Medicaid Drug Programs Could Save $30B by Dropping FFS, Study Claims

State Medicaid pharmacy programs could save more than $30 billion over the next decade if they switched from fee-for-service programs to the more efficient approaches used by Medicare Part D plans, Medicaid managed care organizations, and commercial plans, claims a study from healthcare and human services consulting firm, TheLewin Group.

The study notes that Medicaid FFS pharmacy programs use fewer generic drugs and pay pharmacies higher dispensing fees and ingredient costs than other programs.

Lewin said the findings challenge the assumption that Medicaid pharmacy can reduce costs only by cutting benefits, limiting eligibility, demanding deeper manufacturer rebates, or paying drugstores higher dispensing fees in exchange for more pricing transparency.

"Medicaid is one of the few pharmacy benefit programs that still relies heavily upon a fee-for-service approach. By operating more like Medicare and commercial market plans, Medicaid could increase the use of generics and save billions without cutting benefits," said Pharmaceutical Care Management Association President/CEO Mark Merritt. 

Three-fourths of Medicaid pharmacy dollars are administered using a fee-for-service approach in which public officials play a role in determining how much to pay drugstores for each prescription filled and ingredient costs.

The remaining one-fourth of Medicaid pharmacy dollars is managed more like pharmacy benefits in the commercial sector, where third-parties use management tools and negotiate pharmacy payments directly with chain drugstores and the drug wholesalers that represent independent pharmacies.

The Lewin study also found that although state Medicaid programs pay widely varying Medicaid dispensing fees, they are largely unrelated to the level of ingredient cost reimbursements a state pays, or the level of generic utilization a state achieves. For example, Texas pays the nation's highest dispensing fees ($7.50) and New Hampshire pays the lowest ($1.75), but they both pay about the same for ingredient costs and generate similar rates of generic drug utilization.

In addition, Lewin said the statutory and supplemental rebates paid to Medicaid by brand name drug makers are determined separately from pharmacy dispensing fees and ingredient costs. This means that manufacturer rebates have no impact on the savings that more active management of dispensing fees and ingredient costs could achieve. Likewise, these savings also do not assume any additional cost sharing for Medicaid beneficiaries.

Lewin identified four areas where pharmacy benefit management could improve:

• Generic Drug Dispensing: Medicaid FFS is less effective at encouraging the use of generic drugs. The generic dispensing rate in Medicaid FFS averages 68%, compared to an average 80% generic dispensing rate in Medicaid MCOs.
• Dispensing Fees: At $4.81 per prescription, the national average dispensing fee that Medicaid FFS programs pay to retail pharmacies per each prescription is more than double the average dispensing fees paid by Medicare Part D payers, Medicaid MCOs, or health plans in the commercial sector.
• Ingredient Costs: The rate at which retail pharmacies are reimbursed for the pills, capsules, etc. is also higher, on average, in Medicaid FFS programs than in Medicare Part D or the commercial sector.
• Drug Utilization: The number of prescriptions dispensed per person is typically higher in Medicaid FFS programs than in Medicaid MCOs due to less effective controls on polypharmacy, fraud, waste, abuse, and other factors in the FFS setting.

If all state Medicaid programs used a market-based approach with norms for Medicaid MCOs, Medicare Part D, and commercial payers, Lewin estimates that:

• Combined federal and state savings to the Medicaid program would total $30.3 billion over the next decade.
• Medicaid FFS prescription costs could be reduced by 14.8%.
• Per member per month costs for Medicaid FFS pharmacy benefits could be reduced by $12 in 2011 under optimal management.