If You Want to Cut Costs in Medicaid, Sharpen Your Knives: Innovation in Medicaid Pharmacy

Pharmacy is a Byzantine policy area that confounds and frustrates wonks, reporters and policymakers alike. However, it is common knowledge that the pharmacy benefit in Medicaid is, if anything, a major driver of cost. While this is well known and was most recently identified by the Joint Medicaid Oversight Committee’s (JMOC) actuary in late 2016, the recent Pharmacy Benefit Manager (PBM) imbroglio at the state level has brought these issues to light. Notably, it has revealed just how little actual oversight and strength the state has in directly negotiating price and, what’s more, the casual activity of Ohio’s managed care organizations (MCOs) in cost-managing the benefit. With outrage one often finds innovation and, in this blog, I will look at two state’s bold proposals to fundamentally shift how pharmacy is managed in Medicaid.

Pharmacy is a Byzantine policy area that confounds and frustrates wonks, reporters and policymakers alike.

What innovation could help cut #Medicaid pharmacy costs? We take a look here Click To Tweet 
Waivers are not new to policy conversations in Ohio Medicaid
. It should be no surprise then, that states have sought the same flexibility with the federal government in regulating price. In Massachusetts, the state recently submitted an 1115 demonstration waiver that would make the state’s formulary “closed.” That would mean that the covered drugs in a Medicaid program are listed in something called a “formulary” and, per federal law, Medicaid must cover all FDA-approved drugs. This would give tremendous leverage tomanufacturers in establishing prices. By closing the formulary, the state would be able to better negotiate prices by excluding specific drugs – a potentially controversial idea. The Centers for Medicare and Medicaid Services (CMS) denied this request in early July, however, stating the Massachusetts Medicaid program could not close its formulary unless it gave up rebates (a major source of revenue) and that any savings would subtract the value of rebates from the total savings. Those conditions made the proposal ineffective, so it is unlikely the state will continue to pursue the policy.

By closing the formulary, Massachusetts would be able to better negotiate prices by excluding specific drugs – a potentially controversial idea.

Beyond waivers, states can take a more “hardcore” approach. According to federal law (28 U.S.C. §1498) the government has the right to infringe on privately held patents if doing so is in the national interest. The government, in return, can give the holder “reasonable compensation” in exchange. It should be clear that the government has exercised this power before with pharmaceuticals and, in fact, during one three-year period in the 1960s, the federal government used that law to obtain 50 drugs for a total governmental savings of $21 million. About a year ago, Louisiana Health Secretary Rebekah Gee put forward an idea to ask CMS and the Department of Health and Human Services to invoke 28 U.S.C. §1498 as a way to mandate companies produce generic drugs for Hepatitis C. Interestingly, this class of drugs is the same one identified by JMOC in its report as the largest cost driver in Ohio Medicaid. The proposal has not yet been approved.

Manufacturers have influenced decisions on pharmacy purchasing in Medicaid programs by making payments to physicians associated with medical boards who oversee the benefit…

The state’s tools are limited and the incentives are counter-intuitive in terms of cost control. Currently, Ohio Medicaid is able to leverage rebates from the drug companies when buying them. These rebates and are also available to MCOs and PBMs alike. Another tool is the preferred drug list (PDL) which allows the state to list preferred drugs as a way to negotiate better prices. As was revealed in a recent piece by NPR and the Center for Public Integrity, manufacturers have influenced decisions on pharmacy purchasing in Medicaid programs by making payments to physicians associated with medical boards who oversee the benefit as well as individuals who testify on the effectiveness of drugs before drug utilization review committees.

The reality in Medicaid is that getting a grasp on pharmacy cost requires innovative policy solutions that are simply not at the disposal of the Ohio Department of Medicaid.

Let’s be clear: neither the Massachusetts or Louisiana options are things drug manufacturers will like, and some analysts say efforts like the one Louisiana attempted will “collapse the Hepatitis C market.” Good. The reality in Medicaid is that getting a grasp on pharmacy cost requires innovative policy solutions that are simply not at the disposal of the Ohio Department of Medicaid. If lawmakers are outraged about PBMs, they should be equally outraged at a completely irrational marketplace that has zero price control, and one where there is rampant regulatory capture by the industry. This sort of honest policymaking requires changing the abilities of the purchasers in the market to either better leverage their purchasing power (closing the formulary) or outright disrupting the intellectual property of the industry as a matter of national interest (28 U.S.C. §1498 ). The state could also simply outlaw the ability of medical board appointees from accepting monies from those they regulate within a given timeframe and, where appropriate, require financial disclosure at the time of testimony when speaking to the effectiveness of a given drug. If not, then we should expect Medicaid to keep paying the ransom of a captive market.