LAO report analyzes Medi-Cal pharmacy services carve-out

The Legislative Analyst Office released a new report this week on the potential impact of a Medi-Cal carve out for managed care pharmacy services. The new policy came out of Governor Newsom’s Executive Order on drug pricing signed in early January 2019 that directs the Department of Health Care Services (DHCS) to transition Medi-Cal managed care pharmacy services to a fee-for-service (FFS) benefit by January 2021 as part of an effort to leverage the state’s size and power to impact rising prescription drug costs.


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The Governor’s Order relies on the premise that consolidating drug purchasing under a state-wide purchasing system will give the state a strong bargaining position to negotiate lower bulk drug prices.  Specifically, the Order charges DHCS, in concert with the California Pharmaceutical Collaborative, to come up with a list of the 25 highest-cost drugs to prioritize for bulk negotiation.

According to the report, in 2018‑19 overall Medi-Cal spending for pharmacy services was around $8 billion. Around 70 percent of pharmacy spending occurred in the managed care delivery system, with the remaining 30 percent as fee-for-service. In the LAO’s assessment, the carve out can be expected to promote Medi-Cal savings by lowering the state spend on drugs to cost and by increasing the state’s collection of supplemental rebates on drugs as more drugs fall under its umbrella for negotiation. But, the savings are not without potential downsides.

After significant review of potential costs of the program as compared with savings, the LAO report concludes that while the program is likely to result in net savings to the state in the hundreds of millions of dollars annually, those savings should be balanced against potential impacts on major Medi-Cal stakeholders including enrollees, pharmacies, providers, and Medi-Cal managed care plans.

Potential impacts of a carve-out cited in the report are:

  • Costs of dispensing drugs and of pharmacy services would be shifted to the state
  • Reduction in 340B earnings for providers
  • Reduction in funding of between 15 and 20 percent for Medi-Cal managed care plans
  • Increased revenue to pharmacies due to higher FFS dispensing fees
  • Statewide standardization of the Medi-Cal pharmacy services benefit with the same preferred drug list applying to all Medi-Cal enrollees
  • Difficulty with care coordination and management of prescription drug use, filling, and adherence
  • Concerns about opioid dispensing curtailment management programs that have historically been managed by managed care plans

Due to a lack of information, however, the LAO’s report had difficulty predicting the actual scope of these impacts. In light of these concerns, the LAO offers four alternative approaches to the carve-out for reducing Medi-Cal prescription drug spending and includes the background, benefits, and downsides for each. The analyzed alternatives include:

  1. Universal Medi‑Cal preferred drug list spanning FFS and managed care to work toward standardizing the Medi‑Cal pharmacy services benefit and encourage drug manufacturer to offer steeper discounts (in the form of supplemental rebates) in exchange for their drugs’ placement on the list;
  2. Transfer savings from 340B drug discounts in Medi‑Cal to the state. Ending the 340B discounts in Medi-Cal would make additional drugs dispensed to Medi‑Cal enrollees eligible for alternative drug discounts available under federal Medicaid law, likely resulting in savings for the state;
  3. Formalize the use of cost‑effectiveness analysis for preference of drugs in Medi‑Cal providing a formal structure for evaluating whether an intervention, such as the utilization of a given prescription drug, is justified at its cost;
  4. Adopt a Medi‑Cal prescription drug spending cap emulating states like New York who saw significant reductions in drug spending when the cap triggered the negotiation of additional rebates with drug manufacturers.

In the end, the LAO report suggests that given the uncertainty of facts surrounding and impacts of the Order, the Legislature should take a strong oversight role as implementation moves forward. Specifically, the LAO urges the Legislature to gather more specific information on the potential impacts of the carve-out from the stakeholders before proceeding.  It also proposes that the Legislature condition resources necessary for implementation of the program on DHCS provision of key information and a detailed implementation plan.