At the beginning of the year, California’s governor signed an executive order directing DHCS to adopt a fee-for-service model for Medi-Cal. Under the order, California would consolidate its purchasing power and leverage the state’s population size to achieve lower drug costs by purchasing in bulk from pharmaceutical companies. In addition, DHCS has been assigned with the task of developing a list of twenty-five of the most expensive drugs that would be included in the negotiations with manufacturers.

Between 2018 and 2019, spending on pharmacy services reached $8 billion in California and the majority of pharmacy spending took place under the managed care delivery model. According to the Legislative Analyst’s Office (LAO), carving out managed care pharmacy services could result in hundreds of millions in savings annually. That being said, the savings could come at a cost to stakeholders such as enrollees, pharmacies, provider, and MCO’s. Recently, the LAO released a report that analyzes what the move could mean for the state and Medi-Cal’s stakeholders.

The LAO’s analyses pointed out the following impacts of the carve-out:

Impact On Non-Consumer Stakeholders

• Reduction in Retained 340B Earnings for Eligible Providers

“By transitioning Medi Cal pharmacy services entirely to a FFS benefit, 340B eligible providers would no longer be able to generate earning on any pharmacy dispensed drugs paid for by Medi-Cal. Rather, these earnings would largely convert into state savings in the form of lower prescription drug expenditures.”

• Reduction in Funding for Medi-Cal Managed Care Plans

“Funding for Medi-Cal managed care plans would likely be reduced by between 15 percent and 20 percent under the carve-out. A portion of the reduction would likely come from existing Medi-Cal managed care plan funding for purposes such as administration, care coordination, reserves, and profits.”

• Minimal Impact on Drug Manufacturing Industry

“The carve-out is unlikely to have a major impact on earnings for the drug manufacturing industry overall, both in the state and nationwide. Selected drug manufacturers, however, may pay higher negotiated supplemental rebates to the state in exchange for greater utilization of their drugs in MediCal through placement on a more widely applicable Medi Cal wide preferred drug list.”

• Likely Increase in Funding for Pharmacies

“Pharmacies will potentially benefit from increased funding under the carve-out due to (1) (absent any changes) the higher dispensing fees paid by Medi-Cal FFS compared to Medi-Cal managed care plans and (2) the larger network of pharmacies serving Medi Cal FFS compared to individual Medi-Cal managed care plans. A portion of the increase in funding may be offset by lower reimbursement for the drugs since Medi Cal FFS, but not Medi-Cal managed care, pays pharmacies at close to pharmacies’ costs in acquiring their drugs.”

Impact On Beneficiary Access and Care

• Statewide Standardization of the Medi-Cal Pharmacy Services Benefit

“While the standardization of the Medi-Cal drug benefit under the carve-out has potential to improve care from a beneficiary perspective in the long run, the transition to FFS could result in beneficiaries losing ready access to drugs they are currently taking. As such, the Legislature may wish to consider continuity of care protections for beneficiaries currently utilizing prescription drugs.”

Expansion of the Pharmacy Network Where Beneficiaries Can Obtain Prescription Drugs

“According to the administration, Medi-Cal’s FFS pharmacy network extends to almost all pharmacies throughout the state. Transitioning pharmacy services coverage to a FFS benefit could give Medi-Cal enrollees greater choice in where they obtain their prescription drugs.”

Less Timely Prescription Drug Utilization Information for Medi-Cal Managed Care Plans

“While DHCS provides FFS prescription drug utilization data to managed care plans on behalf of their members for currently carved out drugs, it is our understanding is that this data does not arrive from DHCS in a timely enough manner to assist plans’ care coordination activities.”

• Opioid Curtailment Programs

“These initiatives have likely contributed to dramatically reducing the number and potency of opioid prescriptions among Medi-Cal members. Under the carve-out, it is uncertain whether such initiatives by Medi-Cal managed care plans would continue.”

At this point, the administration has not released information on how the change will be implemented and they have yet to release any details on how stakeholders could be affected. To help the legislature understand what the carve-out could mean for the state, the LAO also identified outstanding details that should be addressed prior to transitioning. They include:

  • Overall Fiscal Estimate
  • What New State Resources Are Needed to Administer the Entire Medi Cal Pharmacy Services Benefit?
  • How Would State Information Systems Be Improved to Maintain or Improve Existing Managed Care Plan Care Coordination?
  • Managed Care Plans’ Continued Role in Coordinating the MediCal Pharmacy Services Benefit in Conjunction With Their Members Overall Health Care.

Lowering prescription drug costs is a top priority for states at this point and California’s effort is just one approach. Aside from transitioning to a fee-for-service model, there are also a variety of alternative approaches. As California sorts out the details in its transition, the analyses from the LAO also includes four alternative options that could be utilized in place of a complete carve-out.

  1. Universal Medi Cal Preferred Drug List Spanning FFS and Managed Care
  2. Transfer Savings From 340B Drug Discounts in MediCal to the State
  3. Formalize the Use of Cost-Effectiveness Analysis for Preference of Drugs in MediCal
  4. Adopt a MediCal Prescription Drug Spending Cap

At the end of the analyses, the report made two specific recommendations to state legislatures due to the uncertainty surrounding the order and its potential impact. First and foremost, the LAO recommended that strong oversight should be in place prior to the implementation. They also suggested that the state condition resources for implementation based off of key information provided by DHCS.