Medicaid Prescription Drug Laws and Strategies


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The cost of prescription drugs not only affects consumers but also fiscally impacts states. States pay for medicines used in state Medicaid programs, state employee health plans and state corrections populations. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), gross spending in the U.S. for Medicaid prescription drugs totaled $66.7 billion in 2019 and, on average, states spend between 4-5% of their Medicaid budget on prescription drugs.

Under federal law, the prescription drug benefit is an option for state Medicaid programs; however, all 50 states provide this benefit. Under the Medicaid Drug Rebate Program states receive the best price offered by manufacturers as a condition of coverage. States can make changes to their Medicaid program by negotiating supplemental rebate agreements (SRA) with manufacturers through the Centers for Medicare & Medicaid Services (CMS) state plan amendment process. A state plan is the agreement between each state and CMS outlining program specifics such as services and populations covered, reimbursement methodologies for providers and other administrative actions.

Responding to challenges arising from prescription drug access and affordability, legislators may consider modifying how their state Medicaid program pharmacy benefit is administered, with a wide variety of strategies as outlined below.

It should be noted that many policy options apply to both Medicaid and private markets. Please visit NCSL’s Prescription Drug Policy Resource Center for more information and examples of state action.


State Strategies

Carve in or carve out certain or all pharmacy benefits from Medicaid managed care (MCO) plans

Managed Care Organization (MCOs) provide Medicaid health benefits and additional services through contracted arrangements between state Medicaid agencies and managed care organizations (MCOs). MCOs accept a set per-member, per-month capitation payment for these services, including pharmacy benefits. As of July 2019, 40 states had risk-based contracts with one or more MCOs.

MCOs are not eligible for rebates under the MDRP. States are eligible to receive Medicaid drug rebates on purchases made by MCOs. Most states with MCO contracts include, or “carve in,” the pharmacy benefit, placing the MCO at risk for expenditures. Four states—Missouri, Tennessee, and West Virginia and Wisconsin—”carved out” the pharmacy benefit from MCO contracts, instead choosing to pay a traditional fee-for-service reimbursement rate.

States may choose to carve out certain high-cost drugs from MCO contracts rather than carving out the entire benefit. For example, as of 2019, the Hepatitis C drug class was carved out by four states: Indiana, Michigan, South Carolina and Washington. Other states, like Maryland, are adjusting policies to carve in drugs that had previously been carved out, such as HIV/AIDS drugs.

Enter into a Medicaid purchasing pool

Medicaid multi-state purchasing pools are arrangements made to consolidate states’ purchasing power when negotiating supplemental Medicaid rebates. Purchasing power can be leveraged to help states get a better price on the prescription drugs they reimburse for their Medicaid populations.

Three national Medicaid-focused purchasing pools exist today: the National Medicaid Pooling Initiative (NMPI), the Top Dollar Program (TOP$) and the Sovereign States Consortium (SSDC).

Thirty-one state Medicaid programs in total participate.

You can find more information at NCSL’s webpage, Pharmaceutical Bulk Purchasing

Establish a uniform, or single, preferred drug list (PDL) or universal formulary

A preferred drug list (PDL) is a list of medications that Medicaid will cover without prior authorization—where a prescription drug must be approved before dispensation. A uniform, or single, PDL agreement requires providers of pharmacy services in the state’s Medicaid traditional fee-for-service (FFS) contracts to utilize one PDL.

According to the Kaiser Family Foundation, 46 of the 50 states have a PDL in place for FFS. The four state Medicaid FFS programs that do not use a PDL are Hawaii, New Jersey, New Mexico and South Dakota.

MCOs may opt to establish a uniform PDL and, as of July 2019, at least 16 MCO states reported having a uniform PDL across certain or all classes of drugs.  

Establish drug substitution processes

Generic drugs are often cost-effective alternatives to their brand-name equivalents. Encouraging the use of these products may reduce overall prescription drug costs across the health care system.

Depending on state Medicaid law, when dispensing a prescription, a pharmacist may be allowed to substitute products if there is a less expensive, often generic, version of the medicine available. At least 41 states require automatic generic substitution for drugs prescribed through Medicaid. While 34 states allow biosimilar substitution, none require it.

You can find more information at NCSL’s webpage, Generic and Biosimilar Drugs

Explore alternative payment models (APMs)

States receive federal statutorily required rebates under the Medicaid Drug Rebate Program (MDRP) but states can achieve additional savings by negotiating optional supplemental rebate agreements  with manufacturers. States can enter into these agreements with approval from CMS under a state plan amendment.

Alternative payment models (APMs)—which often tie payment to the quality of care—are another potential cost-savings measure. Federal rules in the MDRP require state Medicaid programs to cover all Food and Drug Administration (FDA) approved drugs produced by participating manufacturers, which means states may face even greater affordability challenges.

A variety of APMs exist including:

Subscription-based or finance-based arrangements
In this arrangement, a contracted, fixed amount is paid to a manufacturer in exchange for unlimited access to a treatment. A well-known example, Louisiana implemented a so-called “Netflix” model to treat people living with Hepatitis C (HCV) who are Medicaid beneficiaries or incarcerated. The state receives an unrestricted supply of HCV anti-viral which is subject to an expenditure cap, versus an upfront payment. When the cap is reached, the manufacturer provides the drug for a nominal amount. Additionally, the manufacturer is required to provide services aimed to promote screening and linkage to care.

Outcomes-based arrangements
In an outcomes-based arrangement, payment is tied to key metrics or performance outcomes. An early adopter, Oklahoma pegged payment to metrics such as hospitalizations and patient adherence. For example, in one contract the state receives a higher rebate if patients adhering to their regimen are hospitalized. In return, the state will not require prior authorization for that specific treatment. At least six other states—Alabama, Arizona, Colorado, Massachusetts, Michigan and Texas—have CMS approval to enter into outcomes-based APMs with manufacturers.

Impose patient cost-sharing requirements

Cost sharing requirements are the share of costs paid by the Medicaid beneficiary. For beneficiaries with incomes below 150% of the federal poverty level (FPL), federal law limits cost sharing amounts to $4 for preferred drugs and $8 for non-preferred drugs. Coinsurance for non-preferred drugs can be up to 20% of the cost of the drug for beneficiaries with incomes over 150% FPL, though copayments for preferred drugs are still capped at $4. Some population groups, including children, individuals in institutions and those receiving hospice care, are exempt from out-of-pocket costs.

As of 2019, 15 states did not impose any cost sharing for prescription drugs.

Modify Drug Utilization Review (DUR) Processes

States are required to establish drug utilization review (DUR) boards to complete retrospective DUR activities, monitor for therapeutic appropriateness, review over and underutilization patterns, utilization of generic drugs and other activities. DUR boards are required to have at least one-third of its members be actively practicing, licensed physicians and one-third licensed and actively practicing pharmacists. Medicaid managed care organizations (MCOs) are also required to establish their own DUR boards.

DUR boards also provide ongoing education and interventions to physicians and pharmacists regarding issues identified through retrospective review activities. Interventions can include recommendations for changes in prescribing and dispensing practices both at the patient level or for specific drugs. To accomplish these goals, DUR boards use utilization management tools including prior authorization and step therapy.

Prior Authorization
Prior authorization is a tool used within Medicaid programs to manage utilization across all Medicaid benefits, including prescription drugs. This process requires prescribers to obtain prior approval from the Medicaid agency (or its designee) before certain drugs can be dispensed.

Federal law requires the Medicaid agency process prior authorization requests within 24 hours and provide for a 72-hour supply of medication in emergency circumstances. These same requirements apply to Medicaid MCOs choosing to require prior authorization for prescription drugs. In addition, as of 2018, MCOs with prior authorization procedures are required to use to same clinical criteria for review as the Medicaid agency in at least 30 states.

Step Therapy
Step therapy is a tool used to manage drug utilization and costs by requiring Medicaid beneficiaries to use lower-cost or generic drugs at the start of treatment, and only allowing beneficiaries to “step up” to more expensive options if the initial treatment is determined ineffective.

Some state laws require exceptions to step therapy requirements, such as New Mexico and Ohio, which allow for an override when certain conditions are met.

Reform pharmacy benefit manager (PBM) administration or contracts

Pharmacy benefit managers (PBMs) are third-party administrators of prescription drug coverage for a variety of sponsors, including Medicaid. They provide a wide variety of services including developing and maintaining formularies, processing claims, and negotiating discounts and rebates between payers and manufacturers.

Legislators may consider a wide variety of policy options when it comes to PBMs. For example, some states have opted to eliminate spread pricing in their state Medicaid contracts. In a spread pricing model, the PBM keeps a portion of the amount, or spread, between what the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription. With a pass-through contract, the PBM passes through the amount charged by the pharmacy to the health insurer. Since no spread is collected, PBMs typically charge an administrative fee. More than a dozen states bar the use of spread pricing models.

You can find more information at NCSL’s webpage, State Policy Options and Pharmacy Benefit Managers (PBMs).

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