Privatizing Medicaid pharmacy benefits can save states money, study says

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Researchers say states can save money by allowing MCOs to create their own formularies for Medicaid patients.

State Medicaid programs could see drug spending drop considerably by fully privatizing the delivery of pharmacy benefits, according to a recent study.

Before the Affordable Care Act, states maintained their public pharmacy benefits programs separately even as they increasingly shifted coverage for medical services to private insurers, noted the study (PDF), which was published in the National Bureau of Economic Research.

But when the ACA allowed states to collect drug rebates for managed care organization enrollees, many states either added pharmacy benefits to their existing medical-only MCO plans or moved from full public coverage of the combined drug and medical benefit to full coverage through an MCO.

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Northwestern University researchers used this variation in states’ approaches to study the effects that privatizing pharmacy benefits had on drug costs and utilization.

They found that full privatization of a state’s Medicaid drug benefit decreases program drug spending by 22.4%—a result largely driven by MCOs’ ability to negotiate drug prices with pharmacies and steer patients toward lower-cost drugs, such as generics.

Savings tend to be larger, researchers noted, in states where MCOs can create their own formularies for Medicaid patients.

The study also found that “MCOs do not appear to skimp on performance” to achieve these savings, as privatization does not lead to an overall decrease in the number of prescriptions that enrollees receive, and the shift toward less expensive drugs is weaker among drugs that are generally expected to lower medical utilization.

“Our results indicate that market mechanisms can control healthcare costs and lower upstream prices,” the researchers wrote.

In addition, various policy interventions—such as price caps, limits on consumer out-of-pocket costs and direct price negotiation between government programs and drug manufacturers—may be less effective than simply privatizing pharmacy benefits.

The study’s results come at a time when managed care organizations are gaining an ever-larger foothold in the Medicaid landscape. A recent survey from PwC found that 12 states now have at least 90% of their Medicaid populations covered by private plans, compared to just nine last year and four in 2013.

But there have also been questions about how managed care plans do business—particularly those in California, which have seen their profits soar under the ACA even though the state has sometimes found their patient care to be subpar.