Should MCOs get the Medicaid drug rebate?

A report of the pros and cons of extending the federal Medicaid drug rebate to managed care plans shows the potential for savings of up to $700 million over 10 years, but also recognizes that there could be some downside risk to plans and each one would have to evaluate the advantages and disadvantages of having access to the rebate if the rules were changed.

Prepared by the Lewin Group for the Association of Health Center Affiliated Health Plans and the National Association of Urban-Based HMOs, the report concludes that while significant savings are possible if the current Medicaid rebate given to fee-for-service state programs is extended to Medicaid managed care plans, "there are a number of factors that could limit the level of savings that occurs, chief among them the almost certain reaction of the pharmaceutical industry. At best, the industry’s crusade would delay the implementation of any policy change and consume state and Medicaid MCO time and resources and, at worst, succeed in preventing such a policy shift altogether."

The report also says that while the trade-offs may not be as significant as once thought, Medicaid MCOs stand to jeopardize some of their successes in managing the pharmacy benefit — for example, they may have to give up effective relationships with their pharmacy benefits managers for their Medicaid lines of business, wait longer to receive rebates, or incur new administrative costs.

"For some MCOs," the report candidly says, "the potential benefit may outweigh the potential cost."

Other MCOs, however, may conclude that rebates are a low priority in their efforts to control drug costs and may find that resources could be better spent in areas other than extension of the federal rebate.

Environment has changed

"When the drug rebate program was instituted in 1990," says Association for Health Center Affiliated Health Plans executive director Margaret Murray, "less than 10% of all Medicaid beneficiaries received their drugs through Medicaid managed care. Today the situation is very different. [More than] a third of all Medicaid beneficiaries receive their drugs through Medicaid managed care, yet the government does not get to benefit from the higher rebates."

Included in the Omnibus Budget Reconciliation Act of 1990, the Medicaid drug rebate program is intended to tap Medicaid’s purchasing power by giving the program the same types of volume discounts generally afforded to other large purchasers of health care services. Under the program, drug manufacturers must have a signed agreement with the Secretary of Health and Human Services for payment to be made for Medicaid-covered outpatient drugs.

In exchange for getting the Medicaid "best price," state Medicaid fee-for-service programs must maintain a relatively open drug list. With the exception of a few drugs or classes of drugs that can be excluded from coverage altogether (such as barbiturates, agents used for anorexia, weight loss, or weight gain), states that include outpatient drugs in their Medicaid benefit package (and all states plus the District of Columbia do include them) must provide coverage of all Food and Drug Administration-approved drugs made by companies that have signed a rebate agreement.

The Omnibus Budget Reconciliation Act of 1993 amended the law to allow states to create a formulary if: 1) it was developed by a committee of physicians, pharmacists, and other appropriate individuals; 2) it limits coverage of an outpatient drug only if it does not have a significant clinically meaningful therapeutic advantage in terms of safety, effectiveness, or clinical outcome over other drugs in the formulary; and 3) the state permits coverage of an excluded drug pursuant to a prior authorization program.

Although states cannot take the "closed formulary" approach usually followed by private insurers, they can take other steps to pharmacy benefit management, including prior authorization requirements, often in conjunction with preferred drug lists, mandatory generic substitution, step therapy, or as a standalone utilization control mechanism; quantity limits; generic substitution; step therapy; and patient cost-sharing.

The Lewin researchers say that while these techniques theoretically have been available to states for many years, they only have recently begun to implement them in large scale and/or groundbreaking ways. The drug companies have challenged some, with the final outcome not yet known.

An earlier Lewin Group study analyzed differences among pharmacy costs, drug mix, and utilization in the capitated Medicaid MCO setting vs. fee-for-service Medicaid. That study demonstrated that the approaches taken by the Medicaid managed care companies in the drug cost area have been highly effective in containing costs when contrasted with the fee-for-service environment.

"Even though the Medicaid MCOs are at an ingredient price disadvantage of approximately 15 percentage points as a result of the larger rebates available to [fee-for-services] FFS Medicaid," the researchers said, "they generally are managing the mix and usage of prescription medications such that overall TANF [Temporary Assistance for Needy Families] per member per month costs of the pharmacy benefit are 10% to 15% lower in the capitated [Medicaid MCO] setting than in FFS Medicaid."

How useful would rebate be?

The latest report looks at the fundamental question of whether Medicaid MCO participation in the federal rebate program would create cost advantages that would be entirely additive, or whether there would be trade-offs and/or mitigating factors associated with such participation, and identifies five key factors likely to affect the impact of a change in federal rebate policy: potential restrictions on Medicaid MCO utilization and cost-management approaches; timing of rebates (Would they come more slowly with a rebate program?); MCOs’ relationships with their pharmacy benefits managers that could change and lead to increased costs; pharmaceutical industry reaction; and dynamics of capitation rate development and its potential impact on sharing of savings between MCOs and states.

The Lewin Group sees two scenarios that are most likely in terms of drug company reaction. First, the industry could argue that companies agreed to a certain level of rebates based on the size of the population for whom the rebates would apply and would likely push for a lower rebate percentage if the law was changed to broaden the size of the rebate population. The researchers say counterarguments can be made that the number of capitated enrollees has grown substantially and that changes in welfare rules have reduced the number of persons to whom rebates apply.

"If the pharmaceutical industry is unsuccessful in recouping its additional rebates through the above approach, the industry could raise prices more sharply for all payers than would otherwise be the case. In effect, this would create a cost-shift’ to the private sector. Such an approach would reduce or eliminate any systemwide savings, but would still create sizeable savings for the Medicaid program," researchers say.

Savings vary by scenario

Applying a number of different scenarios for calculating savings, the Lewin report says that even under the most conservative assumptions regarding capitated pharmacy penetration, annual savings start at approximately $50 million in the first year and grow to almost $150 million in year 10, for a cumulative savings of more than $900 million over the 10 years. The most aggressive assumptions result in cumulative savings of almost $2 billion over 10 years.

"While it is impossible to know which of these scenarios will play out, the mid’ scenario represents Lewin’s best estimate of the degree to which Medicaid pharmacy costs will be capitated," the report says. "This scenario is based on a growth in capitated pharmacy penetration over the next 10 years from approximately 32% to 55% for TANF, and from 13% to 25% for Social Security Income. The annual savings generated in this scenario grow to $267 billion by year 10, with cumulative savings of $1.4 billion."

Ms. Murray tells State Health Watch that while there are pros and cons to extending the rebate, as outlined in the Lewin report, her association is in favor of making it available on a voluntary basis so plans could decide if it would be beneficial for them. "Our support was announced at our recent meeting, and we’re now trying to find someone in Congress who will champion it for us and will introduce legislation for a voluntary rebate program," she adds.

[Contact Lewin Group at (703) 269-5500 and Margaret Murray at (202) 331-4600.]