What could a Medicaid pharmaceutical carve-out mean for Kentucky?
West Virginia’s newly implemented (and widely touted) Medicaid pharmaceutical carve-out has caused a buzz about the potential for a similar plan in Kentucky. The solution offered by the policy’s proponents – just cut out the middleman who negotiates pharmaceutical prices and the state’s Medicaid tax bill shrinks – sounds too good to be true, and it is.
Kentucky has already tried keeping pharmaceutical care within its Department for Medicaid Services. Before 2011, when Kentucky’s Medicaid program moved to managed care, the Department for Medicaid Services was unable to properly administer and manage patients’ care or pharmacy needs and the associated costs to the state. In contrast, the managed care organizations operating in Kentucky have vast clinical resources and are far better equipped to oversee all aspects of patient care.
As it stands today, the Department for Medicaid Services certainly does not have the resources or personnel to take over the Medicaid pharmacy program. The Department for Medicaid Services employs around 280 individuals – with only one pharmacist and one physician among them. The pharmacist, who serves as the Pharmacy Director and is assisted by a very small team, has been tasked with implementing SB5 from the 2018 Regular Session. The bill requires increased transparency of pharmacy benefit managers, who are contracted by managed care organizations to administer the drug plans for Medicaid recipients. The Department has been unable to fully implement a relatively straightforward transparency program, yet carve-out proponents in Kentucky argue that the Department will somehow be able to manage a Medicaid pharmacy program for the entire state.
Another key problem with a carve-out, like the one up for debate in Frankfort, is that it would give major drug manufacturers more leverage in negotiating drug prices. Instead of negotiating with the many regional and national managed care organizations operating within any given state as they do now, the pharmaceutical companies only need to negotiate with a single state entity.
There is also good reason to doubt the amount Kentucky would save under such a plan. West Virginia has widely publicized its $38 million savings from the first year of this program yet has failed to acknowledge the $122 million dispensing fee paid to the pharmaceutical business community under their new fee-for-service model. The $122 million dispensing fee West Virginia paid in 2018 under the fee-for-service plan is a staggering $116 million more than the state paid in 2017 under the managed care model. A 2015 study by the Menges Group stated more broadly that managed care organizations in twenty-eight states that administer Medicaid pharmaceutical benefits are resoundingly more cost effective – resulting in net savings of around 15%.
In Kentucky, experts estimate that, while the plan may lead to some savings, more than 80% of any savings would go to the federal government – not to the state. Further, a preliminary feasibility study conducted by Myers and Stauffer, LC in 2019, was unable to quantify or predict the feasibility of hiring new personnel or retraining existing personnel within the Department for Medicaid Services to implement the program successfully. Any savings figure for Kentucky is also likely to underestimate the costs to the Department for Medicaid Services, which would need a dramatic overhaul to be able to manage the burden of the pharmacy program.
Other states have been weary of following West Virginia’s course on this issue. In 2019, legislators in Ohio considered a plan like to the one from West Virginia to take pharmacy benefits for Medicaid recipients out of the hands of managed care organizations and pharmacy benefit managers. They decided against it because the plan would be far more costly than their current arrangement. Ohio – like Kentucky – had tried using a fee-for-service model during the Kasich administration but found that the switch to managed care organizations had saved the state money.
Kentucky should not rush to change a pharmaceutical management model that works for the state and for Medicaid recipients without fully considering the difficulties the state would face in implementing the policy and the realities of such policies elsewhere.