Over the next decade, Medicaid expansion under Obamacare will add millions more people to the program, doubling its current cost and bringing the number of enrollees to 84 million by 2022, according to the Congressional Budget Office. Policymakers need solutions that reduce costs but avoid draconian cuts to patients, hospitals and physicians.
One place to look is the Medicaid pharmacy benefit, which tends to cost much more than pharmacy benefits in Medicare and the commercial sector. A new report by the Menges Group, “Medicaid Savings Opportunities, National and State-Specific Estimates,” finds that if Medicaid pharmacy benefits operated more like those in the popular Medicare Part D program and commercial plans, costs could be reduced by $74.4 billion over the next 10 years, with $43 billion in federal savings and $31.4 billion in savings for states.
State Medicaid programs vary widely in their abilities to restrain costs. While each state employs different degrees of pharmacy-benefit management “best practices,” there are some recurring challenges:
Pharmacy payments in most state Medicaid programs are set by state officials who are subject to political pressure from drugstore lobbying groups. Medicare Part D and commercial plans negotiate market-based rates with pharmacies on a case-by-case basis.
State-administered Medicaid programs are often less aggressive than other programs in terms of promoting generics and preferred-brand drugs.
Various state laws and regulations hinder the use of affordable pharmacy networks in Medicaid. That’s unfortunate since there are more drugstores in the United States than McDonald’s, Burger Kings, Pizza Huts, Wendy’s, Taco Bells, KFCs, Domino’s Pizzas and Dunkin’ Donuts combined, creating a highly competitive environment.
As policymakers prepare for Obamacare’s Medicaid expansion, this report finds a number of savings opportunities in Medicaid pharmacy, including:
$23.5 billion could be saved by increasing the use of generic drugs: State-administered Medicaid programs generally dispense fewer generics compared with managed benefits, such as Medicare Part D and commercial-sector plans.
$12.5 billion could be saved by negotiating market-based pharmacy-dispensing fees: Most Medicaid programs are paying more than double the pharmacy-dispensing fees (averaging $4.77) than Medicare Part D and commercial-sector plans pay (averaging less than $2). The reason is that these plans negotiate market-based pharmacy-dispensing fees in contrast to a system that faces intense lobbying from drugstore groups in each state to set fees at higher levels.
$33.4 billion could be saved by using limited pharmacy networks: State Medicaid programs could achieve greater savings by using a competitive process and negotiating better discounts from select drugstores that wish to participate in a limited pharmacy network.
$2.7 billion could be saved by encouraging the use of more affordable, preferred brands: State Medicaid programs generally do not aggressively encourage the use of more affordable, preferred brands through active formulary management.
$2.3 billion could be saved by reducing drug diversion, polypharmacy, fraud and waste: Medicaid plans that are more actively managed better detect patterns of fraud, waste and abuse.
Some states are beginning to upgrade Medicaid pharmacy benefits and are reaping huge savings as a result. For example, New York Gov. Andrew Cuomo’s decision to reform the state’s Medicaid pharmacy program using some of these tools saved the state $425 million in 2012 alone. This is more than four times the $100 million in savings originally estimated by the New York Department of Health.
In our health care system, our goal should be to focus on better care at lower costs. Improving Medicaid pharmacy benefits offers a place to start.
Mark Merritt is president and CEO of the Pharmaceutical Care Management Association.