October 11, 2012

Executive Summary

Medicaid is one of the nation’s few remaining programs in which public agencies still use a fee-for-service (FFS) model to deliver pharmacy benefits. In this FFS model, care coordination and benefits management are typically limited and pharmacy reimbursement rates are established by government officials in the regulatory and/or legislative arena.

Medicare Part D and commercial payers on the other hand, rely upon competitive negotiations between pharmacy benefits managers (PBMs) and drug retailers to reduce costs.

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In 2011, the FFS model accounted for more than two-thirds of Medicaid prescriptions nationwide, even for Medicaid enrollees who receive their other health benefits through managed care organizations (MCOs).

The passage of the Affordable Care Act (ACA) in 2010 allowed states to collect statutory manufacturer rebates on prescriptions reimbursed by capitated Medicaid MCOs. Before this, many state Medicaid programs continued to use a FFS pharmacy benefit approach for fear of losing access to those rebates. Since 2010, many states have revisited the idea of modernizing pharmacy benefits.

New York is among a growing number of states shifting away from a FFS pharmacy benefit to reduce costs without reducing the number of enrollees or the quality of pharmacy benefits they receive. In January 2011, Governor Andrew Cuomo created a Medicaid Redesign Team (MRT) with a goal of “ending the state’s Medicaid fee-for-service system and replacing it with a comprehensive, high-quality and integrated care management system that will lower costs and improve health outcomes.”

Major Findings:

  • New York Medicaid saves $425 million in 2012, four times greater than expected. SNCS projects that New York’s Medicaid program and taxpayers will save an estimated $425 million in 2012 by transitioning to a more efficient PBM approach. This is four times the $100 million in savings originally estimated by the New York Department of Health.
  • The federal government saves more than $212 million. The federal government splits the savings with New York since it is responsible for roughly 50 percent of Medicaid costs.
  • The vast majority of savings is from greater use of generics and lower-cost brands. New York Medicaid MCOs expect to achieve generic drug dispensing rates of up to 84%, compared to a 79% rate that would be expected under Medicaid FFS.
  • Dispensing fees are no longer higher than those paid by Medicare and private insurers. Consistent with the commercial sector and Medicare Part D, pharmacy dispensing fees have been reduced from $3.50 under the FFS carve-out approach to an average of approximately $1.75 under the PBM approach.
  • There is even greater savings potential since New York has yet to tap into the savings available through affordable pharmacy networks and targeted use of mail-service pharmacy.