Paying for Prescribed Drugs in Medicaid: Current Policy and Upcoming Changes


At nearly $16 billion in FY 2010, prescription drug spending is a significant component of Medicaid total spending.1 Although in recent years, Medicaid prescription drug spending has been growing more slowly than in the early 2000s, it remains an area of concern. Medicaid prescription drug spending is driven by many factors, including utilization and reimbursement. Medicaid programs reimburse pharmacies for outpatient drugs based upon a drug ingredient cost and a dispensing fee. Revising drug ingredient cost reimbursement methodology continues to be an area for potential cost savings. In 2011, U.S. Department of Health and Human Services Secretary Kathleen Sebelius wrote to the state governments to inform them that the federal government would help states identify cost drivers and provide states with new ways to achieve cost savings. More effective drug ingredient costs were one of many items relating to pharmaceutical services in a long list.2

Reimbursement methodology is just one factor that determines how much states and the federal government spend on Medicaid outpatient prescription drugs. Rebates at the federal and state levels offset some of this spending; in FY 2010, rebates accounted for over 40 percent of the $27 billion in pre-rebate Medicaid drug spending.3 Since 1991, federal law has required manufacturers wishing to have their products covered by any Medicaid program to participate in the Federal Medicaid Drug Rebate Program. In 2010, Congress raised the minimum required rebate level as part of the Affordable Care Act, and expanded the rebate requirement to include drugs paid for by Medicaid managed care plans.4

When managed care plans cover drugs as part of the package of services for which they receive capitated payments from the state Medicaid agency, the plans establish the reimbursement levels paid to pharmacies. Prior to passage of the Affordable Care Act, several states with comprehensive Medicaid managed care plans carved out their prescription drug benefits—i.e., paid for drugs on a fee-for-service basis rather than including them in the package of services for which plans received capitated payments—in order to collect manufacturers’ rebates, because these discounts were not required when managed care plans paid for the prescription. The Affordable Care Act required manufacturers to provide rebates on all Medicaid-covered drugs purchased by managed care plans for their Medicaid clients, effective March 23, 2010. Proponents of incorporating drug benefits into the package of managed care services tend to highlight potential advantages from better coordination of pharmacy services with other medical care and administrative tasks handled by managed care plans. Arguments for carving out drugs generally focus on potential differences in formularies, prior authorization, benefit management processes among health plans, and concerns that plans may not have the same incentives to maximize federal or state rebates. 5 Although this paper primarily focuses drug reimbursement, it is important to keep in mind that there are other policies that affect Medicaid drug spending.

In this paper, we examine current Medicaid pharmaceutical reimbursement policy and explain how and why the policy is changing.  We then consider research on how Medicaid drug pricing metrics compare. Finally, we conduct our own analysis on how the recently created NADAC compares to other pricing metrics.


Executive Summary Current Reimbursement Policy

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