We will use our market power and our moral power to demand fairer prices for prescription drugs. And we will continue to move closer to ensuring health care for every Californian."

RFP # 19-96125

In July, DHCS sent out a request for proposals for managing the FFS pharmacy benefit. RFP # 19-96125 is requesting proposals for the takeover, operation, and ensuing turnover of administration of the FFS pharmacy services. Entities including commercial businesses, nonprofit organizations, state or public universities that fulfill the qualification criteria are eligible for submission.

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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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EXECUTIVE ORDER: MEDI-CAL TO NEGOTIATE PRESCRIPTION DRUG COSTS

California's newly elected governor; Gavin Newsom (D) has recently taken a legislative measure to address skyrocketing drug prices. Shortly after he was sworn in last week, Newsom signed an executive order making the state responsible for negotiating drug prices directly with pharmaceutical drug companies. In addition, the governor is seeking increased funding for Medi-Cal and a state-level individual mandate.

The order outlines a singular purchasing model which intends to achieve better drug pricing for the state's Medicaid program. Newsom is attempting to making use of the purchasing power that comes along with a Medicaid population of over 13 million and growing. In addition, there is very little doubt that executing the order will have ramifications with California's relationship with big pharma. Under the order, California will develop a list of drugs to be purchased in bulk as well as target specific medications for negotiation. It would also enable private payers to enter into the public system and negotiate prices.

Advocates of the initiative view it as an opportunity to not only reduce costs locally but also at the federal level. Jack Hoadley, a researcher at Georgetown University's Health Policy Institute, believes that the order could encourage the use of costly pharmaceuticals and make them more common.

Hoadley explained, "States like California could bring a lot of leverage to a sole-source drug that is priced very high."

Friso van Reesema concentrates on Medicaid pharma at Cipher Health and sees Newsom's order as an "interesting move that shows that states are diving deeper into their budgets to identify ways to allocate funds to priority programs." Reesema believes that pharmaceutical companies will have to comply with the state's new purchasing model, thus allowing payers to negotiate drug pricing based on health outcomes rather than models that are based solely on volume.

On the other hand, some experts are concerned about the fact that managed care plans will no longer have complete control over their formularies. This could lead to denied prescriptions and could greatly impact patient and provider satisfaction.

Dr. Adam Fein from Pembroke Consulting is skeptical of the governor's order. Fein points out, "It sounds like a supplemental rebate play. States can negotiate supplemental rebates with manufacturers (either through state pools or via managed care). Nearly all states already do this as single states or as part of a multistate group."

Sandeep Wadhwa, MD, chief health officer and senior vice president of government programs at Solera Health, agrees with Fein's observation. According to Wadhwa, "This is a bit like other state-administered services such as long-term services or dental care which may not be part of managed care contract. This will almost certainly require a state plan amendment to be approved by feds."

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GAO CRITICIZES MEDI-CAL'S OUT-OF-DATE REPORTING MODEL AND IMPROVED MEDICAID OVERSIGHT

In August, the GAO issued a report to Congress that focused on what CMS would need in order to better target risks and improve Medicaid oversight. The review discovered that one of the critical problems the agency is facing is the failure to incorporate new reporting technology. Currently, California's Medicaid program is still using paper files to report expenses and that translates into thousands of documents.

Carolyn Yocom is the Health Care Director at the GAO that focuses on Medicaid. She stated, "For this type of reporting on expenditures, California really should be able to provide that electronically."

Medi-Cal provides services to 1 in 3 Californians with a combined federal and state budget of $104 billion annually. Presently, the state utilizes 92 separate computer systems to run the program. However, according to DHCS, "Given system limitations and the magnitude of the supporting documentation, providing it electronically is currently not feasible."

Over the course of the program's lifespan, Medi-Cal has been unsuccessful in implementing new technology. For example, in 2010 Xerox acquired a contract worth $1.7 billion to create a new system for the program. However, the deal was terminated after six years of delay and according to the state, Xerox paid more than $123 million as a settlement deal. Conduent was then spun off into a separate company from Xerox to continue running the system and process claims.

The issue is even more problematic when you take into consideration that California's outdated paper reporting system is not only a problem within the state but its also entrenched across the country's healthcare system.

States are mandated to send Medicaid data to the federal government on a quarterly basis. This data consists of expenses and supporting documentation including invoices, cost reports, and eligibility records. Even though California provides its spending reports electronically, its supporting documentation is not.

Recently, California has made some attempts to upgrade its systems that would result in improved Medicaid oversight. DXC Technology was granted a contract in August to take over some of the functions of Conduent. In addition, program officials are also planning for a new system that would cost an estimated $500 million. If approved, the federal government would be accountable for 90% of the design and implementation costs and the state would cover $50 million out of pocket.

As the state begins updating its operations, a remedy to the program's reporting issues remains a focus among government officials. According to Elaine Howle, a state auditor, Medicaid's information technologies system, "needs to be replaced, because it is more than 40 years old, its operations are inefficient, maintaining the system is difficult and there is a high risk of system failure."

Howle wrote a letter to Governor Brown and other officials in June. She stated that California is paying roughly $30 million a year to maintain the 40-year old system.

The GAO also criticized CMS for its lack of Medicaid oversight. The report disagreed with the fact that the agency appoints nearly the same amount of staff to review case files regardless of the size of a state's program. As an example, under the ACA, California had ten times the amount of new enrollees as Arkansas. For that reason, California is at higher risk of enrollment errors and improper payments due to its program's size. Regardless of the substantial difference in enrollment figures, both states were assigned 30 staff members to review claims. In addition, the authors of the report specified that California represents 15% of federal Medicaid spending, while Arkansas only represents 1%.

Carolyn Yocom commented that CMS "needs to step back and assess where are the biggest threats and vulnerabilities." She also stated, "If you aren't looking, you don't know what you aren't catching."

According to the GAO, from FY2014 to FY2018 federal Medicaid spending rose to around 31% and at the same time, CMS financial oversight decreased by about 19%.

In a July letter to the GAO, DHHS agreed with the report's Medicaid oversight recommendations and wrote that it "will complete a comprehensive national review to assess the risk of Medicaid expenditures reported by states and allocate resources based on risk."

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