The 2018-19 Budget: Analysis of the Governor's 340b Medi-Cal Proposal

The 2018-19 Budget: The Governor’s Medi-Cal Proposal for the 340B Drug Pricing Program MAC TAYLOR LEGISLATIVE ANALYST MARCH 22, 2018 Summary This budget report analyzes the Governor’s 2018-19 budget proposal to eliminate the use of the 340B Drug Pricing Program in Medi-Cal. The federal 340B Program (1992) entitles eligible healthcare providers (mainly hospitals and clinics that serve large numbers of low-income patients) to discounts on outpatient prescription drugs. These discounts result in savings that benefit participating healthcare providers and their healthcare partners. Federal Medicaid law establishes a separate federal Medicaid prescription drug discount program that results in prescription drug savings for Medi-Cal (savings are shared between the state and federal government). Currently, either of the two federal prescription drug discount programs could apply when drugs are dispensed to Medi-Cal enrollees. However, federal law requires that only one of the drug discount programs be used for a given drug dispensed to a Medi-Cal enrollee. The Governor’s proposal requires the use of the federal Medicaid discount program and prohibits the use of the 340B Program for a given drug dispensed to a Medi-Cal enrollee. In support of his proposal, the Governor cites challenges in administering the federal Medicaid discount program in conjunction with the 340B Program (preventing prohibited duplicate discounts after the fact) and asserts that the proposal would result in state General Fund savings. The administration does not currently have, but is working on, an estimate of the savings that would ultimately be generated under its proposal. (These savings would not likely be generated before 2019-20.) We find that the Governor’s proposal merits serious consideration from the Legislature since, among other benefits, it would likely result in state savings that the Legislature could, in turn, use to fund its priorities. We note, however, that these savings would be in place of savings currently enjoyed by eligible healthcare providers. Before making a decision on the Governor’s proposal, we recommend that the Legislature ask the administration to provide the following key information on the Governor’s proposal: (1) the amount of Medi-Cal savings that would be generated and (2) the impact on healthcare providers currently participating in the 340B Program. We provide a preliminary analysis of alternative policy approaches to addressing the challenges associated with the use of the 340B Program in Medi-Cal, highlighting some of the trade-offs associated with each alternative approach. We recommend that the Legislature ask for additional information from the administration on the trade-offs of each alternative approach during upcoming budget hearings. analysis full gutter 2018-19 BUDGET BACKGROUND 340B PROGRAM IS A FEDERAL Nationwide, the 340B Program Is Estimated to Have Saved Covered Entities Around PRESCRIPTION DRUG DISCOUNT $6 Billion in 2015. In 2015 (the most recent year PROGRAM for which the information is available), covered entities are estimated to have saved around The federal 340B Drug Pricing Program (which $6 billion on prescription drugs through the 340B we refer to as the 340B Program), established Program. Net of the 340B discounts, covered in 1992, requires drug manufacturers to provide entities are estimated to have spent over $12 billion discounts on the outpatient prescription drugs they on 340B prescription drugs in 2015. sell to certain eligible healthcare providers, referred to as “covered entities.” Covered Entities Retain a Portion of 340B Savings. 340B savings result from the lower Eligible Healthcare Providers. There are relative cost of 340B prescription drugs compared various criteria that healthcare providers may to non-340B drugs. Ultimately, savings resulting meet in order to be designated as covered entities from the 340B Program are likely shared by multiple that are eligible for the 340B Program. Major participants in the healthcare system rather than healthcare provider types that are generally eligible entirely retained by covered entities themselves. to participate in the program include certain Covered entities retain 340B savings by charging hospitals that serve large numbers of low-income external payers of 340B prescription drugs—such patients (including both the uninsured and Medicaid as health insurers—prices that are higher than the enrollees); certain rural hospitals; community health 340B prices at which they acquired the drugs. The clinics, such as Federally Qualified Health Centers 340B Program does not place restrictions on how (FQHCs), which are not-for-profit outpatient health covered entities may use any retained savings. To facilities that provide general healthcare services; the extent covered entities charge external payers and others. lower prices for prescription drugs than they would 340B Discounted Prescription Drugs Available have if the drugs had been purchased without the to Covered Entities’ Patients Regardless of 340B discounts, then these external payers benefit Payer. Under federal law, covered entities may from the 340B discounts as well. dispense or arrange for the dispensing of 340B prescription drugs to their own patients, regardless MEDICAID PRESCRIPTION DRUG of who ultimately pays for the prescription drugs. As such, the 340B discounts apply regardless of DISCOUNTS (SEPARATE FROM THE whether the covered entity is ultimately reimbursed 340B PROGRAM) for the dispensed prescription drugs by Medicaid, Medicare, commercial health insurance, or the Medi-Cal is the state’s Medicaid program, which patient. provides healthcare coverage to low-income state residents. The Department of Health Care Services 340B Program Provides Significant Discounts (DHCS) administers Medi-Cal. for Covered Entities. The 340B Program generally requires covered entities to receive prescription Medi-Cal Pays Enrollees’ Prescription Drug drug discounts that reduce the prices paid by Costs. Prescription drugs are a covered benefit a covered entity to at least the lower of (1) the under Medi-Cal. Accordingly, Medi-Cal pays for best price offered to most public and private the drugs prescribed and dispensed to Medi-Cal entities or (2) the average manufacturer sales enrollees. prices minus a percentage of between 13 percent Prescription Drug Reimbursement in and 23.1 percent (depending on the type of the Fee-for-Service (FFS) and Managed Care. prescription drug). Medi-Cal pays for enrollees’ prescription drug costs 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET through both of its major delivery systems, FFS rebates in total in 2017-18, over $1.3 billion of and managed care. In FFS, the state reimburses which represents savings to the General Fund. pharmacies directly for each drug dispensed to Around half of these rebates are collected for Medi-Cal enrollees. In managed care, the state drugs paid for through FFS (and a subset of pays managed care plans (MCPs) a predetermined county-operated MCPs), with the remaining half per-member per-month payment that is expected— collected for prescription drugs paid for through on average—to cover each MCP member’s managed care. healthcare costs, including her or his average expected prescription drug costs. About 80 percent INTERACTION BETWEEN of Medi-Cal enrollees are enrolled in managed care. 340B PROGRAM AND MEDICAID We would note that certain prescription drugs, such as antipsychotics, are paid for through the FFS The 340B Program and the Medicaid prescription system even if the Medi-Cal enrollee is enrolled in drug rebate program are separate prescription drug Medi-Cal managed care. discount programs. They interact, however, when Medi-Cal Receives Discounts on Prescription covered entities dispense 340B prescription drugs Drugs. Federal law requires drug manufacturers to to Medi-Cal enrollees. Under current federal and provide discounts on prescription drugs ultimately state law, covered entities may choose whether paid for by Medicaid. Despite being a separate to dispense 340B prescription drugs to their prescription drug discount program from the 340B patients who have Medi-Cal coverage. It is our Program, Medicaid’s prescription drug discounts understanding that, in practice, the dispensing of are calculated through the same statutory formulas 340B prescription drugs to Medi-Cal enrollees is as the 340B prescription drug discounts and, as widespread. We estimate that there are at least such, are likely similar in magnitude. Unlike the 1,500 covered entity sites in California that serve as 340B prescription drug discounts, which occur Medi-Cal providers and dispense 340B prescription on the front end, Medicaid’s prescription drug drugs to Medi-Cal patients. As shown in Figure 1, discounts come in the form of retroactive rebates since the implementation of the ACA, the number from manufacturers for prescription drugs that have of covered entity sites participating in Medi-Cal has already been paid for and dispensed by pharmacies increased dramatically. The interaction between the to Medi-Cal enrollees. 340B Program and Medicaid creates administrative Medicaid Prescription Drug Rebates Recently complexities, which we summarize below. Expanded to Managed Care. Prior to the Patient Protection and Figure 1 Affordable Care Act (ACA), the Number of Covered Entities Serving state only collected prescription Medi-Cal Has Grown Significantly Since 2012 drug rebates within the FFS delivery system (as well as for a 1,600 subset of county-operated MCPs). 1,400 The ACA expanded the state’s 1,200 authority to collect Medicaid prescription drug rebates within 1,000 Medi-Cal managed care. 800 Total General Fund Benefit 600 Resulting From Federal 400 Medicaid Prescription Drug 200 Rebates Is Over $1.3 Billion. DHCS estimates that it will 1992 1997 2002 2007 2012 2017 collect over $4.1 billion in federal Each unit represents a distinct covered entity site that is registered as a Medi-Cal provider. Medicaid prescription drug www.lao.ca.gov 3 analysis full gutter 2018-19 BUDGET Duplicate Discounts Sometimes Occur, but Savings generated by Medicaid prescription drug Are Prohibited Under Federal Law. A duplicate rebates, on the other hand, are fully retained by the discount can occur when a state Medicaid state and federal government. program collects a Medicaid rebate from a drug In the sections that follow, we describe in greater manufacturer on a prescription drug dispensed by detail how the 340B Program and Medicaid interact a covered entity to a Medicaid enrollee. A major within Medi-Cal’s major delivery systems and goal of federal law and regulation related to the pharmacy arrangements. 340B Program is to prevent duplicate discounts from occurring when 340B prescription drugs are Fee-for-Service dispensed to Medicaid enrollees. In this case, the Paying for a 340B Prescription Drug in covered entity has already received an up-front Medi-Cal FFS. As elaborated in the text below, 340B discount on the dispensed prescription drug. Figure 2 illustrates how the 340B Program is A duplicate discount would occur should the state designed to work within Medi-Cal FFS. The collect a Medicaid rebate on that same prescription dollar amounts listed represent hypothetical drug. While not allowed under federal law, such payment amounts. In the simplest Medi-Cal FFS duplicate discounts can occur in situations when arrangement, a covered entity, such as a public a Medicaid program is not aware that a 340B hospital, would purchase a prescription drug at its prescription drug—as opposed to a non-340B 340B price ($10) directly from a drug manufacturer. prescription drug—was dispensed to an enrollee. A Medi-Cal enrollee would then visit the public Without information indicating that a dispensed hospital, be prescribed a drug, and obtain the prescription drug was a 340B drug, the Medicaid prescription drug from the public hospital’s program would seek to collect a rebate on that in-house pharmacy. Following the submission of drug and therefore risk receiving a duplicate a FFS claim for payment by the public hospital discount. To prevent the provision of duplicate to the state, Medi-Cal would then reimburse the discounts, drug manufacturers are challenging covered entity for the prescription drug obtained certain Medicaid prescription drug rebates sought ($10 plus a $1 dispensing fee). The claim submitted by DHCS on the grounds that the requested rebates relate to 340B drugs to which a 340B discount Figure 2 has already been applied. Paying for a 340B Prescription Drug According to the administration, in Medi-Cal Fee-for-Service this is having the effect of adding complexity to, and slowing down, Medi-Cal enrollee the prescription drug rebate obtains prescription drug from covered entity collection process in Medi-Cal. Covered Entity Who Benefits From Purchases drug at Pays discounted 340B discounted 340B price Prescription Drug Discounts price plus a dispensing fee $10 $11 Varies Between the 340B Program and the Medi-Cal Drug Medi-Cal Drug Manufacturer Rebate Program. As previously discussed, covered entities retain at least a portion of the savings generated by the 340B Program Does not pay Medicaid by charging payers of 340B prescription drug rebatea $0 prescription drugs—including a This represents how the process is supposed to work given the prohibition on duplicate discounts. Medi-Cal MCPs—prices that are Note: Non-340B drug price = $13; $3 = 340B discount; $1 = dispensing fee. higher than the 340B prices at Dollar amounts represent hypothetical payment amounts. Direction of arrow represents direction which they acquired the drugs. of potential payment. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET would include an identifier that indicates that the Managed Care dispensed prescription drug was obtained through Paying for a 340B Prescription Drug in the 340B Program. Medi-Cal Managed Care. Paying for 340B Duplicate Discounts Largely Avoided in prescription drugs in Medi-Cal managed care differs Medi-Cal FFS. Because Medi-Cal FFS prescription from FFS in a number of respects. As elaborated in drug claims—at least when dispensed at covered the text below, Figure 3 illustrates one way in which entities’ in-house pharmacies—include a 340B the 340B Program is supposed to work within identifier, information that a 340B drug was Medi-Cal managed care. The dollar amounts listed dispensed is generally effectively communicated to represent hypothetical payment amounts. Under DHCS. DHCS would then exclude the drug from a simplified model of the use of 340B prescription its Medicaid rebate claims list that is sent to the drugs in Medi-Cal managed care, a public hospital drug’s manufacturer, and therefore not collect a that is a covered entity would, as under the FFS rebate. It is our understanding that DHCS largely example above, purchase a prescription drug at its avoids mistakenly attempting to collect duplicate 340B price ($10) directly from a drug manufacturer. discounts in FFS—at least when dispensed at The public hospital would then dispense the 340B covered entities’ in-house pharmacies—since 340B drug to a patient with Medi-Cal coverage from an drugs are readily identified through the FFS claims in-house pharmacy. Then, instead of submitting a process. claim for reimbursement to the state through FFS, 340B Savings Essentially Passed on to the State in FFS. State law requires Medi-Cal to Figure 3 reimburse covered entities for Paying for a 340B Prescription Drug in prescription drugs dispensed to Medi-Cal Managed Care Medi-Cal enrollees through the FFS delivery system at covered entities’ actual acquisition costs Medi-Cal MCP enrollee obtains prescription Purchases drug at plus a professional dispensing drug from covered entity discounted 340B price fee. Since actual acquisition $10 costs for 340B drugs should at Covered Entity least roughly equal the 340B prices paid, covered entities Pays price negotiated should not be retaining savings Drug Manufacturer between MCP and under the 340B Program for covered entity $12.50 prescription drugs dispensed to Medi-Cal enrollees through FFS. MCP Instead, covered entities’ 340B savings are passed onto the Pays per-member per-month payment that state (and shared with the federal accounts for MCP's government) in the form of lower average expected prescription drug costs reimbursement rates for the 340B $15 Medi-Cal Does not pay Medicaid prescription drugs dispensed to prescription drug rebatea $0 Medi-Cal enrollees within the FFS system. a This represents how the process is supposed to work given the prohibition on duplicate discounts. Note: Non-340B drug price = $13; $3 = 340B discount. Dollar amounts represent hypothetical payment amounts. Direction of arrow represents direction of potential payment. MCP = managed care plan. www.lao.ca.gov 5 analysis full gutter 2018-19 BUDGET the covered entity would bill the Medi-Cal MCP in separately from a covered entity but who have a which the patient is enrolled. The Medi-Cal MCP contract with a covered entity to dispense 340B would then pay the covered entity ($12.50) using prescription drugs on the covered entity’s behalf. funds it receives from the state in the form of CVS and Rite Aid, for example, might serve as ongoing per-member per-month payments ($15). contract pharmacies for certain covered entities. Provided the 340B drug is properly identified as Contract pharmacy arrangements occur in both a 340B drug and this information is conveyed to Medi-Cal FFS and managed care. (Our discussion DHCS in a timely manner, Medi-Cal would not of contract pharmacies below focuses on managed retroactively seek a Medicaid rebate on the drug care because it is generally under managed care from its manufacturer. that covered entities and contract pharmacies can Covered Entities May Retain at Least a share in a portion of the 340B savings.) The use Portion of 340B Savings in Managed Care. of contract pharmacies has increased significantly Unlike in Medi-Cal FFS, covered entities may following federal guidance, released in 2010, that receive reimbursement from Medi-Cal MCPs authorized their expanded use. for 340B prescription drugs that is higher than Paying for a 340B Prescription Drug their actual (discounted) cost of acquiring the Dispensed by a Contract Pharmacy in Medi-Cal prescription drugs. This is because state and Managed Care. As elaborated in the text federal rules allow covered entities to bill Medi-Cal below, Figure 4 illustrates how a 340B contract MCPs for the 340B prescription drugs dispensed pharmacy arrangement might work in Medi-Cal to their members at whatever reimbursement rates managed care. The listed dollar amounts represent are agreed to between the particular covered entity hypothetical payment amounts. While covered and MCP. Medi-Cal MCPs, in turn, are funded by entities’ arrangements with contract pharmacies the state through per-member per-month payments vary, an example of how the use of a contract that account for the prescription drug costs of the pharmacy in Medi-Cal managed care can work MCPs’ members. Since (1) MCPs’ costs in paying is as follows. The contract pharmacy purchases for 340B prescription drugs can be higher than a prescription drug from a manufacturer at a covered entities’ costs in purchasing them and negotiated sales price ($13), which generally (2) state payments to MCPs generally reflect MCPs’ would be higher than the 340B price at which that costs, the state may ultimately reimburse covered drug would have been sold to a covered entity. entities for 340B prescription drugs at higher than A Medi-Cal managed care enrollee visits a public their 340B costs. It is our understanding that this hospital that is a covered entity for a medical is commonly the case in practice. This allows appointment and obtains a prescription. The covered entities to retain savings through the use of enrollee then visits the contract pharmacy, which the 340B Program in Medi-Cal managed care and dispenses the prescribed drug. Without identifying increases Medi-Cal costs beyond what they would at the time of the transaction that the Medi-Cal otherwise be. It is our understanding that, under enrollee was a patient of a contracted covered managed care, information identifying that a 340B entity (the public hospital), the contract pharmacy drug was dispensed is not always communicated to would bill the enrollee’s MCP at the customary DHCS, potentially resulting in duplicate discounts. non-340B prescription drug reimbursement rate ($14) agreed to between the pharmacy and the Contract Pharmacies MCP. Later, the contract pharmacy and public The use of “contract pharmacies” in the 340B hospital would review the pharmacy’s records to Program introduces additional complexity into determine whether any prescription drugs were how the 340B Program operates in relation to dispensed to patients of the public hospital. After the Medicaid prescription drug rebate program. it is determined that the Medi-Cal enrollee who Contract pharmacies—a term that is here used obtained the prescription was a patient of the solely in the context of the 340B Program— public hospital, the public hospital and the contract are pharmacies that are owned and operated pharmacy would go through a reconciliation 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET process with the manufacturer that effectively drug. The savings are generated by the difference lowers the purchase price of the dispensed drug between how much the MCP pays the contract to its 340B price ($10). According to DHCS, pharmacy/covered entity for the drug and how information indicating that the dispensed drug was much it ultimately costs the contract pharmacy/ reclassified as a 340B prescription drug is often not covered entity to obtain the 340B drug from the provided to DHCS in a timely manner to allow for manufacturer. The savings are shared between the exclusion of the drug from the Medicaid drug the contract pharmacy and the covered entity in rebate claims list sent to the drug’s manufacturer, order to encourage mutual participation in the raising the possibility of a duplicate discount. contract pharmacy 340B arrangement. It is also Covered Entities, Contract Pharmacies, and possible that the MCP might share in some of Potentially Others Share in the 340B Savings the 340B savings. Insofar as the MCP shares in Under Contract Pharmacy Arrangements. 340B savings, at least a portion of the MCP’s Under the scenario outlined above, the contract share may be passed on to the state in the form of pharmacy and the covered entity would share in the slightly lower Medi-Cal managed care per-member savings resulting from the lower cost of the 340B per-month payments. prescription Figure 4 Paying for a 340B Prescription Drug in Medi-Cal Managed Care Through a Contract Pharmacy Medi-Cal MCP enrollee obtains prescription from covered entity and drug from contract pharmacy Contract Pharmacy Purchases drug at Pays price negotiated non-340B price negotiated between $13 MCP and pharmacy $14 Reconcile price paid to reflect 340B price of $10. MCP 340B savings of $3 are Drug Manufacturer shared between covered entity and contract pharmacy Covered Entity per-m P o a n y th s p p a e y r- m m e e n m t b th e a r t D pr o e e sc s r i n p o ti t o n p a d y r u M g e r d e i b c a a t id ea accounts for MCP's $0 average expected Medi-Cal prescription drug costs $15 a This represents how the process is supposed to work given the prohibition on duplicate discounts. Note: Non-340B drug price = $13; $3 = 340B discount. Dollar amounts represent hypothetical payment amounts. Direction of arrow represents direction of potential payment. MCP = managed care plan. www.lao.ca.gov 7 analysis full gutter 2018-19 BUDGET GOVERNOR’S PROPOSAL Governor’s Budget Proposes to Eliminate sought by DHCS. It is our understanding the Use of 340B in Medi-Cal. As a part of the that the administrative complexity relates Governor’s 2018-19 budget, the administration has to identifying 340B prescription drugs in a proposed changes in statute that would, conditional comprehensive and timely manner, especially on federal approval, prohibit the dispensing of 340B in managed care and under contract prescription drugs to Medi-Cal enrollees. Covered pharmacy arrangements. entities would remain free to utilize the 340B • Prevent Duplicate Discounts. According Program for their non-Medi-Cal patients. In other to the administration, preventing duplicate words, of the two federal prescription drug discount discounts is critical for the purpose of programs that currently can apply when drugs are Medi-Cal program integrity (including dispensed to Medi-Cal enrollees—only one of which compliance with federal law). The can be used—the Governor’s proposal requires the administration has noted that in recent use of the Medicaid rebate program and prohibits years there has been increased scrutiny the use of the 340B Program. at the federal government of the problem Federal approval of the Governor’s proposal is of duplicate discounts, specifically, and required since Medi-Cal is overseen by both the the use of the 340B Program in Medicaid, state and federal governments. In the event that broadly. Prohibiting the dispensing of 340B the federal government declines to approve the prescription drugs in Medi-Cal would prevent full elimination of the use of the 340B Program duplicate discounts from occurring since the in Medi-Cal, the proposed changes in statute only discounts collected on drugs dispensed would authorize DHCS to alternatively seek federal to Medi-Cal beneficiaries would be by the approval to (1) prohibit or limit the use of contract state in the form of Medicaid drug rebates. pharmacies in Medi-Cal and/or (2) prohibit or limit • Generate State Savings. Eliminating the certain types of covered entities from dispensing use of the 340B Program has the potential to certain or all 340B prescription drugs to Medi-Cal generate state savings since the state would enrollees. (The proposal does not specify which be able to collect Medicaid drug rebates on types of covered entities could be prohibited or prescription drugs that otherwise would have limited from using the 340B Program in Medi-Cal been dispensed under the 340B Program or which prescription drugs could be targeted for and therefore not eligible for a Medicaid exclusion.) Changes to the allowable use of the drug rebate. These savings would largely be 340B Program under the Governor’s proposal generated under Medi-Cal managed care would take place following federal approval but no since in FFS covered entities’ 340B savings sooner than January 1, 2019. Below, we summarize should largely already be passed on to the three of the administration’s primary rationales for state in the form of lower reimbursement its proposal. costs. The administration has not released an estimate of savings under its proposal but • Reduce the Administrative Complexity of has indicated that it is currently working on Utilizing the 340B Program in Medi-Cal. one. Ultimately, state savings resulting from According to DHCS, utilizing the 340B the Governor’s proposal would likely not be Program in Medi-Cal is administratively available until after 2018-19. complex given the federal requirement that the department have policies and procedures in place to avoid the collection of duplicate discounts. Identification of 340B prescription drugs is necessary so that these drugs can be excluded from the Medicaid drug rebates 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET LAO ASSESSMENT Recognize the Administrative Challenges Potential Impacts on Covered Entities and Caused by the 340B Program. We recognize that Their Partners. Under the Governor’s proposal, the complexity of utilizing the 340B Program in covered entities and their partners—such as Medi-Cal has grown in recent years, largely due to contract pharmacies—would no longer be able the ACA’s expansion of Medicaid prescription drug to benefit from savings under the 340B Program rebates to managed care, as well as due to the for prescription drugs paid for through Medi-Cal. increasing use of contract pharmacy arrangements. According to certain covered entities’ association These relatively recent developments have made groups, the elimination of the use of the 340B the task of appropriately avoiding duplicate Program in Medi-Cal could result in some covered discounts more challenging for DHCS. entities ceasing to participate in the 340B Program Proposal Would Likely Bring the Benefit of altogether if the program ceases to be financially State Medi-Cal Savings . . . We agree with the worthwhile. For example, some covered entities administration’s assessment that the elimination that serve high proportions of Medi-Cal enrollees of the use of the 340B Program in Medi-Cal would might no longer find it worthwhile to continue to likely ultimately result in overall state savings. operate under the 340B Program given the reduced These savings would largely come in the form of patient population for which 340B discounts would higher Medi-Cal managed care prescription drug be available. In such cases, for example, the rebates. However, these savings would be partially administrative burden of complying with the 340B offset by higher Medi-Cal costs elsewhere, such Program might outweigh the financial benefit to the as potentially higher prescription drug costs in covered entity. We would note that certain covered managed care since no 340B savings would be entities, such as FQHCs, are reimbursed by passed along to MCPs. The state would ultimately Medi-Cal at the cost of providing care to Medi-Cal have to compensate MCPs for their higher enrollees. Therefore, FQHCs’ loss of savings prescription drug costs. We would note that total through eliminating the use of the 340B Program in Medicaid drug rebate amounts are shared between Medi-Cal could, in certain situations, be made up the federal and state governments, with the state for through other, higher Medi-Cal reimbursements currently receiving about one-third of the total that compensate FQHCs at their higher non-340B rebate revenue. prescription drug costs. . . . While Eliminating a Portion of Covered Governor’s Proposal Merits Serious Entities’ 340B Savings. State savings generated Consideration. We find that the Governor’s by eliminating the use of the 340B Program proposed elimination of the use of the 340B in Medi-Cal would be in place of the 340B Program in Medi-Cal deserves serious savings currently enjoyed by covered entities for consideration by the Legislature since it would prescription drugs dispensed to Medi-Cal enrollees. (1) likely ultimately result in state savings, Covered entities would still be able to benefit from (2) eliminate the administrative challenges 340B savings for the 340B prescription drugs they associated with overseeing the use of the 340B dispense to non-Medi-Cal enrollees. While it is Program in Medi-Cal, and (3) prevent duplicate highly uncertain, it is our understanding that total discounts from occurring in Medi-Cal and state and federal Medi-Cal savings resulting from therefore ensure compliance with federal rules. the proposal might be very roughly comparable in The potential savings generated by the Governor’s magnitude with the 340B savings currently enjoyed proposal would increase the amount of General by covered entities for drugs dispensed to Medi-Cal Fund resources available for appropriation by enrollees. However, the state would likely only the Legislature. Since the associated savings receive about one-third of these savings since the would benefit the state General Fund rather than remaining portion would have to be shared with the covered entities, the availability of these greater federal government. resources would give the Legislature additional www.lao.ca.gov 9 analysis full gutter 2018-19 BUDGET flexibility to pursue its priorities and maximize Legislature request for DHCS to collect this legislative oversight over how savings resulting from information from covered entities operating in prescription drug discounts are targeted. While the state. the state General Fund savings are likely less than Analysis of Alternative Policy Approaches. the reduction in 340B savings for covered entities The Governor’s proposal to prohibit the dispensing since Medicaid drug rebates have to be shared with of 340B prescription drugs to Medi-Cal enrollees the federal government, spending the additional comes with advantages to the state—such as savings on Medi-Cal or another state program in generating state savings and likely simplifying the which the federal government shares in the cost administration of the Medi-Cal prescription drug would increase the total benefit to the state beyond benefit—as well as trade-offs—such as reducing what it would otherwise be. Finally, the Legislature the fiscal benefit covered entities’ receive through could choose to allocate the additional savings the 340B Program. Alternative policy approaches to covered entities to, for example, attempt to that would be designed to ensure compliance with hold them harmless for the change while at the the federal rules on duplicate discounts and protect same time providing input into how this allocated Medi-Cal program integrity exist, but these would funding is spent by covered entities. (As previously feature different trade-offs when compared to the highlighted, there are no restrictions under the Governor’s approach. Below, we offer a preliminary 340B Program on how covered entities may use analysis of several alternative policy approaches savings resulting from 340B prescription drug to address the challenges associated with the use discounts.) of the 340B Program in Medi-Cal. We recommend Before Reaching a Decision on the that the Legislature request additional information Governor’s Proposal, the Legislature Should from the administration on the trade-offs associated Ask for Additional Key Information From DHCS. with alternative policy approaches. Such alternative Certain key pieces of information that could inform policy approaches include, but are not limited to: the Legislature’s decision on the Governor’s 340B • Prohibit or Limit the Dispensing of 340B proposal have not yet been made available to the Drugs to Medi-Cal Enrollees at Contract Legislature. We recommend that the Legislature Pharmacies. As proposed under the request that DHCS gather the following key pieces Governor’s proposal in case the federal of information for submittal to the Legislature government rejects the full elimination of before making a decision on the Governor’s 340B the use of the 340B Program in Medi-Cal, proposal: an alternative policy approach would be • Medi-Cal Savings Estimate. The to prohibit or limit the dispensing of 340B administration has not released an estimate prescription drugs to Medi-Cal enrollees at of the amount of state savings its 340B contract pharmacies. (These pharmacies proposal would generate for the Medi-Cal would continue to be allowed to dispense program if enacted. This information is critical prescription drugs to Medi-Cal enrollees, just for understanding the state fiscal impact of not under the 340B Program.) A potential eliminating the use of the 340B Program in benefit of this approach is that it would target Medi-Cal. an area of the 340B Program in Medi-Cal • Fiscal Impact of Proposal on Covered that is challenging to oversee from a state Entities. The impact of the Governor’s perspective. It would likely generate some proposal on covered entities’ 340B savings state savings, though the savings would be and the overall benefit they receive from the less than under the Governor’s proposed full program is currently unknown. Because the elimination of the use of the 340B Program information needed to develop an estimate of in Medi-Cal. Covered entities would still be this fiscal impact is likely not readily available able to retain some savings through the 340B to the administration, we recommend that the prescription drugs dispensed to Medi-Cal enrollees—though the amount of savings 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET would likely be less than under current state likely result in some state savings, the amount policy. Contract pharmacies, on the other of savings would likely be less than under the hand, would no longer be able to benefit from Governor’s proposed full elimination of the savings under the 340B Program. All in all, use of the 340B Program in Medi-Cal. All in this approach could help to ameliorate the all, this approach could, depending on how it problem of duplicate discounts. was ultimately implemented by DHCS, help to • Prohibit or Limit Certain Covered Entities address the problem of duplicate discounts. From Dispensing Certain or All 340B • Pay for 340B Prescription Drugs at Cost Prescription Drugs to Medi-Cal Enrollees. in Managed Care. Requiring MCPs to As proposed under the Governor’s proposal pay covered entities for 340B prescription in case the federal government rejects the full drugs at covered entities’ actual acquisition elimination of the use of the 340B Program costs plus a professional dispensing fee, as in Medi-Cal, an alternative policy approach currently required in Medi-Cal FFS, would would be to prohibit or limit certain types be yet another alternative policy approach. of covered entities from dispensing certain A potential benefit of this approach is that it or all 340B prescription drugs to Medi-Cal would allow the state (rather than covered enrollees. The Governor’s proposal does not entities and their partners) to benefit from specify which types of covered entities could the savings generated by the 340B Program be prohibited or limited from using the 340B within the Medi-Cal managed care delivery Program in Medi-Cal (or which prescription system and harmonize the reimbursement drugs could be targeted for exclusion). levels that the state pays for 340B drugs Potential policies the administration could across FFS and managed care. State pursue under this approach include, for savings generated under this approach could example, prohibiting the use of 340B potentially be comparable to those generated prescription drugs in Medi-Cal managed care. under the Governor’s proposed full elimination Alternatively, the administration could prohibit of the use of the 340B Program in Medi-Cal. most covered entities from dispensing 340B However, given the need under this approach prescription drugs to Medi-Cal enrollees to still make efforts to prevent duplicate but exempt certain covered entities that discounts, this approach would likely be are needed to ensure access to care from relatively more administratively burdensome this prohibition. A potential benefit of this than the Governor’s proposal and could approach is that DHCS could specifically require additional state resources. target those covered entities or prescription The Implications of the Status Quo. Finally, drugs for which the interaction between we note that the Legislature could elect to maintain the 340B Program and the Medicaid rebate existing state policy related to the use of the 340B program proves most administratively Program in Medi-Cal. This approach would not complex and challenging. However, short generate state savings as under the Governor’s of the full elimination of the use of the proposal or certain alternative approaches we 340B Program in Medi-Cal, some degree of discuss above and instead allow covered entities administrative complexity as related to the to continue to retain savings through the use of Medi-Cal prescription drug benefit would the 340B Program in Medi-Cal. Taking no action remain. In addition, the Governor’s alternative could place strain on DHCS given the challenges approach would delegate to the administration under existing state policy of preventing duplicate significant authority to craft state policy discounts, ensuring program integrity in Medi-Cal, concerning the use of the 340B Program in and obtaining the maximum amount of potential Medi-Cal, and thereby potentially serve to limit state savings available through the federal Medicaid the Legislature’s role in determining the state’s drug rebate program. policy approach. While this approach would www.lao.ca.gov 11 analysis full gutter 2018-19 BUDGET LAO PUBLICATIONS This report was prepared by Ben Johnson and reviewed by Mark C. Newton. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 12 LEGISLATIVE ANALYST’S OFFICE