How the Pandemic Continues to Shape Medicaid Priorities: Results from an Annual Medicaid Budget Survey for State Fiscal Years 2022 and 2023



States may administer the Medicaid pharmacy benefit on their own or may contract out one or more functions to other parties. The administration of the pharmacy benefit has evolved over time to include delivery of these benefits through managed care organizations (MCOs) and increased reliance on pharmacy benefit managers (PBMs). PBMs may perform a variety of administrative and clinical services for Medicaid programs (e.g., negotiating rebates with drug manufacturers, adjudicating claims, monitoring utilization, overseeing preferred drug lists (PDLs), etc.) and are used in fee-for-service (FFS) and managed care settings. MCO subcontracts with PBMs are under increasing scrutiny as more states recognize a need for transparency and stringent oversight of the arrangements.

Managing the Medicaid prescription drug benefit and pharmacy expenditures is a policy priority for state Medicaid programs. Despite remaining stable from 2015 to 2019, net Medicaid spending on prescription drugs increased in 2020. At the same time, Medicaid prescription drug utilization declined in 2020, reflecting the impact of the COVID-19 pandemic on prescription drug patterns. Because state Medicaid programs are required under the Medicaid Drug Rebate Program (MDRP) to cover all FDA-approved drugs from manufacturers that have entered into a federal rebate agreement (in both managed care and FFS settings), states cannot limit the scope of covered drugs to control drug costs. Instead, states use an array of payment strategies and utilization controls to manage pharmacy expenditures, including PDLs, managed care pharmacy carve-outs, and multi-state purchasing pools. States update and expand cost containment strategies in response to changes in the pharmaceutical marketplace, continuously innovating to address pressures such as rising unit prices and the introduction of new “blockbuster” drugs.1 Certain policies traditionally implemented under the pharmacy benefit are being adopted under the medical benefit to better manage the cost and utilization of expensive, physician administered drugs. Some states are also using alternative payment methods to increase supplemental rebates through value-based arrangements (VBAs) negotiated with individual pharmaceutical manufacturers.

The recent passage of the Inflation Reduction Act included a number of prescription drug reforms that primarily apply to Medicare; however, some of the provisions interact with the MDRP and are expected to increase Medicaid prescription drug spending in the coming years.2 There remain an array of other federal and state policy drug pricing proposals that address rising Medicaid prescription drug spending and generate federal or state savings. These proposals could be included in future budget reconciliation bills and include provisions that increase Medicaid drug rebates, increase price transparency, and target drug prices.

This section provides information about:

  • Managed care’s role in administering pharmacy benefits
  • Pharmacy cost containment


Managed Care’s Role in Administering Pharmacy Benefits

Most states that contract with MCOs carve in Medicaid pharmacy benefits to MCO contracts, but some states “carve out” prescription drug coverage from managed care. While the vast majority of states that contract with MCOs report that the pharmacy benefit is carved in to managed care (34 out of 41 states that contract with MCOs3), six states (California, Missouri, North Dakota, Tennessee, Wisconsin, and West Virginia) report that pharmacy benefits are carved out of MCO contracts as of July 1, 2022 (Figure 14). As of January 1, 2022, California carved the pharmacy benefit out of managed care, becoming the latest state to implement a full pharmacy carve out. Two states report plans to carve out pharmacy from MCO contracts in FY 2023 or later (New York and Ohio4), with the original implementation date having been delayed in New York.5 Instead of implementing a traditional carve-out of pharmacy from managed care, in FY 2022, Kentucky began contracting with a single PBM for the managed care population. Under this “hybrid” model, MCOs remain at risk for the pharmacy benefit but must contract with the state’s PBM to process pharmacy claims and pharmacy prior authorizations according to a single formulary and PDL.6 Louisiana and Mississippi7 report that they are moving to a similar model in FY 2023 and FY 2024, respectively, and will require MCOs to contract with a single PBM designated by the state.

The majority of states that contract with MCOs report targeted carve-outs of one or more drugs or drug classes. As of July 1, 2022, 18 of 39 responding states that contract with MCOs report carving out one or more drug classes from MCO capitation payments (Exhibit 7). These targeted drug carve-outs can include drugs covered under the pharmacy benefit or the medical benefit. Some of the most commonly carved out drugs include hemophilia products, spinal muscular atrophy agents, Hepatitis C drugs, and behavioral health drugs such as psychotropic medications. States may use targeted drug carve-outs as part of MCO risk mitigation strategies or for other reasons, including beneficiary protection.

Cost Containment and Other Pharmacy Initiatives

A number of states report laying the groundwork to employ value-based arrangements (VBAs) with pharmaceutical manufacturers as a way to control pharmacy costs. However, only a handful of states have active VBA agreements in place. As of July 1, 2022, seven states have VBAs in place with one or more drug manufacturers (Alabama, Arizona, Colorado, Massachusetts, Michigan, Oklahoma, and Washington), an increase of one state (Colorado) from last year. Most states with VBAs in place also reported plans to expand VBA efforts in FY 2023.8 Drugs covered by the VBAs include but are not limited to Entresto (chronic heart failure), Zolgensma (spinal muscular atrophy), Onpattro (tansthretin-mediated amyloidosis), Givlaari (acute hepatic porphyria), Stelara (psoriasis), re-SET (SUD digital therapeutic), Sublocade (SUD), and hepatitis C treatments. Sixteen additional states9 are considering opportunities or are developing and executing plans to implement a VBA arrangement in FY 2023 or later. Of those states, six10 are considering, or planning to take advantage of, VBAs that are offered by manufacturers to all states under a recently enacted federal rule. At the time of the survey, however, no national-level VBA arrangements were available.11

More than half of responding states reported newly implementing or expanding at least one initiative to contain prescription drug costs in FY 2022 or FY 2023. On this year’s survey, we asked states to describe any new or expanded pharmacy program cost containment strategies implemented in FY 2022 or planned for FY 2023, including initiatives to address PBM spread pricing. We asked states to exclude routine updates, such as to PDLs or state maximum allowable cost programs, as these utilization management strategies are employed by states regularly and are not typically considered major new or expanded policy initiatives. As in prior years, states reported imposition of new prior authorization policies (for specialty drugs in particular), utilization management controls, quantity limits, and rebate maximization generally. Among states that reported newly implementing or expanding at least one cost containment initiative, one-fifth12 reported new or expanded pharmacy cost containment initiatives targeted to physician administered drugs.13 A handful of states reported plans to newly cover or expand coverage of diabetic supplies, durable medical equipment (DME), and other non-drug products under the pharmacy benefit, which can improve access and contain costs. Other cost containment policy changes reported in FY 2022 and FY 2023 include:

  • Uniform PDLs. Uniform PDLs help states maximize supplemental rebates by covering drugs administered under both the FFS and managed care delivery system. They also streamline pharmacy benefit coverage for members and providers. Kentucky (through its hybrid model for pharmacy benefit administration), Massachusetts, Michigan, and Washington reported expanding uniform PDL policies for at least a subset of drugs as a cost containment initiative in FY 2022 or FY 2023. Indiana plans to implement a uniform PDL by July 1, 2023.
  • Pharmacy Reimbursement. Aside from VBAs, three states (Missouri, Maine, and Kansas) reported revising pharmacy reimbursement policy to reduce program costs. Kansas transitioned specialty drugs for managed care populations to fall under the “lesser of” reimbursement methodology set by the state instead of MCO pricing and expanded this approach in FY 2022. Maine reported plans to significantly revise their state maximum allowable cost program beginning in FY 2023.
  • Extending Covered Days’ Supply. Extending covered days’ supply has the potential to improve medication compliance for chronic conditions, as well as reduce aggregate pharmacy dispensing fees. Two states (Alaska and West Virginia) reported new and expanded policies for 90-day fills of certain medications as a cost containment policy change in FY 2022 and/or FY 2023.
  • Prescriber Resources and Tools. In both FY 2022 and FY 2023, Oklahoma reported expanding its academic detailing program as a cost containment policy that also improves prescribing practices and encourages use of evidence-based guidelines through provider outreach and education. Oregon reported updating its dose optimization system as a new cost containment initiative in FY 2022 that will also better support prescribers.

Many states reported reforms aimed at spread pricing and the role of PBMs in administering Medicaid pharmacy benefits, either as a new or expanded cost containment action or as a separate but notable pharmacy initiative recently implemented or under development. Six states reported recently implemented or planned policies to prohibit spread pricing14 or require pass through pricing in MCO contracts with PBMs.15 Other states address spread pricing concerns in alternative ways. For example, North Carolina reported that its MCOs cannot include the expenses related to spread pricing in the numerator of the medical loss ratio (MLR) calculation. This disincentive lowers the MLR for MCOs with spread pricing arrangements, putting the MCOs at risk of having to pay back capitation received in amounts over the MLR target. Additional PBM-related policies reported by states in this year’s survey include increased transparency and oversight, limits on additional fees paid by MCOs to PBMs or charged to pharmacies, and restricting PBM claw back procedures.

Recent state pharmacy initiatives most frequently cited as having a big impact on cost and administration include managed care drug carve outs and uniform PDLs, restrictions on spread pricing and related PBM reforms, and VBAs. On this year’s survey, we asked states to highlight recently implemented or planned initiatives expected to have the biggest impact on improving pharmacy benefit administration, addressing rising drug costs and emerging gene and cell therapies, or enhancing the value of the Medicaid pharmacy benefit. States highlighted a range of initiatives, some of which overlap with specific cost containment policy changes described above. Four states reported planned or recently implemented strategies to address rising costs associated with gene and cell therapy, including expanded prior authorization requirements and leveraging the National Medicaid Pooling Initiative (NMPI) for supplemental rebates.16 A couple states are reviewing reimbursement options for inpatient drugs like gene and cell therapies, including carve outs from the inpatient bundle which allows for rebates under the MDRP. Ohio is carving out the pharmacy benefit from managed care contracts and will contract with a single PBM instead, beginning in October 2022. It is also contracting with a Pharmacy Pricing and Audit Consultant (PPAC) who will provide operational and consulting support in the areas of pharmacy reimbursement, benefit design, oversight, and auditing of the PBM. Massachusetts and Wyoming have implemented, or are in the process of implementing, mandatory 90-day fill policies for maintenance medications.

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