California Makes Waves With Pharma Benefits, Purchasing Plan
This article is reprinted with AIS Health’s permission.
Under the direction of its new governor, Democrat Gavin Newsom, California is planning to take control of the pharmacy benefit for all of the state’s Medi-Cal beneficiaries — the vast majority of which currently have that part of their care administered by private insurers and their PBMs. What’s more, the order directs state agencies to create bulk-purchasing arrangements for high-priority drugs, like those without generic alternatives, and establish a framework for letting private businesses and insurers join the state’s buying pool.
The idea of the state’s Medicaid program shifting to an entirely fee-for-service drug benefits system is already facing industry pushback and sparking worries about what it will do to PBMs’ bottom lines. Meanwhile, health care industry experts tell AIS Health that both aspects of Newsom’s executive order are likely to face formidable challenges — but some of them are also cautiously optimistic about the governor’s ideas.
“If this is going to lead to the lowering of prescription drug costs, then let’s take a look at it,” says L.A. Care CEO John Baackes, describing his reaction to the state planning to take over the Medicaid pharmacy benefit. On its own, the concept of carving out a benefit for the state to administer is not ideal, “but given the prescription drug crisis we’re having in terms of costs, I think this is an absolutely wise thing for us to look at,” he adds.
The Pharmaceutical Care Management Association (PCMA), though, doesn’t appear as convinced.
“It is the mission of pharmacy benefit managers, PBMs, to increase prescription drug access while reducing cost growth,” the trade group said in a statement, pointing out that PBMs saved Medi-Cal $8.59 billion over a 10-year period. “We look forward to working with Governor Newsom to further reduce prescription drug costs for Californians,” PCMA added.
Currently, California’s Medicaid managed care organizations contract with 10 different PBMs to administer the pharmacy benefit for 10.64 million managed Medicaid lives — which comprise nearly 90% of the state’s total Medicaid lives (see infographic, p. 3). Thus, “we suspect that the fee-for-service aspect [of the executive order] may have an adverse impact on PBMs and potentially MCOs that provide managed Medicaid services in the state,” RBC Capital Markets, LLC analyst George Hill wrote in a research note.
Overall, “the effectiveness of this new Order in lowering net drug prices will largely depend on the extent to which the Medicaid formulary can withhold coverage of certain treatments and thus gain credibility in negotiating for rebates in exchange for formulary placement,” Hill wrote. But California may find that difficult, since last year CMS denied Massachusetts’ request to use a limited formulary in its Medicaid program, he pointed out. “Without the power to exclude drugs, California’s negotiating leverage may be limited,” Hill wrote.
Baackes also has questions about what a statewide Medicaid formulary would mean. For example, L.A. Care currently has to run a “fairly quick” appeals process if a Medi-Cal beneficiary’s doctor writes a prescription that’s not on its formulary, “and is the state going to take that on and do that as well?” he wonders. Plus, for a state as large and geographically diverse as California, “it seems challenging to have a formulary that would work across the state,” Baackes says. “Maybe they have to be regionalized in some manner.”
L.A. Care contracts with Navitus Health Solutions for PBM services, but Baackes says the MCO hasn’t spoken to Navitus about Newsom’s plan — rather, it’s waiting to learn more details as California’s agencies produce the reports directed by the executive order.
Care Coordination Could Suffer
In the meantime, another concern for managed care plans is the fact that carving out benefits makes it more difficult to coordinate care, according to Baackes.
“I think one of the advantages of a managed Medi-Cal plan like ours is that for people who are in very difficult circumstances health-wise, we do provide an element of care management that’s important,” he says. “And if there’s an element of the benefit that we don’t control, then it’s awkward.” For example, L.A. Care recently decided to train in-home support service workers who serve its beneficiaries — but function as a carved-out benefit paid by Los Angeles County — in order to help connect them to the MCO’s care team.
Andrey Ostrovsky, M.D., former chief medical officer at CMS’s Center for Medicaid and CHIP Services and current CMO at Solera Health, has a similar concern, noting that “there has been a demonstrated benefit to cost savings and improved outcomes” with states moving to Medicaid managed care. “I don’t think Gov. Newsom’s strategy here addresses that issue of effective integration of care coordination, care management and managing the whole person,” he says. “But maybe he has a strategic plan to do that down the road.”
Still, PBMs currently are not necessarily incentivized to improve outcomes, Ostrovsky argues. Rather, they will often offer a “fixed solution set” promising a certain degree of value, and “the MCO will check a box, and say, ‘OK, this is roughly what we’ll expect to get on spend.’”
Brian Anderson, a principal with Milliman, Inc., adds there are additional considerations for California’s planned move to fee-for-service.
“It’s going to be very important that they see the big picture, and essentially make sure that all the correct management programs, and possibly copays, are implemented to drive appropriate utilization,” he says.
Can Direct Purchasing Work?
“If you’re negotiating directly with the manufacturers on drug prices, how’s the delivery system of that going to work, and how are the pharmacies, at the local level, going to be able to maintain a profit and not lose money?” Anderson asks. Just because a state can negotiate a large rebate from drug manufacturers doesn’t necessarily mean it’s negotiating a lower drug price, he adds. To do that, a state would have to guarantee a certain volume of purchasing to a manufacturer, “and I don’t how know they’d be able to guarantee that, if they’re not actually buying and stocking the medication.”
Indeed, “when negotiating drug pricing with manufacturers, it comes down to volume,” says Friso van Reesema, a Medicaid pharma expert and vice president of business development with the health care tech company CipherHealth. “For the state to predict the number of ACE inhibitors needed and negotiate based on volume tiers, [it] may be a challenge if data are not shared freely,” he tells AIS Health via email. California may decide to go into a value-based purchasing agreement, which could make it challenging to align incentives with payers and providers, he adds. However, the state could glean insights from CMS’s innovation unit to model out the value and help with negotiations “for a win-win arrangement,” van Reesema suggests.
Ostrovsky says California also has the advantage of having already invested in revamping its internal processes. For example, the state engaged Code for America — in which civics-focused engineers and designers help redesign the government experience — to digitize and streamline the state’s Supplemental Nutrition Assistance Program, called CalFresh. “I think Newsom has a really good opportunity here to use the assets that are literally in his backyard to make this thing work really well,” Ostrovsky adds.
For L.A. Care’s part, since it is also a commercial insurer that serves customers in the state’s individual market, it might be interested in joining a bulk-purchasing pool that California sets up if it’s able to offer a better deal on prescription drugs, Baackes adds.
Could Other States Follow Suit?
As for whether other states might follow California’s lead and set up a similar system, van Reesema notes that the model of purchasing drugs directly from manufacturers “will require much administration and negotiating, which many states will not have the resources or power to execute.”
However, New York has successfully negotiated with a handful of drug companies directly on drug prices, according to van Reesema, who adds that Ohio, Pennsylvania and Texas may also have high-enough drug utilization to negotiate at the level California can. “When California shares details on its arrangements, other states will certainly get in line to emulate their model.”
Read Newsom’s executive order at https://bit.ly/2FL0xTV. Contact Baackes via Penny Griego at firstname.lastname@example.org, Ostrovsky and van Reesema via Joe Reblando at email@example.com and Anderson at firstname.lastname@example.org.
by Leslie Small