Wednesday, April 15, 2020

Four Unexpected Ways that the COVID-19 Medicaid Boom Will Affect PBM and Pharmacy Profits

The U.S. economy is in a medically-induced coma. Unemployment is soaring. Companies are teetering on the brink of bankruptcy. It is unclear when our lives will return to their pre-pandemic state.

One thing seems apparent: As people lose jobs and health insurance, Medicaid enrollment will jump, perhaps by as much as 20% to 30%. This will have profound implications for the drug channel.

Today, I focus on how this increase will affect retail pharmacies and pharmacy benefit managers (PBMs). Below, I review Medicaid enrollment trends, how states manage prescriptions, and the factors driving the coming boom in Medicaid enrollment.

As I explain, many (but not all) retail pharmacies will benefit from Medicaid growth. PBMs, however, will not fare as well. Read on and see if you agree.

In early May, Drug Channels Institute will host two live video webinars: Industry Update and COVID-19 Impact: Retail & Specialty Pharmacies (May 1) and Industry Update and COVID-19 Impact: PBMs & Payers (May 8). CLICK HERE TO LEARN MORE AND SIGN UP. DCI will donate 20% of all profits from these events to The Center for Disaster Philanthropy’s COVID-19 Response Fund.


Most of the Medicaid market information in this article is adapted from our new 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

If you have the report and want to learn more, check out the following material:
  • Section 4.1.1.
  • Section 8.4.
  • Section 9.1.3.
  • Section 11.2.3.
  • Section 11.2.5.
MEDICAID ENROLLMENT TODAY

The chart below shows the ongoing growth in Medicaid enrollment over the past 15 years.

[Click to Enlarge]

Two primary factors have increased Medicaid enrollment since 2007:
  • Recession: The great recession of 2008 to 2009 increased Medicaid enrollment by 13.5 million people (+30%), from 45.6 million in the pre-recession period to 59.1 million people in 2013.

    The previous recession also corresponded to a decline in the number of people with employer-sponsored insurance. This figure fell from 179.3 million in 2007 to 167.3 million people in 2011, and then began increasing. In 2019, employers provided insurance coverage for 175 million people.
  • The Affordable Care Act (ACA): Beginning in 2014, the ACA expanded eligibility to nearly all non-elderly adults with income at or below 138% of the federal poverty level. Enrollment has increased by 15 million people (+25%), from 59.1 million in the pre-expansion period to 74.1 million in 2019. Consequently, Medicaid has become the fastest-growing source of insurance coverage in the United States.
States have flexibility in how they administer the Medicaid program. For prescription drugs, a state can choose to reimburse pharmacies directly for filling prescriptions for Medicaid beneficiaries on a fee-for-service basis. Alternatively, the state can rely on Managed Medicaid (managed care organizations that operate under capitated arrangements).

Most states have both fee-for-service and managed care programs within their states. However, managed care plans accounted for 71% of Medicaid’s total dispensed prescriptions in 2018. Managed care’s share varies by state. (See MACPAC’s MACStats data).

As I explain below, the fee-for-service vs. managed care distinction is crucial to understanding the impact of Medicaid enrollment growth.

THE COMING MEDICAID BOOM

The economic dislocation from COVID-19 has been and will continue to be extreme. It’s not clear how deep the recession will be or how long it will last.

Here’s one plausible outlook for Medicaid enrollment: Health Management Associates (HMA) estimates that the COVID-19 economic downturn will ultimately increase Medicaid enrollment from 82 million (+11%) to 94 million (+27%). HMA’s intermediate forecast projects that Medicaid enrollment will grow by 17 million people, to 88 million. See the complete HMA report for more details about its projections.

PHARMACY IMPACT

Most pharmacies will benefit from Medicaid expansion. What’s more, some states are reevaluating their managed care relationships because of new disclosures about PBM compensation from network spreads in Medicaid. The changes in how states operate their Medicaid programs will increase the number of pharmacies that will benefit.

The profit outlook from growing Medicaid enrollment for a pharmacy depends largely on whether it operates in a state that reimburses prescriptions using fee-for-service or via managed care. That’s because pharmacies earn higher gross profits from prescriptions paid under fee-for-service Medicaid reimbursement than the gross profits they earn from those paid under managed care.

I delve deeply into this issue in chapters 8 and 11 of our new report. Briefly:
  • A pharmacy’s commercial and Medicaid managed care reimbursement for generic drugs is usually set by a PBM-determined maximum allowable cost (MAC). On average, pharmacies will earn positive prescription gross margins. However, a pharmacy can sometimes earn a low margin or even lose money on a prescription.

    PBM reimbursement to pharmacies is highly controversial and has prompted various state laws that attempt to ensure that pharmacies are not paid less than their acquisition costs. During 2020, these laws will be subject to new scrutiny by the U.S. Supreme Court, which could rule on whether states have the authority to regulate certain aspects of PBM behavior. The case—Rutledge v. Pharmaceutical Care Management Association—is based on an Arkansas law that regulates PBMs’ reimbursements to pharmacies. (Arguments in the case have been delayed due to the coronavirus shutdown.)
  • Federal regulations require fee-for-service state Medicaid programs to reimburse pharmacies based on an acquisition cost survey benchmark. (See my 2016 analysis of the infamous AMP final rule.) These surveys overestimate a pharmacy’s actual, confidential net acquisition costs. In addition, pharmacies are also paid a state-determined professional dispensing fee that averages $10 to $12 per prescription.
Thus, the fee-for-service acquisition cost approach provides a pharmacy with a stable average gross profit per prescription. Note that a pharmacy’s marginal (incremental) cost of dispensing one extra script is lower than its average cost of dispensing, which boosts prescription profitability. (Refresh your memory with my 2012 article on pharmacy economics 101.)

The good news for pharmacies: Fee-for-service is becoming more popular. The bad news: Pharmacies in states with managed care may see reimbursement drop as Medicaid enrollment increases. For retail chains, the net impact will depend on where their stores are located.

PBM IMPACT

PBMs will experience lower profits from a jump in Medicaid enrollment. I see at least three negative effects:

One, Medicaid enrollment growth will come at the expense of its commercial employer-sponsored insurance, which is more profitable to a PBM and its affiliated insurer than its Medicaid business. Some people will unfortunately become uninsured, which means those prescriptions will drop out of the PBM system.

Two, PBM compensation models in Medicaid have shifted, due to increased scrutiny by payers, regulators, and politicians.

PBMs do not retain any of the statutorily determined rebates under the Medicaid Drug Rebate Program. Consequently, states compensate PBMs using a combination of administrative fees and retail network spreads, a.k.a., spread pricing. With spread pricing, plan sponsors compensate the PBM by permitting the PBM to retain differences, or spreads, between (a) the amount that a PBM charges to a Medicaid plan, and (b) the amount that the PBM pays to the pharmacy that dispenses the drug to a Medicaid beneficiary.

Surprising new information about PBMs’ spread pricing profits in Managed Medicaid has emerged over the past two years. Below, I reproduce Exhibit 180 from our new report. It shows the results of audits in four states: Kentucky, Maryland, Ohio, and Virginia. PBMs added an average of $6 to $18 per Medicaid prescription above the amounts paid to pharmacies.

[Click to Enlarge]

The scrutiny and disclosure of these spreads have started to change some states’ contracting practices. Many states are moving from spread pricing to pass-through agreements with an administrative fee. Last week, New York became the latest state to carve out pharmacy benefits from Medicaid managed care. It followed such states as Ohio and West Virginia in switching pharmacy reimbursement to Medicaid fee-for-service amounts.

A third negative effect arises from disruption to a PBM’s dispensing profits from the 340B Drug Pricing Program. (You didn’t think I would forget 340B, did you?)

In a series of articles last summer, I documented how the biggest PBM-owned specialty pharmacies participate as contract pharmacies within the 340B program. These specialty pharmacies are able to share in the 340B discounts that covered entities earn. Gross profits can be $1,000 per prescription—far exceeding a pharmacy’s typical profits from dispensing a third-party-paid prescription. See Here’s How PBMs and Specialty Pharmacies Snag Super-Size Profits from the 340B Program.

However, the 340B statute prohibits manufacturers from having to provide a discounted 340B price and a Medicaid drug rebate for the same drug. The prohibition on duplicate discounts applies to traditional Medicaid arrangements as well as Medicaid programs operated by managed care organizations. Consequently, a shift from commercial insurance to Medicaid will reduce the number of prescriptions eligible for the 340B contract pharmacy process.

Note that manufacturers won’t necessarily benefit from this change. That’s because the dollar value of a drug’s gross-to-net reduction will flow to states in the form of a Medicaid rebate, instead of flowing to providers as a 340B discount that can be shared with a PBM’s pharmacy.

WHAT’S NEXT?

This article only describes some of the initial effects of the coming Medicaid expansion. For more, please join me for my upcoming live video webinars.

I’ll share DCI’s latest market data and trends from The 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. Topics will include:
  • How will health insurance markets change
  • What will happen to pharmacy and PBM profits
  • Business implications for prescription demand and the drug channel
  • Impacts on the 340B Drug Pricing Program
  • Whether short-term changes in pharmacy and buy-and-bill markets will persist
  • What’s next for federal and state drug pricing legislation
  • How the pandemic will affect prospects for new industry entrants, including Amazon and venture-capital-backed pharmacies
  • And more!
CLICK HERE to submit questions to me in advance of the events.

Stay safe, everyone!

CORRECTION: An earlier version of this article incorrectly stated that Michigan had carved-out pharmacy from Medicaid managed care. In February 2020, the previously-announced plan to transition pharmacy to fee-for-service was abandoned.

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