In March 2020, under former Governor Andrew Cuomo’s administration, the New York Medicaid Redesign Team recommended that the state carve-out pharmacy benefits from the Medicaid program due to concerns regarding pharmacy spend and provider transparency. The reform essentially transitions prescription drug reimbursement from a managed care model to a fee-for-service model, making the state responsible for the pharmacy benefit rather than managed care organizations and pharmacy benefit managers. To date, seven other states, including California, West Virginia, Wisconsin, Missouri, Ohio, Kentucky, and Tennessee, have carved-out pharmacy benefits from their Medicaid programs.

The state’s decision was immediately met by opposition from safety net providers, 340B covered entities, community leaders, and nonprofits. They warned legislators of the negative impact the move would have on the program and its beneficiaries’ access to care. As a result, the carve-out was delayed in April 2021.

After a two-year delay, the New York State Department of Health announced earlier this year that it would proceed with the carve-out. Beginning April 1, 2023, Medicaid members will begin receiving their pharmacy benefits under the state’s new model, NYRx.

Despite the state’s decision, those in opposition to the reform continue to make a concentrated effort to derail the carve-out as the April start date approaches. Save New York’s Safety Net is a statewide coalition of providers and community organizations that represent vulnerable populations in the state. The coalition is fighting the transition because of its potential to disrupt access to specific drugs and its consequences for community health centers.

For instance, State officials that support the move to a fee-for-service model believe that it will increase program revenue by $250 million. However, under the current program structure, this money goes to safety-net providers around the state as a part of the 340B drug discount program. The program provides qualifying hospitals and clinics that treat low-income and uninsured patients with pharmaceutical drugs at a significantly lower cost. These savings help to fund programs such as vaccination clinics, housing assistance, transportation, outreach, and nutrition services. If the carve-out is implemented, it will divert these funds and result in a reduction of services, clinic closures, and disruptions to the coordination of care.

Jacqui Kilmer, CEO of Harlem United, is among those in opposition to the state’s decision. She expects the carve-out to drive up healthcare costs and views the measure as bad government both from a policy and legal standpoint. However, the former business attorney is hopeful and believes there is still a chance to persuade Gov. Hochul to repeal the carve-out. According to Kilmer, “she can do that on her own without legislative approval, any kind of other oversight, budgetarily, or from the Department of Health.” 

Among legislators, a number of representatives sponsored bills in the previous legislative session to repeal the pharmacy carve-out but they were unsuccessful. These efforts are expected to be reintroduced this year and legal challenges are anticipated if NYRx is implemented.

In addition to the coalition’s concerns surrounding the transition, there is also data that suggests New York and other states may want to reconsider carving-out pharmacy benefits. In a 2018 report from the Association for Community Affiliated Plans (ACAP), the trade association found that when compared to fee-for-service models, managed care improves the quality of care and saves significantly more on brand name and generic drugs. ACAP analyzed Medicaid drug spending over a six year period and discovered the following:

  • Managed care drug benefits generated considerable savings despite the increasing prescription drug costs. “The average net (post-rebate) cost per MCO-paid Medicaid prescription during 2016 was $37, 73 percent of the average net cost of Medicaid prescriptions paid in the fee-for-service (FFS) setting during 2017, which was $50.”
  • Managed care prescription services had greater utilization of generic drugs, which helped to reduce drug expenses. “In 2017, generic drugs represented 88.1 percent of MCO-paid Medicaid prescriptions versus 83.7 percent in the FFS setting.”
  • Six states that implemented managed care prescription benefits only had a 1 percent increase in net costs per prescription between 2011 and 2014. Alternatively, seven states that carved-out pharmacy benefits saw a 20 percent increase in net costs per prescription during the same period. These seven states missed out on an estimated $307 million in savings in 2014 in comparison to the six states that transitioned to managed care. 
  • Carving-in prescription drug benefits reduces complexity and improves the quality of care for beneficiaries because managed care plans can coordinate with providers more efficiently.

In 2021, Medicaid expenditures were the largest category of spending, accounting for 27 percent of state budgets on average. In the same year, Medicaid spent approximately $80.6 billion on outpatient prescription drugs. Some states have opted to transition to fee-for-service models and carve-out pharmacy benefits to reduce program expenditures. While this is one approach to try and reduce costs, states should also look for opportunities to improve efficiency and cost avoid in their Medicaid plans.