The 2019-20 Budget: Analysis of the Carve Out of Medi-Cal Pharmacy Services From Managed Care

The 2019-20 Budget: Analysis of the Carve Out of Medi-Cal Pharmacy Services From Managed Care GABRIEL PETEK LEGISLATIVE ANALYST APRIL 5, 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Executive Summary Governor’s Executive Order on State Prescription Drug Spending. In early January 2019, Governor Newsom released an executive order to change and study how the state pays for prescription drugs, with the goal of reducing the state’s prescription drug spending. The executive order features two distinct initiatives, both of which aim to leverage the purchasing power of California to obtain better prices on prescription drugs. This report analyzes one of the two initiatives included in the executive order: to transition—by January 2021—the pharmacy services benefit in Medi-Cal, the state’s largest low-income health care program, from managed care to entirely a fee-for-service (FFS) benefit directly paid for and administered by the state. (Transitioning a Medi-Cal service from managed care to FFS for managed care enrollees is referred to as “carving out” a service.) Carve Out of the Pharmacy Services Benefit Likely to Result in Net Savings to the State. We find that the carve out of the Medi-Cal pharmacy services benefit from managed care is likely to generate net savings for the state. While the amount of net state savings is highly uncertain at this time, we believe it could potentially be in the hundreds of millions of dollars annually, as attested by the administration. Primarily, these state savings are likely to arise as a result of the state paying for all drugs dispensed by pharmacies to Medi-Cal beneficiaries at pharmacies’ cost of purchasing the drugs, as is done in Medi-Cal FFS. In Medi-Cal managed care, in contrast, drugs are ultimately paid for at prices negotiated between pharmacies, drug manufacturers, and managed care plans. These negotiated prices—particularly for drugs that receive steep, upfront discounts under a federal drug discount program known as the 340B program—are often higher than what the state would otherwise pay under FFS, raising the cost of the Medi-Cal pharmacy services benefit. Carve Out Would Significantly Impact Major Medi-Cal Stakeholders. The carve out would have major and disparate impacts on key Medi-Cal stakeholders, including enrollees, pharmacies, health care providers, and Medi-Cal managed care plans. For example, Medi-Cal enrollees might benefit under the carve out through access to a larger network of pharmacies where they may obtain their drugs and also enjoy a more standardized benefit where which drugs are available no longer depends upon which managed care plans they are enrolled in. On the other hand, going forward, managed care plans would receive significantly less funding (including a profit component) relative to today, largely to reflect the elimination of their responsibility to pay for their members’ pharmacy services. In addition, health care providers, principally hospitals and community clinics that are eligible to participate in the 340B drug discount program, would experience a significant loss of earnings currently generated by the margin between what they pay for pharmacy-dispensed drugs and what they charge Medi-Cal managed care plans for those drugs. (These 340B-related earnings, instead, would convert into savings in Medi-Cal in the form of lower prescription drugs expenditures.) Opportunity and Role for the Legislature to Determine Whether and How the Carve Out Proceeds. The administration attests that it has the authority under current state law to effectuate the transition of Medi-Cal pharmacy services coverage from a managed care to a FFS benefit. Our initial review of state law supports the administration’s view. Nevertheless, the www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET Legislature has the authority and an important role to provide input into how Medi-Cal pharmacy services are delivered going forward, as we note that the Governor’s action not only is likely to produce net savings, but also involves costs and policy trade-offs. Given that the Department of Health Care Services (which administers Medi-Cal) will need new state resources to implement the carve out, the Legislature can provide input into whether and how the carve out proceeds through the approval or rejection in the budget process of any associated future request by the administration for state resources. Recommend That the Legislature Condition Approval of Future State Resource Requests to Implement the Carve Out on DHCS Providing Key Information. Many details of (1) how the carve out will be implemented and (2) how the administration believes it will affect Medi-Cal spending and stakeholders have yet to be released. Given the important details that are lacking, we recommend that the Legislature withhold approval of future new state operations resources to implement the carve out until the administration provides key information that adequately answers major outstanding questions. Such information includes, for example: • A robust fiscal estimate of the carve out, including detail on the estimate’s major underlying assumptions and the additional state administrative resources that would be needed. • A plan to upgrade the state’s information technology systems to facilitate the real-time transfer of prescription drug utilization data to managed care plans. • Prospective guidance for Medi-Cal managed care plans’ continued role and responsibilities in coordinating and managing their members’ prescription drug utilization. • What continuity of care protections for managed care enrollees are appropriate to ease the transition to a new statewide Medi-Cal preferred drug list. • An analysis of the benefits and trade-offs of feasible alternatives to the Governor’s plan to reduce prescription drug spending in Medi-Cal, and how these compare to those of the carve out. We Offer a Brief Description and Analysis of Select Alternatives to the Governor’s Action to Carve Out Medi-Cal Pharmacy Services From Managed Care. The Governor’s order to carve out the Medi-Cal pharmacy services benefit from managed care represents one approach to achieving savings on prescription drug spending in Medi-Cal. There are a variety of alternative approaches, some of which have recently been considered but ultimately not implemented in California. In addition to analyzing the Governor’s approach, we briefly introduce and analyze the trade-offs associated with four alternatives to the Governor’s order. The approaches we analyze are (1) the creation of a universal preferred drug list spanning both FFS and managed care in Medi-Cal, (2) transferring savings from the 340B drug discount program from providers to the state, (3) formalizing the use of cost-effectiveness analysis in providing preference to certain drugs over others in Medi-Cal, and (4) adopting a Medi-Cal prescription drug spending cap similar to what was recently done in New York State. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET INTRODUCTION Rising Prices Have Led to Significant agencies with significant spending on Public Concern. Nationwide, public and private prescription drugs are tasked with evaluating prescription drug spending increased from existing prescription drug procurement $259 billion in 2012 to $333 billion in 2017, strategies and outcomes, and developing a significantly faster rate of annual growth new strategies to reduce prescription drug (5.2 percent) than general inflation (1.3 percent) costs going forward. In addition, the second and somewhat faster than the growth in health care initiative envisions private entities that pay for spending overall (4.6 percent) over this time period. prescription drugs, such as commercial health Much of the growth in spending is attributed insurers and hospitals, joining together with to rising prescription drug prices, as opposed the state in order to leverage greater collective to greater utilization. In recent years, state and purchasing power to lower prescription drug national policymakers have proposed and enacted costs on behalf of all the participating public a number of policy changes to address rising and private entities. prescription drug prices. This Report Analyzes the Medi-Cal Initiative. Governor’s Executive Order on State In this report, we focus on the Medi-Cal component Prescription Drug Spending. In early January of the Governor’s executive order. We note 2019, Governor Newsom released an executive that the initiative to expand existing state bulk order to both study and change how the state pays purchasing efforts appears to be in an early stage for prescription drugs, with the goal of reducing the of development, with the administration’s current state’s prescription drug spending. The executive activities being focused on surveying existing state order can be separated into two distinct initiatives, drug procurement practices and their associated both of which aim to leverage the purchasing power outcomes. Accordingly, the administration has of California to obtain better prices on prescription yet to share what specific strategies to expand drugs. upon existing bulk purchasing efforts are under • Transition Medi-Cal Pharmacy Services consideration other than the broad concept of Entirely Into a Fee-for-Service (FFS) encouraging participation by private entities in the Benefit. The first initiative is to transition state’s negotiations. A meaningful LAO assessment the pharmacy services benefit in Medi-Cal, of the merits and drawbacks of the second initiative the state’s largest low-income health care would require detail on the specific strategies being program, to entirely a fee-for-service (FFS) considered and/or pursued by the administration. In benefit. As such, most Medi-Cal enrollees— contrast, the strategy behind and potential impact who are enrolled in managed care—would of transitioning Medi-Cal’s pharmacy services now have this benefit directly administered by benefit from managed care to FFS are relatively the state through FFS as opposed to by their clearer. managed care plan. The report is laid out as follows. We first provide • Expand the State’s Bulk Drug Purchasing background on Medi-Cal coverage of prescription Program. The second initiative would drugs and associated spending. We then introduce expand the state’s existing bulk purchasing the Governor’s action to transition Medi-Cal program for prescription drugs. Currently, the pharmacy services entirely to FFS. We assess the Department of General Services negotiates Governor’s action and offer several alternative drug prices on behalf of multiple state approaches to the Governor’s action to reduce agencies and programs, such as the California state prescription drug spending, and close with Department of Corrections and Rehabilitation, our recommendations. the Department of State Hospitals, and others. Under this second initiative, state www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET BACKGROUND Brand-Name Versus Generic Prescription individual payment from DHCS for each medical Drugs. A “brand-name” drug is a drug that is sold service delivered to a beneficiary. In managed under a trademarked name. Brand-name drugs care, DHCS contracts with managed care plans are often “innovator” prescription drugs, which to provide health care coverage for Medi-Cal represent the first instance a particular chemical beneficiaries. Managed care plans are public or combination is developed and sold. For a limited private health insurance plans that arrange and pay period of time—in practice, usually for between for the health care of their members. 12 and 16 years—these innovator drugs enjoy Managed Care Has Grown to Become the patent protection that prohibits nonowners of the State’s Predominant Delivery System. As patent from manufacturing and selling the drug shown in Figure 1, most Medi-Cal beneficiaries without the owner’s consent. As such, brand-name (82 percent) are now enrolled in managed care. drugs are often “single-source” drugs, meaning Over time, Medi-Cal spending has also shifted from that the patent owner has no competitors offering FFS to managed care. an identical drug for sale within the drug market. Medi-Cal Covers Pharmacy Services. A generic drug is a non-brand-name drug that is Medi-Cal benefits are wide-ranging, covering, for made with the same chemical combination as a example, hospital stays, physician services, and currently or formerly available brand-name drug care in nursing homes. The federal government that has had its patent expire. Typically, generic requires state Medicaid programs to cover certain drugs are “multiple-source” drugs where multiple services, including the three listed above. Other manufacturers compete to produce and sell drugs services are generally considered optional for state made of identical chemical combinations. In Medicaid programs to cover, such as prescription some cases, the original brand-name drug is no drugs, dental services, and personal care. Medi-Cal longer sold and only generic drugs are available. covers prescription drugs, including those delivered In other cases, both a brand-name drug and in a hospital setting, by a physician, or obtained generic-equivalent drugs will be available. by a Medi-Cal enrollee from a pharmacy, such as Because there is limited or no competition, CVS. If a state opts to cover prescription drugs single-source, brand-name drugs are on average (which all states do), federal rules effectively require much more expensive than generic drugs. Medi-Cal to cover nearly all prescription drugs that According to the Congressional Budget Office, in are available for sale in the United States (though the United States, brand name drugs on average coverage of a specific prescription drug for a given are four times as expensive as generic drugs. enrollee is dependent on the drug being considered Among multiple-source drugs, brand-name drugs medically necessary to treat a diagnosed condition). tend to be more expensive than their generic In this report, we will focus on prescription drugs equivalents. obtained from pharmacies, as this constitutes what Medi-Cal Is the State’s Medicaid is referred to as Medi-Cal’s “pharmacy services Program. Medi-Cal is administered by the benefit” (the subject of the Governor’s executive Department of Health Care Services (DHCS) and order). Hospital and physician-administered drugs, provides health care coverage to over 13 million on the other hand, are generally available through of the state’s low-income residents. Coverage is Medi-Cal’s coverage of hospital and physician cost-free for most Medi-Cal enrollees. Instead, services and are not directly affected by the Medi-Cal costs are generally shared between Governor’s executive order. (These are drugs that the federal and state governments. There are are administered within a hospital or physician two main Medi-Cal systems for the delivery of office setting, as opposed to being drugs that are medical services: FFS and managed care. In the prescribed by a physician in such a setting and FFS system, a health care provider receives an then subsequently picked up by the patient at a 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Figure 1 Managed Care Has Grown to Become Medi-Cal’s Predominant Delivery System Caseload: Managed Care Versus Fee-for-Service (In Millions) 12 Managed Care Fee-for-Service 10 8 6 4 2 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Expenditures: Managed Care Versus Fee-for-Service Total Funds (In Billions) $60 Managed Care Fee-for-Service 50 40 30 20 10 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET pharmacy.) As is the case for Medi-Cal benefits more cost-effective than their alternatives. Since, broadly, Medi-Cal pharmacy services are cost-free under federal law, Medi-Cal must cover almost all for the vast majority of beneficiaries. prescription drugs, the use of a preferred drug list Pharmacy Services Spending Reflects About is DHCS’s primary means for guiding utilization of 8 Percent of Overall Medi-Cal Spending. At prescription drugs toward cost-effective options, around $8 billion in 2018-19, pharmacy services thereby reducing Medi-Cal prescription drug costs spending reflects about 8 percent of overall below what they otherwise would be. Pursuant Medi-Cal spending from all fund sources. Around to state law, DHCS must include at least one 70 percent of pharmacy services spending occurs prescription drug within each therapeutic class on in Medi-Cal’s managed care delivery system, with Medi-Cal’s preferred drug list. (A therapeutic class the remaining 30 percent occurring in FFS. of drugs is a set of prescription drugs that are used to treat the same or a similar medical condition. Examples of therapeutic classes of drugs include HOW PHARMACY SERVICES ARE antibiotics, antidepressants, and antivirals. ) PAID FOR IN MEDI-CAL Managed Care This section provides background on how Medi-Cal pays for pharmacy services in FFS and Managed Care Plans Arrange and Pay for managed care. the Health Care of Their Members. Medi-Cal managed care is a delegated service delivery Fee-for-Service model whereby the state contracts with about 30 public or private managed care plans—such State Directly Pays Pharmacies for as the Kaiser Foundation Health Plan—to arrange Prescription Drugs Obtained in FFS. In FFS, for covered Medi-Cal services that the state would DHCS directly reimburses pharmacies for otherwise arrange and pay for directly through prescription drugs dispensed to Medi-Cal enrollees. Medi-Cal FFS or another delivery system, such DHCS reimburses pharmacies at their actual cost as county-administered personal care services. of acquiring a given prescription drug, plus a Medi-Cal managed care plans’ responsibilities dispensing fee that accounts for the pharmacies’ are set in state law, state regulations, and in their administrative costs in dispensing the drug. contracts with DHCS. While the cost for the prescription drug will vary from drug to drug, the dispensing fee paid by Medi-Cal Managed Care Plans Funded on a Medi-Cal is fixed at either $10 or $13 per billing. “Capitated” Basis. Medi-Cal managed care plans The network of pharmacies where beneficiaries are paid on a capitated, or per member, basis in may obtain drugs paid for through Medi-Cal FFS return for arranging their members’ health care extends to the vast majority of all pharmacies in the services. Managed care plan capitated payments state. (Figure 2 illustrates how reimbursement for are predetermined amounts of funding per member prescription drugs at pharmacies works in Medi-Cal per month, regardless of the cost of services FFS versus Medi-Cal managed care, which is actually utilized by the member. With a variety of discussed later.) adjustments, the fixed per member per month amounts are set to equal each Medi-Cal managed Preferred Drug List Used to Promote Efficacy care plan’s average costs of providing covered and Reduce Costs. In FFS, DHCS utilizes a Medi-Cal services to each of their members. preferred drug list (also known as a “formulary”), which is a list of prescription drugs that may be “Carved-In” Versus “Carved-Out” Medi-Cal dispensed through Medi-Cal FFS without the Benefits. Medi-Cal managed care plans are pharmacy having to seek prior authorization from not responsible for arranging and paying for all DHCS. By placing an administrative burden on Medi-Cal benefits on behalf of their members. pharmacies for non-preferred drugs, selective prior Medi-Cal benefits that are not covered by Medi-Cal authorization requirements help steer utilization managed care plans are known as carved-out toward drugs that DHCS has deemed to be benefits and are instead available to all Medi-Cal 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET enrollees through FFS or an alternative delivery prescription drugs utilized by their members, system. An example of a carved-out benefit is including drugs obtained at pharmacies. Funding personal care services, which is delivered by for the pharmacy services benefit under Medi-Cal counties under the In-Home Supportive Services managed care is provided through the capitated Program. Benefits that managed care plans are payments made to plans. A portion of these responsible for are referred to as carved-in benefits. capitated payments is intended to cover the costs Rather than being set in state law or regulation, of the prescription drugs dispensed by pharmacies DHCS’s contracts with Medi-Cal managed care and utilized by managed care plan members, as plans generally establish which benefits the plans well as plans’ costs in administering the benefit. are responsible for covering. . . . However, Certain Prescription Drugs Are Medi-Cal Pharmacy Services Are Currently a Currently Carved Out of Managed Care and Paid Carved-In Managed Care Benefit . . . Medi-Cal for Through FFS. Although Medi-Cal managed managed care plans are currently generally care plans are currently responsible for covering responsible for providing and paying for the most prescription drugs, certain therapeutic classes Figure 2 Paying for Prescription Drugs in Medi-Cal: FFS Versus Managed Carea Total Funds (In Billions) FFS Managed Care $45 Managed care $50 Medi-Cal pays Pharmacy $40 Pharmacy plan pays pharmacy Pharmacy $40 Pharmacy pharmacy at pharmacy's purchases drug at negotiated price previously purchases acquisition cost ($40) for from manufacturer ($43) for the drug drug from manufacturer the drug plus a dispensing 1 2 plus a dispensing 2 3 fee ($10) fee ($2) Drug Managed Drug Medi-Cal 3 4 Manufacturer Care Plan Manufacturer $1 Manufacturer $10 Manufacturer pays Medi-Cal pays Managed Care a federal rebate ($9) and state Plan a rebate 5 supplemental rebate ($1) $49 Medi-Cal pays 1 $9 Manufacturer pays managed care plans' Medi-Cal a federal rebate expected prescription Medi-Cal drug costs ($44) and associated administrative costs and profit ($5) Net Earnings/Costs Under Hypothetical Reimbursement Net Earnings/Costs Under Hypothetical Reimbursement Model Above Model Above Cost Revenue Net Earnings/Cost Cost Revenue Net Earnings/Cost Pharmacy $40 $50 $10 Pharmacy $40 $45 $5 Manufacturerb 10 40 30 Managed 45 50 5 Care Plan Medi-Cal 50 10 -40 Manufacturerb 10 40 30 Medi-Cal 49 9 -40 a In the special case of drugs discounted under the 340B program, the state does not receive a federal rebate. In managed care, this can raise the net cost of the these drugs above what they otherwise would be. b In this simplified model, only the cost of paying rebates is included for manufacturers. Thus, the manufacturer's costs exclude drug development, marketing, and other associated costs. Note: Dollar amounts represent hypothetical payment amounts. Direction of arrow represents direction of payment. FFS = fee-for-service. www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET of drugs—primarily, expensive classes of drugs, • Establish Pharmacy Networks Where such as those for hemophilia and HIV—are carved Members Must Obtain Prescription Drugs. out of managed care and instead paid for directly It is our understanding that Medi-Cal managed by the state through FFS. care plans sometimes limit their networks to Medi-Cal Managed Care Plans Have Flexibility certain pharmacies within a geographic area in in How They Design Their Pharmacy Services an effort to achieve lower prices. This helps to Benefit. As with their other covered benefits, lower managed care plans’—and, in turn, the Medi-Cal managed care plans have flexibility in how state’s—prescription drug costs. they design and administer the Medi-Cal pharmacy Figure 2 compares how drugs are paid for in services benefit. For example, Medi-Cal managed Medi-Cal in FFS and managed care, taking into care plans have the flexibility to: account certain discounts Medi-Cal receives. We • Contract With Pharmacy Benefit Managers describe these discounts in the next section of the to Administer Functions of the Medi-Cal report. Pharmacy Services Benefit. Often, managed care plans contract with a type of third-party MEDI-CAL DISCOUNTS ON administrator—known as pharmacy benefit PRESCRIPTION DRUGS managers—to help administer certain facets of the Medi-Cal pharmacy services benefit Federal Law Directs Drug Manufacturers to such as, for example, claims processing. For Provide Best Prices to Medicaid Programs. plans that use pharmacy benefit managers, For a drug to be covered by Medicaid, federal the pharmacy benefit manager may carry out law requires its manufacturer to make it available some or all of the functions described in the to Medicaid programs for at least the best price bullets below on behalf of the plan. paid by almost any other public or private payer. • Establish Their Own Preferred Drug Federally mandated drug discounts come in the Lists. Medi-Cal managed care plans may form of rebates from drug manufacturers to state establish their own preferred drug lists. As a Medicaid programs. Thus, after a drug is dispensed consequence, the drugs available to Medi-Cal to a Medicaid beneficiary, the state Medicaid beneficiaries without prior authorization program will bill its manufacturer for a rebate can vary from plan to plan. Given financial payment that ultimately lowers the final, or net, incentives such as lowering costs, managed price of that drug. For the remainder of this report, care plans’ preferred drug lists heavily steer we refer to these federally required Medicaid drug utilization toward generic drugs. As shown discounts as “federal rebates.” in Figure 3, generic drugs are more heavily Since 2014, the State Has Collected Federal utilized in Medi-Cal managed care compared Rebates on Prescription Drugs Paid for to FFS. Through Managed Care. The Patient Protection • Negotiate Prices. Medi-Cal managed care and Affordable Care Act (ACA) made a number plans negotiate with pharmacies on the of changes to federal law governing Medicaid’s prices they pay for (1) the drug and (2) the federal rebates. Prior to the ACA, drugs paid for by dispensing costs of drugs obtained by members. This Figure 3 contrasts with FFS, where Brand Name Versus Generic Prescription Drug each drug’s price is based on Utilization in Medi-Cal pharmacies’ costs of acquiring Average Percent of Utilization in Fiscal Years 2015-16 Through 2017-18 the drug and a dispensing fee schedule established in state Brand Name Drugs Generic Drugs regulation. Managed Care 6% 94% Fee-for-Service 13 87 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Medicaid managed care plans were ineligible for estimated to reduce total net Medi-Cal spending on federal rebates, and therefore were not necessarily prescription drugs from $12.8 billion to $8.4 billion. reimbursed by state Medicaid programs at the Federal rebates for drugs paid for through both best price. The ACA expanded states’ authority to Medi-Cal FFS and managed care account for collect federal rebates for drugs paid for through 95 percent of rebate revenue, with supplemental Medicaid managed care. Since 2014, pursuant to rebates accounting for the remaining 5 percent of the ACA, Medi-Cal has collected federal rebates rebate revenue. Federal rebate revenue in Medi-Cal from manufacturers for drugs paid for through is roughly evenly split between drugs dispensed Medi-Cal managed care. through FFS and managed care. State Negotiates “Supplemental Rebates” on Top of Federal Rebates, But Only for THE 340B PRESCRIPTION DRUG Prescription Drugs Paid for Through FFS. As DISCOUNT PROGRAM previously discussed, DHCS has a preferred drug list that steers utilization toward preferred drugs This section briefly summarizes the federal 340B within Medi-Cal FFS. In exchange for placement Drug Pricing Program, and how it operates within on DHCS’s preferred drug list, drug manufacturers the context of Medi-Cal. For more information on offer supplemental rebates to the state, which are the interaction between the 340B program and rebates on top of the federal rebates that lower Medi-Cal, see last year’s report: The 2018-19 the preferred drugs’ final price below the best Budget: The Governor’s Medi-Cal Proposal for the price available under the federal rebates. DHCS 340B Drug Pricing Program. only collects supplemental rebates on drugs paid Many Medi-Cal Providers Are Eligible for for through FFS. The state’s ability to collect Prescription Drug Discounts Through the 340B supplemental rebates is generally limited to FFS Program. The federal 340B program entitles because DHCS’s preferred drug list—which is eligible health care providers (mainly hospitals and what gives the state leverage to negotiate further clinics that serve large numbers of low-income discounts—only applies to drugs paid for through patients) to discounts on outpatient prescription FFS. drugs (drugs that are not administered by a Medi-Cal Managed Care Plans Negotiate physician or within a hospital setting). These Their Own Rebates. Similarly to the state’s discounts result in savings that benefit participating collection of supplemental rebates for drugs health care providers and their health care partners, paid for through FFS, Medi-Cal managed care such as the retail pharmacies with which they plans collect rebates from drug manufacturers in contract. 340B discounts under federal law are exchange for placement on their preferred drug nearly identical in magnitude to those available to lists. Unlike the other Medi-Cal drug rebates, the Medicaid programs through federal rebates—that state does not receive these rebate revenues is, 340B discounts entitle eligible providers to at directly. Instead, the state accounts for the least the best price available to almost any public savings associated with Medi-Cal managed care or private payer for each drug. Unlike for Medicaid plans’ negotiated drug rebates when determining programs, however, 340B discounts apply at the capitated payment amounts. It is our understanding time a drug is purchased rather than coming in the that while these negotiated rebates historically form of retroactive rebates. resulted in significant discounts, the magnitude of Implementation Challenges Associated With these rebates declined following the expansion of the Use of the 340B Program in Medi-Cal. federal rebates to Medicaid managed care under Currently, either the 340B program or the Medicaid the ACA. federal rebate program could potentially apply DHCS Collects Billions of Dollars in Rebates when a drug is dispensed to a Medi-Cal enrollee. Annually. As displayed in Figure 4 (see next page), However, federal law requires that only one of DHCS will collect an estimated $4.4 billion in drug the drug discount programs be used for a given rebate revenue in 2018-19. This rebate revenue is drug dispensed to a Medi-Cal enrollee, thereby www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET forbidding duplicate discounts. Preventing duplicate a dispensing fee. Because 340B discounts are discounts in Medi-Cal has proven a challenge for applied to 340B drugs’ acquisition cost, 340B DHCS, as well as other state Medicaid programs. discounts get passed onto the Medi-Cal program When drugs that have already received 340B at the time Medi-Cal pays for the drugs. This is not discounts (hereafter referred to as 340B drugs) are necessarily true in Medi-Cal managed care since dispensed to Medi-Cal beneficiaries, pharmacies plans pay pharmacies at negotiated prices for all are supposed to identify the drug as having already the drugs paid for by the plan. These negotiated received a 340B discount. Then, DHCS will not prices are often higher than the discounted costs bill the drug’s manufacturer for a Medicaid rebate. associated with acquiring 340B drugs. As a result, However, 340B drugs are often not identified as 340B eligible providers and their partners, such as such in a timely manner, creating administrative retail pharmacies, are able to earn income based challenges for DHCS and other affected parties in on the difference between the prices negotiated ensuring Medicaid rebates are sought only on drugs with Medi-Cal managed care plans and the that have not already received a 340B discount. discounted costs of acquiring 340B drugs. The 340B Savings Do Not Necessarily Accrue state and federal governments ultimately pay the to the State in Managed Care, as They Do in costs associated with these higher negotiated FFS. As previously noted, in FFS, DHCS pays prices through Medi-Cal managed care plans’ pharmacies for drugs at their acquisition cost plus capitated rates. Figure 4 Net Prescription Drug Spending in Medi-Cal Total Funds (In Billions) Net Spending After Rebates Managed Care Rebate Revenue + Gross Spending Fee-for-Servicea Medi-Cal Total 2 4 6 8 10 12 $14 a The state historically collected rebates on drugs paid for through County Organized Health System (COHS) managed care plans before the state's collection of Medicaid rebates was expanded to all of Medi-Cal managed care in 2014. At least a portion of the fee-for-service rebates in fact reflect rebates collected on drugs paid for through COHS managed care plans. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET GOVERNOR’S ORDER TO CARVE OUT PHARMACY SERVICES FROM MEDI-CAL MANAGED CARE All Pharmacy Services Would Be Paid for of managed care plan contracts, which benefits Through FFS. Under the Governor’s executive are carved into managed care and which benefits order, Medi-Cal pharmacy services would be are carved out. Accordingly, the Governor is not entirely carved out of managed care. By January seeking statutory changes at this time to effectuate 2021, instead, all prescription drugs dispensed to the carve out. As we discuss in our assessment, Medi-Cal enrollees at pharmacies would be paid for while it appears that statutory changes are not through FFS. needed to effectuate the carve out, this does not Goals of the Governor’s Plan. A principal goal prevent the Legislature from exercising its oversight of the Governor’s executive order to carve out the powers to provide input into how pharmacy pharmacy services benefit from Medi-Cal managed services are delivered in Medi-Cal going forward. care is to reduce prescription drug spending in Administration Expects Hundreds of Medi-Cal. In addition, the administration believes Millions of Dollars in Annual Savings to Begin transitioning Medi-Cal pharmacy services coverage Materializing in 2021-22. The administration entirely into a FFS benefit will bring advantages in expects to implement the carve out beginning terms of (1) standardizing the pharmacy services in January 2021. However, significant savings benefit so that there is a single, statewide list of generated by the carve out are not expected preferred drugs in Medi-Cal and (2) improving to materialize until 2021-22. Although the beneficiary access to pharmacies. administration does not have a precise savings Administration Asserts No Statutory Changes estimate at this time, it has stated that it expects Are Needed to Effectuate the Carve Out. The annual savings in the hundreds of millions of administration asserts that no statutory changes dollars once the plan is fully implemented. The are needed to effectuate the carve out since, administration has stated that it intends to provide under state law and federal rules, the director of a detailed savings estimate at the time of the May DHCS has broad authority to determine, by way Revision. LAO ASSESSMENT OF THE CARVE OUT In this section, we provide our assessment of The administration’s rough and preliminary estimate the Governor’s action to carve out the Medi-Cal of hundreds of millions of dollars in annual state pharmacy services benefit from managed care. savings appears possible but is highly uncertain. Specifically, we outline what we believe could (We would note that total Medi-Cal savings will be be the likely impact of the carve out on (1) state more than double annual state savings. Because spending; (2) funding for major nonconsumer the federal government shares in the costs of stakeholders in Medi-Cal such as managed funding pharmacy services in Medi-Cal, a portion care plans, health care providers, and drug of total savings generated under the carve out— manufacturers; and (3) the quality of care Medi-Cal about 60 percent—would accrue to the federal, beneficiaries receive. as opposed to state, government.) Below, we summarize how the carve out will affect Medi-Cal Carve Out Likely to Result in financing of pharmacy services and explain why net Net Savings to the State state savings are likely, though not guaranteed, to materialize. In our view, the carve out is likely to result in net savings to the state, but of an unknown magnitude. www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET State Savings Under a Full Carve Out. The Medi-Cal managed care plans’ negotiated carve out can be expected to generate savings in rebates, the state would achieve savings. Medi-Cal in two primary ways, the first of which Savings Partially Offset by Higher Costs, is likely and the second of which brings greater Such as for the Dispensing of Drugs to Medi-Cal uncertainty. Beneficiaries. While we believe the carve out • Lower Spending by Paying for Drugs is likely to generate savings, as discussed at Cost. As previously noted, Medi-Cal immediately above, we expect there to also be managed care plans reimburse pharmacies some higher costs that partially offset the savings at negotiated prices for prescription drugs. described above. Most notably, we would anticipate These drug prices (not including pharmacy potentially higher state costs due to the increase in dispensing fees, which we address below) dispensing fees that Medi-Cal would pay under the are likely higher than the pharmacies’ costs full carve out. As previously noted, in FFS, Medi-Cal in acquiring the drugs, particularly for 340B currently pays significantly higher dispensing drugs that receive significant, federally fees to pharmacies than Medi-Cal managed care mandated discounts. Medi-Cal FFS, on the plans pay. Paying FFS-level dispensing fees for all other hand, reimburses pharmacies for drugs prescription drugs paid for in Medi-Cal—absent at prices that are meant to be equivalent to changes to Medi-Cal FFS dispensing fees—would pharmacies’ costs of acquiring the drugs. thus increase spending for this purpose above As a result, pharmacies have limited or no current levels. ability to mark up the prices of the drugs Costs to Administer Pharmacy Services dispensed to Medi-Cal beneficiaries under Would Shift From Managed Care Plans to the FFS. Under the full carve out, pharmacy State, With Uncertain Net Fiscal Impact to markups would be eliminated on behalf of the State. Most of the costs of administering $9 billion in additional drugs dispensed to the pharmacy services benefit would shift from Medi-Cal enrollees through FFS rather than managed care plans to the state, which we believe managed care. This could potentially generate will require new state resources. Whether the significant annual Medi-Cal savings, in large required new state resources will be greater or part due to the state paying for 340B drugs at less than existing funding for managed care plans cost. to administer the Medi-Cal pharmacy services is • Potentially Increased Savings Due to uncertain. Accordingly, the overall impact of the Greater Supplemental Rebates. As carve out on the state’s costs of administering the previously discussed, the state currently Medi-Cal pharmacy services benefit is uncertain. collects supplemental rebates on top of Net State Savings Likely. We believe the federal rebates, but only for drugs paid for increased state savings due to (1) reimbursing through FFS (and certain select managed pharmacies at cost for their drugs and (2) collecting care plans). By fully transitioning the Medi-Cal supplemental rebates are likely to be greater than pharmacy services benefit into FFS, the the increased costs under the carve out, such as state should be able to begin collecting those associated with potentially paying higher supplemental rebates for a significantly pharmacy dispensing fees under FFS. We believe higher proportion of the drugs paid for under these net state savings could potentially be in the Medi-Cal, potentially increasing state savings hundreds of millions of dollars, as attested by the on drugs relative to today. These greater state administration. However, the amount of savings supplemental rebates would be in place of is highly uncertain for many different reasons, the negotiated rebates currently received by including, for example, the challenge of predicting Medi-Cal managed care plans. Provided the the results of future negotiations between the state state supplemental rebates result in lower and drug manufactures on Medi-Cal prescription net drug prices than what is achieved from drug costs going forward. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Impact of Carve Out on Major drugs in Medi-Cal through placement on a more Nonconsumer Stakeholders widely applicable Medi-Cal-wide preferred drug list. That said, we would not expect the magnitude The carve out will significantly impact a variety of of the rebates to have a major impact on the drug providers and other entities that serve the Medi-Cal manufacturing industry’s overall earnings. program. This section describes these impacts Likely Increase in Funding for Pharmacies. on nonconsumer stakeholders in the Medi-Cal Pharmacies will potentially benefit from increased program. funding under the carve out due to (1) (absent Reduction in Retained 340B Earnings for any changes) the higher dispensing fees paid by Eligible Providers. As described earlier, health Medi-Cal FFS compared to Medi-Cal managed care providers eligible for 340B drug discounts care plans and (2) the larger network of pharmacies currently are able to generate earnings based on serving Medi-Cal FFS compared to individual the difference between the discounted prices at Medi-Cal managed care plans. A portion of which they purchase 340B drugs and the higher the increase in funding may be offset by lower prices they charge payers for the 340B drugs. reimbursement for the drugs since Medi-Cal FFS, These payers include, for example, private health but not Medi-Cal managed care, pays pharmacies insurers, Medicare (the federal health care coverage at close to pharmacies’ costs in acquiring their program primarily for the elderly), and Medi-Cal drugs. managed care plans, but exclude Medi-Cal FFS, which pays for 340B drugs at their acquisition cost. Impact of Carve Out on While eligible providers could continue to generate Beneficiary Access and Care earnings through 340B for drugs dispensed to In addition to likely generating net savings for non-Medi-Cal enrollees, by transitioning Medi-Cal the state and having disparate fiscal impacts on pharmacy services entirely to a FFS benefit, key nonconsumer stakeholders in the Medi-Cal 340B-eligible providers would no longer be able program, the carve out will very likely affect to generate earning on any pharmacy-dispensed Medi-Cal beneficiary access to quality care. This drugs paid for by Medi-Cal. Rather, these earnings section explores a few of the likely impacts on would largely convert into state savings in the form beneficiary care. of lower prescription drug expenditures. Statewide Standardization of the Medi-Cal Reduction in Funding for Medi-Cal Managed Pharmacy Services Benefit. One potential benefit Care Plans. Funding for Medi-Cal managed of the transition of Medi-Cal pharmacy services care plans would likely be reduced by between to a FFS benefit is that the same preferred drug 15 percent and 20 percent under the carve list would apply to all Medi-Cal beneficiaries. out. While this reduction in funding largely Currently, which drugs are readily available to reflects managed care plans’ decreased funding Medi-Cal enrollees can vary depending upon which responsibilities—due to no longer paying for Medi-Cal managed care plan they are enrolled in. the pharmacy-dispensed drugs utilized by their Although almost all drugs are ultimately available members—a portion of the reduction would likely to Medi-Cal enrollees regardless of which delivery come from existing Medi-Cal managed care plan system or managed care plan they are enrolled funding for purposes such as administration, care in, different Medi-Cal managed care plans and coordination, reserves, and profits. Medi-Cal FFS maintain different preferred drug Minimal Impact on Drug Manufacturing lists. Obtaining a non-preferred drug comes with Industry. The carve out is unlikely to have a major administrative burdens. For Medi-Cal enrollees impact on earnings for the drug manufacturing that move counties, change plans, or change industry overall, both in the state and nationwide. from FFS to managed care (or vice versa), there Selected drug manufacturers, however, may pay may be challenges associated with continuing higher negotiated supplemental rebates to the on a drug that was on the enrollee’s previously state in exchange for greater utilization of their applicable preferred drug list but is not on the new www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET list. With the transition of the Medi-Cal pharmacy particularly for relatively sick members services benefit to FFS, a single, statewide enrolled in disease management programs— Medi-Cal preferred drug list would likely apply for in coordinating their members’ care. For all program beneficiaries, thereby increasing the example, by informing a managed care standardization of the Medi-Cal drug benefit. While plan when a prescription is filled, the plan’s the standardization of the Medi-Cal drug benefit designated care coordinator can learn whether under the carve out has potential to improve care the member is adhering to the schedule from a beneficiary perspective in the long run, the recommended for her or his prescription. As transition to FFS could result in beneficiaries losing previously stated, certain drugs are currently ready access to drugs they are currently taking. carved out of managed care. While DHCS As such, the Legislature may wish to consider provides FFS prescription drug utilization continuity of care protections for beneficiaries data to managed care plans on behalf of their currently utilizing prescription drugs. members for currently carved out drugs, it is Expansion of the Pharmacy Network Where our understanding is that this data does not Beneficiaries Can Obtain Prescription Drugs. arrive from DHCS in a timely enough manner According to the administration, Medi-Cal’s to assist plans’ care coordination activities. FFS pharmacy network extends to almost all • Opioid Curtailment Programs. Some pharmacies throughout the state. This contrasts to Medi-Cal managed care plans have Medi-Cal managed care to the extent that at least proactively developed initiatives aimed certain plans exclusively contract with only some at curtailing the overuse of prescription of the pharmacies in their areas of operations. opioids, which were responsible for around While this practice is likely effective in lowering 1,500 overdose deaths in the state in 2017. costs, it does limit the number of pharmacies where These programs, for example, place elevated Medi-Cal managed care enrollees can obtain their prescribing restrictions on opioids and prescription drugs. Thus, transitioning pharmacy attempt to educate prescribers on safe opioid services coverage to a FFS benefit could give prescribing practices. In many counties, Medi-Cal enrollees greater choice in where they these initiatives have likely contributed to obtain their prescription drugs. dramatically reducing the number and potency Potential Negative Impacts on Care of opioid prescriptions among Medi-Cal Coordination and Management. Medi-Cal members. Under the carve out, it is uncertain managed care plans’ primary responsibilities whether such initiatives by Medi-Cal managed include providing care coordination and care plans would continue. management for their members. While the carve out could bring the potential benefits described Important Details on the Carve Out above, the coordination and management of Are Lacking Medi-Cal beneficiary’s prescription drug use could Many details of (1) how the carve out will be be weakened under the administration’s plan. implemented and (2) how the administration Below, we outline areas where care coordination believes it will affect Medi-Cal spending and and management could be negatively impacted stakeholders have yet to be released. To some under the carve out. degree, this is likely due to many aspects of the • Less Timely Prescription Drug Utilization policy and implementation framework remaining Information for Medi-Cal Managed Care in development by the administration. Below are Plans. Medi-Cal managed care plans, and/or several outstanding pieces of information that could their contracted providers, currently receive help the Legislature assess the potential benefits data—often in real-time—from pharmacies and downsides of transitioning Medi-Cal pharmacy when their members fill their prescriptions. services entirely to a FFS benefit. These data assist the managed care plan— 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET • Overall Fiscal Estimate. While the the overuse of opioids or tracking medication administration has shared that it projects adherence among their members. annual savings in the hundreds of millions of • Continuity of Care Protections. The dollars, it has not released a precise fiscal administration has not shared what, if any, estimate of the carve out that also outlines continuity of care protections would be put in its major assumptions. A more precise fiscal place to allow beneficiaries currently utilizing estimate, with clearly laid-out assumptions, is drugs on their managed care plans’ preferred necessary to be able to fully understand and drug list to continue to use those same weigh the potential trade-offs of the carve out. drugs—at least in certain situations—even if • What New State Resources Are Needed to they are not on Medi-Cal’s statewide preferred Administer the Entire Medi-Cal Pharmacy drug list under the carve out. Services Benefit? We believe new state staff, contracting authority, or both will be Opportunity and Role for necessary to administer the entire Medi-Cal Legislative Oversight pharmacy services benefit through FFS. In addition to lacking an overall fiscal estimate, The administration attests that it has the the administration has not identified what new authority under current state law to effectuate the state resources are required to implement the transition of Medi-Cal pharmacy services coverage carve out. from a managed care to a FFS benefit. Our initial review of state law supports the administration’s • How Would State Information Systems Be view as state law appears to give the director of Improved to Maintain or Improve Existing DHCS fairly broad authority to selectively include Managed Care Plan Care Coordination? or exclude Medi-Cal benefits from managed care As previously noted, Medi-Cal managed care plans’ contracts with the state. plans use prescription drug utilization data in the coordination and management of their Nevertheless, we believe the Legislature has members’ care. The state currently provides the authority to provide input into how prescription prescription drug utilization data to managed drugs are covered in Medi-Cal going forward. We care plans for currently carved out drugs, but think that this is an important oversight role for these data transfers are not timely or always the Legislature to exercise, in part because the complete. The administration, to date, has not Governor’s executive order action involves not only released a plan to improve DHCS’s information savings but also costs and policy trade-offs. For systems to facilitate the timely transfer of one, the Legislature can enact statute constraining prescription drug utilization data between the the administration’s ability to unilaterally effectuate state and Medi-Cal managed care plans. the carve out, for example, by setting conditions on its implementation. Additionally, given that • Managed Care Plans’ Continued Role new state resources are needed to implement the in Coordinating the Medi-Cal Pharmacy change, we believe the Legislature can provide Services Benefit in Conjunction With Their input into whether and how the carve out proceeds Members Overall Health Care. Medi-Cal through its approval or rejection in the budget managed care plans are generally responsible process of any associated future request by DHCS for coordinating and managing the care of for additional state resources. their members. Under the carve out, it is unclear what Medi-Cal managed care plans’ role would be in coordinating and managing their members’ care in relation to the pharmacy services benefit. For example, it is unclear whether Medi-Cal managed care plans would continue to have a role in curtailing www.lao.ca.gov 15 analysis full gutter 2019-20 BUDGET ALTERNATIVE APPROACHES TO REDUCING MEDI-CAL PRESCRIPTION DRUG SPENDING The Governor’s order to carve out the Medi-Cal prescription drug usage. The state would also pharmacy services benefit from managed care continue to benefit from the lower dispensing fees represents one approach to achieving savings on paid by Medi-Cal managed care plans compared to prescription drug spending in Medi-Cal. There are Medi-Cal FFS. a variety of alternative approaches, some of which Downsides Relative to the Governor’s have recently been considered but ultimately not Approach. State savings would likely be implemented in California. Below, we introduce significantly lower under a universal Medi-Cal several of these alternative approaches, each preferred drug list, as the sole approach, compared of which brings different benefits and trade-offs to the Governor’s approach. The primary reason relative to the status quo and to the Governor’s is that existing 340B savings could remain with approach. These alternative approaches are not 340B-eligible providers and their partners, rather necessarily mutually exclusive, and thus could than transferring to the state in the form of lower potentially be implemented as part of a broader prescription drug costs. package of changes. Transfer Savings From 340B Drug Universal Medi-Cal Preferred Drug Discounts in Medi-Cal to the State List Spanning FFS and Managed Care Background. As previously discussed, in Background. Currently, the state has a preferred Medi-Cal managed care, at least a portion of the drug list that only applies to drugs obtained through savings associated with the 340B discounts can Medi-Cal FFS. One approach to potentially lowering be retained by eligible providers and their partners. Medi-Cal prescription drug spending would be Eliminating the use of 340B discounts in Medi-Cal to adopt a universal Medi-Cal preferred drug list would have the effect of making additional drugs that would apply to all drugs dispensed to all dispensed to Medi-Cal enrollees eligible for 13 million Medi-Cal beneficiaries across the FFS alternative drug discounts available under federal and managed care delivery systems. This would Medicaid law, likely resulting in savings for the work toward standardizing the Medi-Cal pharmacy state. This approach was proposed by Governor services benefit, as with the Governor’s approach. Brown in 2018, but was not ultimately adopted. A By employing a universal Medi-Cal preferred drug slightly different approach that could achieve similar list, drug manufacturers would likely be willing to outcomes would be to require Medi-Cal managed offer steeper discounts (in the form of supplemental care plans to pay for 340B drugs at the drugs’ rebates) in exchange for their drugs’ placement acquisition costs. For additional background, see on the list. In 2014, Governor Brown proposed our report (referenced on page 9) on Governor to adopt a universal Medi-Cal preferred drug list. Brown’s 2018 proposal to eliminate the use 340B However, this proposal was ultimately not approved drugs in Medi-Cal. by the Legislature. Benefits Relative to the Governor’s Approach. Benefits Relative to the Governor’s Approach. Eliminating the use of 340B discounts in Medi-Cal Unlike the carve out, the Medi-Cal pharmacy or restricting payment to 340B drugs’ acquisition services benefit would continue to be provided costs would maintain Medi-Cal managed plans’ as currently by Medi-Cal managed care plans, existing level of responsibility and discretion over though they would have significantly less discretion the Medi-Cal pharmacy services benefit for their over the benefit’s design. This would lessen the members. As with the universal Medi-Cal preferred disruption to plans’ existing care coordination and drug list, this would allow plans to continue existing management activities related to their members’ care coordination and management activities 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET related to their members’ prescription drug usage. use of cost-effectiveness analysis in deciding In addition, making changes to the use of 340B which prescription drugs are placed on Medi-Cal’s drugs in Medi-Cal would not necessarily require preferred drug list. new resources for DHCS and may even further Benefits Relative to the Governor’s Approach. simplify administration of Medi-Cal’s pharmacy On its own, the use of cost-effectiveness analysis services benefit relative to the status quo and the in designing Medi-Cal preferred drug list may Governor’s approach. not generate significant savings on prescription Downsides Relative to the Governor’s drugs. This is because Medi-Cal’s preferred drug Approach. As previously discussed, the principal list only applies to the minority of drugs paid for in way DHCS can increase supplemental rebates Medi-Cal through FFS. However, were it employed provided directly to the state, and thereby in conjunction with either a full carve out of the potentially generate additional savings on pharmacy Medi-Cal pharmacy services benefit or a universal services spending in Medi-Cal, is to extend the Medi-Cal preferred drug list, it could potentially reach of its preferred drug list. As such, total state generate significant long-run savings while also savings may not be as high as under the carve improving the quality of care Medi-Cal beneficiaries out since changes only to the use of 340B drugs receive. in Medi-Cal would not affect the scope of the Downsides Relative to the Governor’s preferred drug list. In addition, this approach would Approach. Creating the infrastructure to formalize not serve to standardize Medi-Cal’s pharmacy the use of cost-effectiveness analysis in drug services benefit, as managed care plans would preference decisions would require new ongoing continue to be able to design their own preferred state resources. drug lists and other aspects of the pharmacy services benefit. Adopt a Medi-Cal Prescription Drug Spending Cap Formalize the Use of Background. In 2017, New York State enacted Cost-Effectiveness Analysis for a cap on drug spending in its Medicaid program. Preference of Drugs in Medi-Cal Exceeding the statutory cap, which limits growth in Background. Another potential approach to drug spending in its Medicaid program to around reducing the costs and improving the effectiveness 8 percent annually, triggers the negotiation of of the Medi-Cal pharmacy services benefit would be additional rebates with manufacturers of drugs to formalize the use of cost-effectiveness analysis whose cost growth contributed to surpassing the in decisions about which drugs are placed on statutory cap. New York State will identify targeted Medi-Cal’s preferred drug list. Cost-effectiveness rebate amounts from these manufacturers. Should analysis generally provides a formal structure for a manufacturer not voluntarily offer rebates close evaluating whether an intervention, such as the to the amounts targeted by the state, the state utilization of a given prescription drug, is justified at may (1) impose prior authorization requirements its cost. Cost-effectiveness analysis is used in other for all drugs made by the manufacturer; (2) direct countries and by some U.S. health insurers to help its Medicaid managed care plans to remove determine which prescription drugs to make readily the manufacturer’s drugs from their Medicaid available and at what levels of reimbursement. formularies (as long as there are other options While DHCS is currently required under state law to within the drug’s therapeutic class); and (3) require evaluate the safety, effectiveness, and cost of drugs the manufacturer to provide information to New under consideration for inclusion on the Medi-Cal York State on the high-cost drug’s costs to preferred drug list, it is unclear how DHCS’s develop, the drug’s prices available to various process for selecting preferred drugs compares purchasers, and the drug’s profitability. As a to the formalized cost-effectiveness analysis result of the cap, New York State expected to approaches used in other countries. As such, the reduce drug spending in its Medicaid program by Legislature could take steps to explore greater 11 percent in 2018. www.lao.ca.gov 17 analysis full gutter 2019-20 BUDGET Benefits Relative to the Governor’s Approach. Downsides Relative to the Governor’s New York’s approach is similar to Governor’s Approach. New York State’s approach to reducing Newsom’s executive order to carve out Medi-Cal its Medicaid program’s drug spending likely pharmacy services coverage insofar as it attempts has downsides as well. For one, barring all of a to leverage the full bargaining power of its manufacturer’s drugs from the preferred drug list state Medicaid program to obtain better prices. in cases where the manufacturer does not offer However, it goes farther than the carve out by sufficient rebates likely goes further in limiting (1) establishing a specific intention to exclude all of beneficiary access to certain drugs than under a manufacturer’s drugs from its Medicaid preferred the California administration’s approach. Fiscally, drug list should it find any of the manufacturer’s adopting New York’s approach would not, on its drugs to be growing excessively in cost and own, lead to the state sharing in more of the savings (2) requiring financial information from drug generated by the 340B program. As such, it is manufacturers, beyond what California law requires, uncertain whether adopting such an approach would on their costs and earnings. These more stringent generate more savings in Medi-Cal than Governor requirements may assist New York’s Medicaid Newsom’s approach. That said, we would note program in reducing net drug spending to a greater that adopting New York’s approach could be done degree than California would be able to solely in conjunction with the carve out or with the other under the carve out. alternative approaches previously described, and thus potentially go further than Governor Newsom’s approach in reducing drug spending in Medi-Cal. RECOMMENDATIONS Leverage Oversight Powers to Gather This key information includes, but is not limited to, Key Information Before the Carve Out Is the following. Effectuated. We find that the carve out has merit • A robust fiscal estimate of the carve out, given its potential to generate net state savings, including detail on the estimate’s major which we believe could be in the hundreds of underlying assumptions and the additional state millions of dollars annually, as also attested administrative resources that would be needed. by the administration. However, we have a • A plan to upgrade the state’s information number of unanswered questions and concerns, technology systems to facilitate the real-time particularly about how the carve out will impact the transfer of prescription drug utilization data to coordination and management of beneficiary care. managed care plans. We therefore advise the Legislature to leverage its oversight powers to gather key information before • Prospective guidance for Medi-Cal managed the carve out is implemented. care plans’ continued role and responsibilities in coordinating and managing their members’ Condition Resources to Implement the Carve prescription drug utilization. Out on DHCS Providing Key Information That Convincingly Answers Outstanding Questions. • What continuity of care protections for We do not believe the carve out should be managed care enrollees are appropriate effectuated until after the administration provides to ease the transition to a new statewide key information and a detailed implementation plan. Medi-Cal preferred drug list. Accordingly, we recommend that the Legislature • An analysis of the benefits and trade-offs of withhold approval of future new state administrative feasible alternatives to the Governor’s plan resources requested by DHCS to implement the to reduce prescription drug spending in carve out until DHCS provides key information that Medi-Cal, and how these compare to those of convincingly answers major outstanding questions. the carve out. 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET www.lao.ca.gov 19 analysis full gutter 2019-20 BUDGET 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET www.lao.ca.gov 21 analysis full gutter 2019-20 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. 22 LEGISLATIVE ANALYST’S OFFICE