Medicaid Plans in California No Longer in Control of Their Formularies

Executive order means that Medicaid insurers are at the mercy of the state for determining what drugs to purchase to get best pricing.

California Gov. Gavin Newsom wasted no time taking on one of the hot-button issues in health care, the skyrocketing costs of drugs. On Monday, the same day he was sworn in, Newson signed an executive order that makes the purchasing of drugs for Medicaid beneficiaries the purview of the state, and the state alone. 

Which means that Medicaid managed care plans will lose a lot of control over exactly what they can include on their formularies. The executive order charges Medi-Cal, the state’s massive Medicaid system, with negotiating prescription drug prices for all of its 13 million recipients, “changing their benefits from a managed-care or HMO approach to one that allows the state to handle all the purchases,” Reuters reports.

Friso van Reesema, a Medicaid pharma expert with Cipher Health in New York City, says that the state negotiating directly with pharmaceutical companies “may limit which drugs are available on formulary. So, a plan may have to reject doctor prescriptions for particular drugs based on what the state negotiates." 

Medicaid managed care plans may be able to improve their profit margins if the costs of the drugs are lower thanks to state negotiating, but quality and member satisfaction could be affected. “Plans will likely field many appeals and grievances from doctors and patients is my prediction,” says van Reesema.

Adam Fein, head of Pembroke Consulting and of the much-followed pharma blog Drug Channels, wonders if Newsom’s executive order will have that much impact. “It sounds like a supplemental rebate play,” says Fein. “States can negotiate supplemental rebates with manufacturers (either through state pools or via managed care). Nearly all states already do this as single states or as part of multistate group.”

Sandeep Wadhwa, MD, former Colorado Medicaid director and current chief health officer and senior vice president of government programs at Solera Health, agrees that other states have done this with their drug spend. The state appears to be carving pharmaceuticals out of the managed care contracts and making this a state administered service. "This is a bit like other state administered services such as long-term services or dental care which may not be part of managed care contract," says Wadhwa. "This will almost certainly require a state plan amendment to be approved by feds."

Van Reesema sees Newsom’s executive order as an “interesting move that shows that states are diving deeper into their budgets to identify ways to allocate funds to priority programs.”

Based on his experience in both the pharmaceutical and insurance industries, van Reesema thinks that:

  • Pharmaceutical companies will adhere to state pricing, which is below wholesale acquisition cost and the best negotiated price (including rebates and discounts) to any organization including payers.
  • Payers will negotiate pharmaceutical pricing based on volume and will now start to negotiate on value (based on health outcomes).

If the state is looking at utilization and/or needs of specific drugs for Medicaid beneficiaries, says van Reesema, “then the state could negotiate better pricing with specific manufacturers on volume and value based on pharmacy transactions of state employees and Medicaid beneficiaries.”