California Medicaid Could Save $2.1 Billion Over Ten Years by Managing Medicaid Pharmacy More Like Medicare and Commercial Sector Programs

A new study finds that the California Medicaid program could save $2.1 billion over the next decade by managing pharmacy benefits more like state employee plans, Medicare, and commercial-sector employer plans. Voters would also prefer to reduce Medicaid spending by better managing pharmacy benefits rather than cutting benefits for patients or payments to doctors and hospitals, according to a new poll.

Unlike Medicaid fee-for-service (FFS) programs, most health plans use third-parties to improve generic utilization and negotiate pharmacy payments directly with chain drugstores and the drug wholesalers that represent independent pharmacies.  Most state Medicaid programs use a different approach in which public officials play a role in determining how much to pay drugstores for each prescription filled (dispensing fees) and ingredient costs (the reimbursement for the cost of the actual drugs).

Key Findings:

While Medicaid policymakers often focus on drug manufacturer rebates, better management of the 76% of Medicaid pharmacy costs in California that now flow through its FFS program could generate savings in four other key areas:

  • Generic Drug Dispensing: In the California Medicaid FFS program, just 64% of prescriptions were dispensed using generics during early 2010, significantly less than the average 80% generic dispensing rate typical of Medicaid managed care plans.
  • Dispensing Fees: At $7.25 per prescription, the average dispensing fee that the California Medicaid FFS program pays to retail pharmacies is significantly higher than average dispensing fees of approximately $2 paid by Medicare Part D, Medicaid managed care organizations (MCOs), and other health plans.
  • Ingredient Costs: The rate at which retail pharmacies are reimbursed for the actual medication ingredients (pills, capsules, etc.) is higher, on average, in Medicaid FFS than in Medicare Part D or the commercial sector.
  • Drug Utilization: The number of prescriptions dispensed per person is typically higher in Medicaid FFS programs than in Medicaid managed care plans due to less effective controls on polypharmacy, fraud, waste, abuse, and other factors in the FFS setting.

Contrary to conventional wisdom, state Medicaid FFS programs across the country that pay high dispensing fees often also pay high ingredient costs and typically do no better at getting generic drugs dispensed.

Estimated State Medicaid Savings

If the California Medicaid program used a market-based approach such that generic dispensing, dispensing fees, ingredient costs, and drug utilization were brought in-line with norms for other programs:

  • California Medicaid FFS prescription costs could be reduced by 19%.
  • Per member per month (PMPM) costs for Medicaid FFS pharmacy benefits in California could be reduced by $22 in 2012.
  • California could save $2.1 billion during the 2012-2021 period in state funds, with total Medicaid savings of $4.8 billion in California during the same period when Federal and State savings are combined.



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