States Respond to COVID-19 Challenges but Also Take Advantage of New Opportunities to Address Long-Standing Issues: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2021 and 2022



States may administer the Medicaid pharmacy benefit on their own or may contract out one or more functions to other parties.1 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. While Medicaid net spending on prescription drugs remained almost unchanged from 2015 to 2019, spending before rebates increased, likely reflecting the launch of expensive new brand drugs and increasing list prices.2 Because state Medicaid programs are required to cover all 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.3 Instead, states use an array of payment strategies4 and utilization controls to manage pharmacy expenditures, including PDLs, managed care pharmacy carve-outs, and multi-state purchasing pools.5 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. 6 Some 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.

Though attention in current federal actions is largely focused on Medicare7 and private insurance drug prices, federal legislation also has been recently introduced8 or enacted9 that would affect Medicaid prescription drug policy. Legislation to generate federal or state savings include proposals that increase Medicaid drug rebates, increase price transparency, and target drug prices.10 These proposals could be included in upcoming budget reconciliation bills, and have the potential to result in savings for state Medicaid programs.11

This section provides information about:

  • Managed care’s role in administering pharmacy benefits and
  • 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 (35 out of 41 states that contract with MCOs),12 five states (Missouri, North Dakota, Tennessee, Wisconsin, and West Virginia) report that pharmacy benefits are carved out of MCO contracts as of July 1, 2021 (Figure 9). Three states report plans to carve out pharmacy from MCO contracts in state fiscal year (FY) 2022 or later (California, New York, and Ohio),13 with the original implementation date having been delayed in some of these states.14 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, which the state reports is the first of its kind, 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.15 Louisiana reports that it is moving to a similar model in FY 2022, 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, 2021, nineteen of 37 responding states that contract with MCOs report carving out one or more classes of drugs 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. Among states with carve-outs, 17 states report using the carve-out as part of a MCO risk mitigation strategy (discussed in more detail below). In addition to risk mitigation, states may carve out drugs or drug classes for other reasons, including beneficiary protection.

A number of states require MCOs to follow a uniform PDL covering the same drugs as FFS. Uniform PDLs allow states to drive the use of lower cost drugs and offer incentives for providers to prescribe preferred drugs.16 States may require prior authorization for a drug not on a preferred drug list or attach a higher copayment, creating incentives for a provider to prescribe a drug on the PDL when possible. In this way, a uniform PDL allows a state to drive utilization to lower-cost drugs carved into managed care. Uniform PDLs also streamline administration of pharmacy benefits and prior authorization policy across MCOs. As of July 1, 2021, nine states reported having a uniform PDL for all classes of drugs and 13 states reported having a uniform PDL for a subset of drug classes (Exhibit 8). At least one additional state (North Dakota) plans to establish a uniform PDL for one or more drugs classes in FY 2022, and seven states will expand existing uniform PDLs. Five states have not decided whether to implement a uniform PDL or make additional changes in FY 2022.

States leverage a variety of risk mitigation strategies, in addition to targeted drug carve-outs, to help MCOs curb the financial risk of administering drugs covered under both the pharmacy and medical benefit. As of July 1, 2021, 30 of the 37 responding states that contract with MCOs report adoption of at least one financial risk mitigation strategy in MCO contracts. Drug carve-outs and risk corridors (global and pharmacy-only) are the most common risk mitigation strategies reported (Exhibit 9). Other strategies include risk pools, reinsurance, kick payments, medical loss ratio (MLR) caps, and non-risk contracts for certain drugs. States report applying risk mitigation strategies to high-cost drugs, including high-cost drugs that have low utilization, drugs exceeding a set cost threshold (ranging from $100,000 to $500,000), or specialty drugs coming on the market with little to no experience. Ten states17 specifically report that they have implemented or will implement a risk mitigation strategy for the new gene therapies available to treat spinal muscular atrophy (Zolgensma and Spinraza).

States have implemented reforms to address concerns related to spread pricing and the role of PBMs in administering Medicaid pharmacy benefits in managed care. Spread pricing refers to the difference between the payment the PBM receives from the MCO and the reimbursement amount it pays to the pharmacy. In the absence of oversight, some PBMs have been able to keep this “spread” as profit.18 Twenty-one out of 31 responding carve in states plus Kentucky reported a prohibition on spread pricing in MCO subcontracts with their PBMs. Pennsylvania reported that its MCOs voluntarily transitioned from spread pricing to transparent pricing in their subcontracts with PBMs, effective January 1, 2020. An additional state, Massachusetts, reported that it will prohibit spread pricing beginning in 2023. Compared to results of previous surveys, this activity reflects a significant increase in state Medicaid agency oversight of MCO subcontracts with their PBMs. For example, in 2019 only 11 states reported that they prohibited spread pricing.19

Pharmacy Cost Containment

Specialty and high-cost drugs remain the biggest cost driver of pharmacy spending growth in most states. This year’s survey asked states to identify the biggest cost drivers that affected growth in total pharmacy spending (federal and state) in FY 2021 and projected for FY 2022. Consistent with the results of prior surveys in recent years, most states identified specialty and high-cost drugs (individually or in general) as the most significant pharmacy cost driver. This includes drugs prescribed for conditions such as cancer, hepatitis C, and rheumatoid arthritis, as well as “orphan” drugs used to treat rare diseases like spinal muscular atrophy affecting only a small patient population. States expressed particular concern with new drugs coming to market, biologics/biosimilars (including gene therapies and immunotherapies), and drugs that have obtained accelerated approval from the U.S. Food and Drug Administration (FDA). A few states acknowledged that they are closely monitoring the impact of Aduhelm, the controversial and costly new drug used in the treatment of Alzheimer’s ($56,000 annually), on their Medicaid program. States also report concerns about increasing unit prices, including for insulin and continuous glucose monitors, and the cost of drugs used to treat substance use disorder (SUD), hemophilia, HIV/AIDS, cystic fibrosis, and COVID-19.

A number of states report laying the groundwork to employ value-based arrangements (VBA) 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, 2021, six states have VBAs in place with one or more drug manufacturers (Alabama, Arizona, Massachusetts, Michigan, Oklahoma, and Washington). Drugs covered by the VBAs include but are not limited to Zolgensma (spinal muscular atrophy), Onpattro (tansthretin-mediated amyloidosis), Givlaari (acute hepatic porphyria), and hepatitis C treatments. Thirteen additional states20 are considering opportunities or are developing and executing plans to implement a VBA arrangement in FY 2022 or later.

A majority of states reported newly implementing or expanding upon at least one initiative to contain costs in the area of prescription drugs in both FY 2021 and FY 2022. In this year’s survey, states were asked to describe any new or expanded pharmacy program cost containment strategies implemented in FY 2021 or planned for FY 2022. States were asked to exclude routine updates 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 policy initiatives. A number of states reported newly implementing or expanding PDLs, including for diabetic supplies, HIV/AIDS drugs, medication-assisted treatment (MAT) drugs, and physician administered drugs. Other states will be implementing or expanding uniform PDL policies, which help states maximize supplemental rebates by covering drugs administered under both the FFS and managed care delivery system. States also report imposition of new utilization management controls and quantity limits. For example, West Virginia is considering implementation of an initial fill limit policy for certain oncology treatments that have high discontinuation rates. Additional state strategies to control pharmacy and overall program costs are noted below:

  • Medication Therapy Management (MTM) Services. California, Oklahoma, and Texas will be implementing medication therapy management services to increase adherence, reduce adverse drug events, and improve outcomes. By improving management of disease through medication compliance, the states also hope to control costs. New Jersey reported that it is also exploring opportunities to offer enhanced MTM services in the future.
  • Elimination of Hepatitis C Strategies. Michigan and Missouri have embarked on new partnerships to eliminate hepatitis C through increased access to and utilization of hepatitis C treatments. Both states entered into an agreement with the pharmaceutical manufacturer of Mavyret and aim to reduce costs associated with hepatitis C by decreasing or even eliminating the incidence of hepatitis C in the state. For example, Michigan negotiated a low net cost for the treatment and, once an agreed upon utilization threshold is met, the therapy will be provided at nearly zero cost to the state.
  • Pharmacy Reimbursement. Five states reported revising pharmacy reimbursement policy to reduce program costs (Alabama, Alaska, Colorado, Kansas, and Kentucky). For example, Colorado added a maximum allowable cost for drugs without an average acquisition cost (AAC) in FY 2021 and Kansas transitioned specialty drugs for managed care populations to fall under the “lesser of” reimbursement methodology set by the state instead of MCO pricing. Additionally, Missouri and North Carolina report revising 340B policy to ensure accurate payments.
  • Extending Covered Days Supply. Three states (Alaska, West Virginia, and Wyoming) report extending the covered days supply in an effort to contain pharmacy costs by reducing aggregate dispensing fees.
  • Program Integrity. In FY 2021, Missouri invested in hiring a Program Integrity Pharmacist responsible for reviewing pharmacy data on a daily basis to identify trends, potentially fraudulent activity, and billing errors. In a single month, the pharmacist uncovered a billing error that resulted in $1 million in savings for the state.
  • Prescriber Resources and Tools. In FY 2021, Colorado unveiled a real-time provider tool that helps prescribers identify more affordable alternatives and locate information about the most cost-effective treatments. In both FY 2021 and FY 2022, Oklahoma reported expanding its academic detailing program which provides outreach and education to improve prescribing practices and encourage use of evidence-based guidelines.

States are in various stages of preparing for coverage of emerging gene and cell therapies. In this year’s survey, we asked states to describe any initiatives underway or planned to address future coverage of new gene and cell therapies, including CAR-T therapy. These therapies come with high price tags but are often curative. While nearly half of the states interviewed were not able to report any specific initiatives, a few states indicated internal discussions and/or planning efforts are currently underway. Several states reported the development of prior authorization policy or clinical criteria to ensure appropriate utilization of the drugs. Other states reported that they have or will carve out these drugs from managed care, maximize supplemental rebates, and/or enter into VBAs with the pharmaceutical manufacturers to help contain the costs of coverage for expensive gene and cell therapies. A few states are evaluating opportunities to provide reimbursement outside of bundled inpatient rates which may not adequately cover the cost of these drugs. A few states are also exploring ways to address therapies provided in different settings to secure rebates for both inpatient and outpatient utilization.

Provider Rates and Taxes Key Priorities and Challenges in FY 2022 and Beyond and Conclusion

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