States could save billions in Medicaid spending

State governments could save billions in Medicaid spending without harming enrollees or cutting health benefits, if Congress passes the Drug Rebate Equalization Act of 2007, according to a September 2008 study from the Association for Community-Affiliated Plans (ACAP). This would extend the federal drug rebate program, currently restricted to Medicaid fee-for-service programs, to Medicaid managed care.

The report estimates that states would save $13 billion over 10 years, and provides savings specific to each state. For example, California would save $3,311,714,280 over 10 years and $223,235,060 in the first year.

"Every state that has managed care would see some savings," says Meg Murray, CEO of ACAP, a national organization representing 39 nonprofit safety net health plans serving more than 5.6 million enrollees in Medicaid, Medicare, and other public health programs in 23 states.

The savings come from reductions in the capitation rate, as health plans' rebates will increase from the levels that they currently can earn through private negotiations with the pharmaceutical manufacturers.

For the first time, health plans would be held to the federal requirements for covering all FDA-approved drugs, providing 24-hour response for prior authorization requests, and 72-hour emergency supply of drugs.

"Several states have recently carved drugs out of their Medicaid managed care capitation in order to get the higher federal drug rebate," says Ms. Murray. "Carving drugs out of the capitation rate undermines the basis of managed care, which is to treat the whole person."

Managed care organizations (MCOs) managing pharmacy benefits have the capability to access in-house pharmacy and medical claims data in real time. This is valuable for tailoring specific health interventions to promote improved health outcomes, managing polypharmacy issues, and positively influencing physician prescribing patterns to address quality and cost issues.

"Giving health plans access to federal drug rebate allows states to have the best of both worlds—the higher rebate and the better care coordination from giving health plans financial responsibility for all acute care services," says Ms. Murray.

More states likely will carve out drugs from the capitation rate if the bill does not pass, adds Ms. Murray. "Pharmacy carve-outs create a range of operational challenges as Medicaid recipients, providers, MCOs, the state, and its fiscal agent must continually sort through how the various parts of the benefits package are administered," she says. MCO enrollees in a carve-out model, for example, typically need to carry multiple health insurance cards and keep track of which card is needed for a given type of service.

If the bill does not pass, Ms. Murray says states will have lost a chance to get $13 billion in state savings and $17 billion in federal savings from a reform that does not negatively affect beneficiaries. "The federal savings could be used to reauthorize the SCHIP program next year, or to help provide coverage for the uninsured," she says.

Contact Ms. Murray at (202) 204-7509 or