In fiscal year (FY) 2021, Medicaid gross spending for outpatient drugs exceeded $80 billion, representing a 29.4% increase from FY 2018. While federal and state supplemental rebates offset over half of gross expenditures, net spending on outpatient drugs increased 5.4% ($26.1 to $38.1 million) from FY 2018 to FY 2021.3*
As drug costs continue to rise, particularly for specialty drugs and innovative targeted therapies, states need to engage in strategies that include policy and nonpolicy options to manage prescription spending. This is the first in a series of articles on this topic by Milliman’s State Medicaid Consulting Group.
State Medicaid programs can employ multiple cost containment and pharmacy benefit management strategies. One of the more common approaches states have utilized is maximization of federal and supplemental rebates by consolidating formularies from the state, as the fee-for-service (FFS) payer, and managed care organizations (MCOs) operating in the state. The consolidated formulary is a state-mandated preferred drug list (PDL). This state-mandated PDL is applied to all Medicaid enrollees within a state. This steers utilization to lower net cost drugs and allows better negotiation of supplemental rebates.
Beyond use of a state-mandated PDL, states have other tools they can use to moderate drug spend, which include policy changes, prescription spending levers, and benchmarking. Some examples of policy changes that may bring clarity into otherwise opaque processes include introduction of transparency reporting, evaluation of 340B payment policy, and benefit design. Prescription spending levers include eliminating spread pricing, regulating reimbursement and utilization for provider-administered drugs, requiring drug coverage policies that are consistent with Medicaid Drug Rebate Program (MDRP) compliance, optimizing utilization management such as dispensing limits, and optimizing prior authorization (PA) and step therapy (ST) criteria.
Figure 1: Examples of state opportunities to manage pharmacy expenditures
The ability to measure and then subsequently benchmark therapeutic duplication, medication adherence, and preventive screening and service utilization promotes appropriate medication use and early detection of disease. Finally, measuring clinical outcomes in reference to matched prescription utilization can provide insight into the effectiveness of disease management.
Comprehensive strategies for managing prescription spending must take into account the viewpoints of all impacted entities, including state agency objectives, MCO contractual obligations, provider retention, and enrollees’ social determinants of health, among others. Although reducing drug spend is often a primary goal, doing so in a sound and clinically appropriate manner is imperative to overall program success.
The Milliman State Medicaid Consulting Group Rx is comprised of experienced actuaries, analysts, and clinicians with expertise in each of these areas. Upcoming papers will provide in-depth discussions of opportunities for states to manage pharmacy expenditures.
* State Drug Utilization Data does not capture all expenditures due to data inclusion and exclusion criteria by the Centers for Medicare and Medicaid Services (CMS), (e.g., 340B, state-only utilization, and suppression).
1 CMS (August 12, 2022). NHE Fact Sheet. Retrieved November 16, 2022, from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet.
2 CMS (March 28, 2022). CMS Office of the Actuary Releases 2021-2030 Projections of National Health Expenditures. Press release. Retrieved November 16, 2022, from https://www.cms.gov/newsroom/press-releases/cms-office-actuary-releases-2021-2030-projections-national-health-expenditures.
3 Park, C. (October 27, 2022). Trends in Medicaid Drug Spending and Rebates. Medicaid and CHIP Payment and Access Commission. Retrieved November 16, 2022, from https://www.macpac.gov/wp-content/uploads/2022/10/07_Trends-in-Medicaid-Drug-Spending-and-Rebates-Chris.pdf.