By DEVON HERRICK PhD

Many states have been looking for alternatives to reimbursing Medicaid providers piecemeal on a fee-for-service (FFS) basis. Increasingly they have been moving beneficiaries into Medicaid managed care plans. Today 39 states contract with managed care organizations to care for at least some Medicaid beneficiaries. States have been slower to integrate drug benefits with managed care, however. The Medicaid Drug Rebate Program requires drug manufacturers to rebate a portion of the drug costs to states and the federal government. Prior to the Affordable Care Act states did not qualify for drug maker rebates unless states managed their own Medicaid drug program on a FFS basis. States can now receive rebates for drugs purchased by Medicaid managed-care plans as well.

Medicaid is a partnership between the federal government and the states. Regardless of whether states manage Medicaid drug benefits, enrollees fill their prescriptions at local pharmacies. Pharmacies are reimbursed for the cost of each prescription, plus a dispensing fee. If the state manages Medicaid drug benefits, the state agency sets fees and reimburses pharmacies.

Today 26 states have transitioned at least some Medicaid beneficiaries away from FFS drug programs into drug plans integrated with managed care. Yet, recent legislative initiatives are bucking this trend for political reasons. Senate Bill 5 in the Kentucky legislature (and similar proposals in Ohio and Arkansas) would require the state to manage Medicaid drug benefits on a FSS basis. Indeed, nearly half of states still hang on to outdated FFS drug programs for political reasons.

When owners of small, independent pharmacies in rural areas descend on state capitols they often get a sympathetic ear from state legislators. The reason politicians protect outdated FFS programs is to benefit constituent pharmacies, who lobby for higher fees than paid by Medicaid managed care.

State-run Medicaid FFS programs tend to pay higher dispensing fees than managed care plans. Proponents of Medicaid FFS drug models lobby lawmakers to mandate dispensing fees higher than could be negotiated in a free market. Medicaid managed care dispensing fees in Kentucky are just under $1, whereas state FFS dispensing fees range from $2 in Arizona to $21.28 in Alaska for pharmacies not located on a road system. Every $1 increase in dispensing fees boosts profits by a similar amount. In Kentucky every $1 increase in the cost of dispensing a Medicaid drug is estimated to cost federal and state taxpayers approximately $27 million.

In the states that integrate drug benefits with managed care plans, health plans tend to contract with private firms to administer drug benefits, called pharmacy benefit managers (PBMs). Using private firms to manage drug benefits is standard practice in nearly all health plans. These are the same private firms that manage seniors’ Medicare Part D drug plans as well as drug benefits for employee health plans and health insurers.

PBMs span multiple states and have numerous public and private clients. PBMs possess far more purchasing power and expertise than any one state agency. They also do a better job at a lower cost than state Medicaid programs. For example, FFS drug prices often differ unnecessarily from one pharmacy to the next. FFS state Medicaid programs arbitrarily pay much higher dispensing fees than would occur in a competitive market. State Medicaid FFS drug programs use low-cost, generic drugs less often than managed drug plans. In addition, unnecessary and redundant prescriptions are often higher for state-managed FFS drug programs.

State-run FFS Medicaid programs are also susceptible to lobbyists, who influence lawmakers to intervene in state Medicaid policies. When private companies manage drug benefits integrated with Medicaid managed care, politicians cannot as easily meddle with the program and cater to pharmacy owners who lobby for higher fees.

A 2013 report commissioned by former Alabama Governor Robert Bentley estimated the state could save as much as $35 million per year by turning over management of Medicaid drugs to private firms. A study by Medicaid consultancy, The Menges Group, estimated the Alabama’s share of savings at more than $500 million over 10 years. The Kentucky the Cabinet for Health and Family Services warned if the state Medicaid agency took over control of managing drugs from managed care plans, taxpayer costs would increase costs by $161 million.

The cost of running Medicaid is funded by federal and state taxpayers. Whether Republican or Democrat, most of us believe our tax dollars should be wisely used. Medicaid drug programs are no exception. Too often public programs like Medicaid are allowed to become state and local economic development programs, whose supporters hope to shift some of the costs to taxpayers in other states. This is a bad deal for taxpayers in Kentucky, Arkansas and residents with similar proposals in other states. It is also a bad deal for federal taxpayers who are forced to share in the cost.

Devon M. Herrick, PhD is a health economist and policy advisor to the Heartland Institute.