Thursday, February 10, 2011

A Neutral POV on Medicaid Drug Savings

The battle over Medicaid pharmaceutical spending is getting uglier.

Both the NCPA and NACDS challenged some of HHS Secretary Kathleen Sebelius’ suggestions on how states can better manage Medicaid pharmacy spending. Over the weekend, Steve Anderson, President and CEO of NACDS, went further by quoting Winston Churchill and calling on the pharmacy industry to “fight for victory” on reimbursement issues at the federal and state levels. Meanwhile, the PCMA coyly cites a need to Focus on Patients, Not Profits, in Medicaid Pharmacy.

I invited Mike Winkelman, the principal of Winkelman Management Consulting, to write the guest editorial below because he offers a frank assessment of today’s reality from a non-partisan, objective perspective. He recently delivered an intriguing presentation to the National Legislative Association on Prescription Drug Prices (NLARX): Medicaid Pharmacy Reimbursement Reform: Trends and Recommendations.

Mike argues that states can and should take the initiative to reduce excessive pharmacy reimbursements in the Medicaid program. His conclusions echo the findings of a recent Lewin Group study that I highlight in How to Stop Medicaid from Overpaying for Drugs.

Many comments on the original Drug Channels post criticized Lewin’s conclusions because the study was funded by the PCMA, which represents PBMs. In contrast, Mike often finds himself conducting audits of PBMs on behalf of his plan sponsor clients. However, he concurs with Lewin's general message about savings opportunities.

By Mike Winkleman, Winkelman Management Consulting

States are struggling to manage their Medicaid budgets since the recession has sharply cut into their revenues. In addition, Medicaid costs keep rising due to increases in the cost of care and the growing number of people who now qualify for this government program.

Our studies have identified the potential for savings in the range of 5 to 10% on Medicaid drug costs. Simply put, Medicaid fee-for-service pays much more to pharmacies for prescription drugs than do the private health plans.

Our firm draws three conclusions from the current situation:
  • State Medicaid programs pay more for drugs than private sector plans.
  • State budgets are underwater and desperate to find savings wherever possible.
  • As a result, Medicaid reimbursements to pharmacies will be reduced.
As we see it, reimbursement reform can increase transparency and lower costs. Medicaid should not pay more than commercial payers and Medicare Part D. Pharmacies can still make a profit without hiding it from sight.

Mindful of the pressure on state budgets, we feel that efforts to reduce Medicaid drug costs will have considerable traction among the states. As all of this happens, retailers will make less money.


Title XIX of the Social Security Act, which created Medicaid, was enacted in 1965. It is a unique program in many ways.
  • Costs are shared between the states and the Federal Government. It is truly an ‘entitlement’ program, with robust benefits. Medicaid consumes a huge share of every state’s budget.
  • Some health care services, such as prescription drug benefits are optional, but Rxs are presently covered by all state Medicaid agencies.
  • Under federal rules (OBRA90), state Medicaid plans are guaranteed rebates from drug manufacturers, which reduce costs substantially.
  • Many states assign some or most Medicaid patients to Managed Care Organizations (MCOs), which get per patient capitation fees to manage their care, on an at-risk basis. Most states do not put the MCOs at risk for the drug benefit; it is ‘carved-in.’

Many years ago, as prescription claims processing evolved from batch to on-line, the Medicaid programs were among the last adopters of this more advanced technology, and, since batch processing was slow and error prone, pharmacies had every right to expect – and get – higher levels of reimbursement. But Medicaid processing has been real time for nearly a generation and the rates were never equalized.

In addition, PBMs continue to reduce network reimbursement rates in the private sector. As a generality, the retail pharmacy community is powerless to fight back and their margins for private sector claims continue their relentless downhill slide.

Conversely, the drug retailers do have some clout with Medicaid, and – again as a generality – NACDS, NCPA and state pharmacy associations have been successful in lobbying the states to maintain the higher Medicaid rates. This has resulted in today’s disparity.

State Medicaid programs do a good job of encouraging the use of generics, but most are paying too much for these drugs. PBMs are very efficient at maintaining low Maximum Allowable Cost (MAC) pricing for generics. Unfortunately, CMS and the states are not nearly as adept.

The Federal Upper Limit (FUL) pricing, which is a ceiling for the states on generic reimbursement rates, is an outdated anachronism and, on an item-by-item basis results in much higher costs as compared to PBM MAC prices. To overcome this disparity, almost all states have implemented their own MAC pricing. But most of these state MAC prices are much higher than private sector MACs. That’s good news for retailers, but states are leaving too much money on the table.


While it should be noted that our analysis is simply based on the arithmetic and theirs is an advocacy piece, on behalf of a client, both come to the same conclusion: Medicaid pays too much for drugs and should reduce rates post-haste. Here are our estimated savings for 12 states:

Note that both studies show estimated savings. Actual savings will differ, but the conclusions as to the savings potential are rock-solid. The Lewin Study suggests that those states that can move the drug risk to MCOs should do so. They are right. The change will reduce Rx costs.

But not all of those states will make that switch and most states are not able to do so in the near term. They all need to embark on a plan to get to market rates as soon as possible. And, while consultants such as my firm can readily facilitate this effort, states can and should take the initiative to so themselves.


  1. This blog discusses two topics: Do states pay too much for Medicaid Rxs and is there underlying bias (marketing) in the reports used and the blogger’s comments about the reports.

    My opinion, the answer is yes to both. Medicaid does pay too much in most states and there is marketing and bias by the consultant bloggers.

    The consultants are all marketing to the PBMs to become consultants for a PBM or they are already consultants for a PBM or perhaps even PBMI.
    The answer to Rx pricing in general and Medicaid in particular is not a PBM business model nor is it the existing retail network business model.

    How did we get here: Good question, PBMs started as adjudication systems that did lower cost to the payers. As more PBMs competed for market share, marketing and contracting became the business model. As contracts and marketing all started looking alike mail order pharmacies became the new model. But the first years of success of lowering cost have not been duplicated as Rx prices increased well above CPI. For the most part this increase was because of PBMs and PHARMAs need to factor in PBM pricing in all new drug releases.

    But without PBMs I am sure that retail pharmacy would have kept pricing much higher than needed and perhaps the resultant CPI for prescriptions would have been equivalent over the same time period as with PBMs.

    The answer is to separate the IT piece (the PBM), the Rx distribution piece, and the clinical piece into different payment categories.

    Return PBMs back to an adjudication system for maximum cost reduction and patient/payer convenience reducing the PBM maximum cost to ~$2.00 per Rx in total, use Acquisition Plus pricing with a 90 supply regardless of distribution point, pay a small dispensing fee for distribution, and add a professional fee only for distribution systems that show documented overall medical cost reductions and/or documents results like reduced cholesterol numbers, i.e. improved patient health over time.

    This model is available but the momentum of the existing system is huge and PBM consultants are constantly figuring ways for the existing momentum to continue rather than tackle the real problem of health outcomes.

  2. Mr Fields: I am in general agreement with your comments, but i do want to make a distinction: My firm does not work for PBMs. Our clients are health plans, governmental agencies and the like. We do not accept revenue from PBMs.

    Mike Winkelman
    Winkelman Management Consulting

  3. Jim -

    As Mike's comments indicates, you can't dismiss his analysis by claiming a pro-PBM bias.


  4. In the case of Mr. Winkelman's comments I did not disagree with his conclusions, as stated, I agree that most states do pay do much for Medicaid Rx's.

    Nor did I feel that in the case of Mr. Winkelman’s analysis that it was biased for against the existing business model of Rx distribution.

    However, his analysis was used, as presented here, to support a report that went beyond Medicaid Rx pricing, a report that suggest/implies that the existing PBM model was the solution.

    Mr. Winkelman never suggested that the existing PBM model is a solution nor do I believe that the existing model is the solution. See how I used his words to make it seem he is in agreement with me

  5. Adam ,

    Where can a reader of your blog see the list of your sponsors and clients?
    Transparency :Special interests , potential conflict of interests that are economic should be made crystal clear at the beginning of each post.
    IF you are not prepared to be transparent then the credibility of the arguments are weakened and questionable.

  6. I always try to provide links to the original source material so that you can make up your own mind. An ad hominem attack on my supposed "conflicts" is not a fact-based rebuttal. As you can see, I freely allow all constructive comments to appear on the site.

    But if you are curious, you can learn about my consulting practice for pharmaceutical manufacturers, read the Drug Channels FAQs, or see the disclaimer below.

    Sponsors are easy to see because they appear in the upper right corner. However, they don't influence the content.

    If this information is not sufficient, then please contact me directly and I will refund your Drug Channels subscription fee.


  7. Adam,

    Thank you for your courage and integrity. While I believe each individual is rationally self-interested, I believe your self-interest seems to me to be providing solid analysis that is based upon facts as they are able to be uncovered (literally). It's a national shame that it takes so much effort to uncover the truth in this industry. However, as you have alluded to before, how much does transparency really benefit ANY of the big players in this industry (pharma, PBM, pharmacy, wholesale etc)? It seems logical that companies like Restat and Wal-Mart would sponsor or publish a white paper because they are disruptive to this unholy alliance (my words, not yours) between "market" participants.

  8. I appreciate Mike's insight on this topic. We always need to be careful in lumping all states into the "poor payer" bucket. It would be valuable to see what Medicaid programs are the tightest payers. Some of this was obvious from the Ernst and Young analysis/chart Adam posted related to FULs. Many states actually blow the commercial rates away in terms of ingredient cost reimbursement. The lower dispensing fees are obvious in the commercial PBM world but one needs to be very careful and look past the dispensing fees. Here's a few considerations to think about:

    -When AWP was rolled back by FDB and Medispan nearly every state refused to adjust the AWP discount. Nearly every commercial PBM adjusted their AWP or moved to WAC plus so that neither party was economically harmed. This leveled the playing field considerably.

    -I have never seen a commercial PBM publish their MAC rates like most Medicaid programs are required to do. Medicaid MACs are typically based off of average acquisition cost plus a small markup. Commercial PBMs still utilize an aggregate AWP- reference that has very little correlation to acquisition costs. You can back into their MAC rate fairly easily. Having done this multiple times one can quickly see that the commercial PBM have substantially higher MACs than many Medicaid programs.

    -Why are the commercial MAC rates so high. Simple-they pay themselves at the same rate for mail order dispensations. That's why they are all licking their chops with the wave of upcoming patent expirations. They typically reduce copay obligations and reduce the dispensing fee to make the mail order route more attractive.

    -Generic Dispensing Rates-yes there is room for improvement but one needs to remember that many programs prefer certain brands over generics because of the lower net due to rebates. This has an affect on the GDR. Lastly, most managed care medicaid PBMs are dealing with relatively healthy women and children. Fee-for-service Medicaid programs are stacked with the sickest of the patients with very expensive chronic conditions. In order to do any comparison there needs to be obvious adjustments for case mix.

    Thanks for the opportunity to comment.

  9. This is a difficult analysis to comprehend. I understand that Mr. Winkelman is trying to demonstrate that some state’s provider reimbursement is not competitive, but he doesn’t adjust for patient mix (as previously stated) in his assessment that Medicaid’s gross expenditures exceed those of a PBM/MCO. The analysis also doesn’t disclose what type of PBM/MCO was included in the study. Were they specifically Medicaid MCO or other? There is a big difference and I would also suggest that even a Medicaid MCO vs. Medicaid FFS is not apples to apples (since there are normally population carve-outs such as behavioral health or hemophilia) and would likely need to be done on a state by state comparison basis to get a good picture.
    A typical Medicaid FFS sees more behavioral health, substance abusers, and hemophiliac patients than a typical PBM/MCO) which drives up spend with expensive medications (irrespective of provider reimbursement).
    This leads me to question his savings projections, which he calls ‘rock-solid’. Consider Kentucky (in the chart provided above). They have formulary management through their PDL, they have an expansive PA program, and their brand reimbursement is competitive in this post-FDB rollback world (AWP – 15% which equates to AWP – 18.40% in the pre-FDB rollback world). Whereas I’d agree that their $4.00 dispensing fee is too high (compared to industry averages), I doubt that a reduction in this dispensing fee would correlate to $43.6 million in savings and if it would; doesn’t the argument become ‘lower your dispensing fee’ and a cry to move the FFS program to a PBM/MCO would not be required?
    NY is another state with formulary management through their PDL, competitive reimbursement at AWP – 16.25% on brand drugs (pre-rollback = AWP – 19.6%), and a robust utilization management through step editing and PA. Their dispensing fee is $4.50, but again if this is the only shortfall
    Also, the slide deck shows that (in general) states use open formularies (what about their PDL’s?) and less advance cost containment strategies; whereas PBM/MCO’s use advanced step therapy and PA. I would contend that most if not all states use step therapy and PA as a way to control costs and would suggest the strategy in and of itself, isn’t very advanced.