| Last Updated: | 5/18/2014 |
| Budget Issue: | Governor's proposal for pharmacy benefits in Medi-Cal managed care |
| Program: | Department of Health Care Services |
| Finding or Recommendation: | Reject Governor’s proposal to (1) establish a statewide outpatient contract drug list and (2) collect state supplemental rebates for drugs provided through Medi-Cal managed care. Investigate continuity of care issues related to managed care pharmacy benefits. If problems are found, consider options that balance patient access with managed care plans' ability to manage drug costs. |
The Medi-Cal Program covers outpatient prescription drugs—also known as pharmacy benefits—in both the fee-for-service (FFS) and managed care delivery systems.
Types of Prescription Drugs. In general, a prescription drug contains an active ingredient (responsible for the drug‘s effect), dosage, and dosage form, all of which are approved by the federal Food and Drug Administration (FDA) as safe and effective to treat a particular illness.
Utilization Management (UM). UM refers to policies used by insurers to manage or direct patients’ utilization of and access to medications.
Both FFS Medi-Cal and Medi-Cal managed care plans apply UM to pharmacy benefits. In managed care, a common form of PA and step therapy is mandatory generic substitution, in which the plan requires the use of the generic version of any multisource drug. Prescribers must justify the use of a brand-name product over its generic equivalent.
The FFS CDL is the list of drugs available without PA in FFS Medi-Cal. The Department of Health Care Services (DHCS) determines which drugs go on the FFS CDL. A drug’s placement on the FFS CDL—also known as “preferred status”—tends to increase the prescribing and dispensing of that drug in FFS Medi-Cal. Before agreeing to grant a brand-name drug preferred status, DHCS often requires the manufacturer to contract with the department to provide a state supplemental rebate, described in more detail below.
Formularies. Each Medi-Cal managed care plan maintains a formulary, which is a list of approved drugs that the plan will reimburse according to specified conditions. The formulary, as well as the plan’s UM policies, are designed and updated by the plan’s pharmacy and therapeutics (P&T) committee. The P&T committee is usually comprised of primary care and specialty physicians, pharmacists, and other healthcare professionals.
Plans Are Required to Provide Comparable Drug Benefits, and May Apply UM. Under current law, Medi-Cal managed care plans are required to establish formularies that are comparable in scope to the FFS CDL. Plan contracts with DHCS describe “comparable” as follows: for every drug listed on the FFS CDL, the plan’s formulary must include at least one drug with “the same mechanism of action sub-class within all major therapeutic categories.” (A drug’s mechanism of action refers to the specific biochemical interaction through which the drug produces its therapeutic effect, such as binding to a specific enzyme or receptor in the body.)
As an example, antiulcer medications represent a major therapeutic category of drugs listed on the FFS CDL. Histamine H2-receptor antagonists, coating agents, and proton pump inhibitors (PPIs) are three sub-classes of antiulcer drugs with different mechanisms of action. Within the sub-class of PPIs, there are seven different drugs, three of which are multisource drugs. Because the FFS CDL includes PPIs, each plan’s formulary must also contain at least one PPI.
Under current law, plans may apply PA to many drugs on their formularies. There is generally no linkage between preferred status in FFS and a plan’s UM policies. Often, if the FFS CDL contains a single-source drug, a plan’s formulary will either (1) only include the closest multisource alternative that is supposed to be equally effective, or (2) subject the single-source drug to PA or step therapy. This is because single-source drugs are often much more expensive for plans to purchase or provide than their closest multisource alternatives.
Non-Formulary Coverage Requirements. Current law and regulations contain several provisions related to access to non-formulary drugs in Medi-Cal managed care.
A rebate is an agreed-upon payment from a drug manufacturer to an insurer, based on reported sales and use of the manufacturer’s product under the insurer’s plan. Typically, the insurer invoices the drug company for rebates on a quarterly basis after the drugs have been dispensed and paid for by the insurer. The rebate lowers the insurer’s net cost for providing the drug. In return, the insurer usually agrees to make the drug more readily available to prescribers and patients, by including the drug on a formulary and/or lifting or relaxing UM policies.
State Supplemental Rebates. Federal law requires drug companies to sign rebate agreements with the federal Centers for Medicare and Medicaid Services (CMS) in order for their products to receive federal financial participation in state Medicaid programs. For brand-name drugs covered under FFS Medi-Cal, DHCS negotiates state supplemental rebates over and above the federal rebates required by CMS. (The federal government generally receives 50 percent of revenue from both federal and state rebates, although the federal share for a certain portion of total rebates is 100 percent.) State rebate contracts, which are based on complex formulas and confidential benchmark prices, are often a condition for a drug’s placement on the FFS CDL. Under these contracts, the more units of the drug dispensed in the FFS system, the greater the amount of supplemental rebates collected by the state from the manufacturer.
Current Law Prohibits State Supplemental Rebates for Managed Care Drugs. Current state law prohibits DHCS from collecting state supplemental rebates for drugs provided through federally-defined managed care organizations (MCOs). The MCOs include most Medi-Cal managed care plans. However, DHCS collects state rebates for drugs provided through five of the six county-organized health systems (COHS), which are not considered MCOs. Currently, state rebate contracts do not affect COHS formularies or UM policies.
The Governor proposes to establish a statewide outpatient CDL that would serve as a “core drug benefit” across both the FFS and managed care delivery systems in the Medi-Cal Program. At the time of this analysis, the administration’s proposed language to authorize this change contained little detail. The proposal does not identify which drugs or drug classes would be included on the statewide CDL. Much of the description below is based on our conversations with DHCS, as well as the department’s communications with legislative staff and stakeholders such as managed care plans.
Plans’ Formularies Must Provide Drugs on Statewide CDL Without PA. Medi-Cal managed care plan formularies would be required to provide access to all drugs on the statewide CDL without PA. Depending on DHCS’ rebate contracts for drugs on the statewide CDL, the department would be able to establish “utilization controls” and “cost containment” provisions for these drugs. The department defines utilization controls as all UM policies aside from PA. The department points out that plans would be allowed to add drugs outside the statewide CDL on their formularies and apply their own UM policies to these non-CDL drugs.
No Brand-Name Versions of Multisource Drugs Required. According to DHCS, for any multisource drug listed on the statewide CDL, plans would be required to make the generic version of the drug available without PA. For example, if the cholesterol drug atorvastatin were placed on the statewide CDL, plans would only have to cover the generic version without PA, rather than a brand-name version such as Lipitor. (This is a major departure from the current FFS CDL, which contains brand-name versions for many multisource drugs under rebate contracts. The DHCS has indicated that state rebates for such drugs will become less relevant, due to anticipated changes to federal and state pricing benchmarks for multisource drugs in FFS Medi-Cal.) This means the most significant change for most plans will be the requirement to cover additional single-source drugs—without being able to apply PA—on their formularies. For example, if a single-source cholesterol drug such as Crestor were added to the statewide CDL, many plans would have to change their formularies to add this single-source drug without PA.
Governance Steering Committee (GSC). To advise the implementation of the proposal, DHCS would establish a GSC consisting of representatives from Medi-Cal managed care plans and FFS Medi-Cal drug contracting staff.
The proposal gives DHCS authority to collect state rebates for drugs provided through Medi-Cal MCOs. This is a natural extension of the statewide CDL component of the proposal. By offering preferred status on a statewide CDL—which would lift PA and direct utilization toward single-source drugs in managed care—the department would be in a position to bargain for greater state rebates from manufacturers of these drugs. The administration estimates the proposal would bring in additional rebate revenue to benefit the General Fund by $32.5 million in budget year, and $65 million ongoing.
The administration has put forth two primary reasons for the Legislature to adopt a statewide CDL: (1) a fiscal rationale based on the opportunity to increase state rebate revenue, and (2) a policy rationale to address a supposed deficiency in continuity of care for current managed care pharmacy benefits.
Negotiate and Collect State Rebates in Managed Care Environment. State rebate revenue for single-source drugs dropped by nearly 70 percent between 2010-11 and 2012-13. Although there are a number of factors contributing to the loss of single-source drug rebates—including some popular brand-name drugs going off patent—the major reason is the movement of Medi-Cal beneficiaries from FFS to managed care. In particular, over 200,000 seniors and persons with disabilities (SPDs), who are the highest users of prescription drugs covered by the Medi-Cal Program, transitioned from FFS to managed care during the period between June 2011 and May 2012. A statewide CDL would make DHCS—not plans—responsible for determining preferred status for drugs in managed care. As a result, the department would once again have leverage to bargain for and collect state rebates for drugs used by SPDs, as well as other populations that are now mostly enrolled in managed care.
Improve Continuity of Care. The administration claims the current comparability standard for Medi-Cal managed care creates an inequitable pharmacy benefit across plans, and potentially disrupts continuity of care for patients who enroll in managed are for the first time or switch plans or providers. To make this point, DHCS has used examples related to anticonvulsant drugs to control seizures. In these examples, an epileptic patient may be stabilized on a particular anticonvulsant drug regimen. If the patient switches plans or doctors, DHCS claims the patient may need to fail—by having a seizure—on less expensive first-line drugs in the plan’s step therapy protocol, before being able to access his or her original regimen. The administration claims that a statewide CDL would prevent these situations from occurring, presumably by requiring plans to cover all anticonvulsants on the market without UM.
The Legislature has two main budgetary options for responding to the Governor’s proposal: (1) adopt the statewide CDL and score MCO state rebate savings, or (2) reject the statewide CDL and do not score rebate savings. State rebate contracts are voluntary, and most drug companies will not enter into these contracts if the state cannot grant preferred status to their single-source products in managed care. Therefore, we believe savings from collecting state rebates for MCO drugs can only be achieved if the Legislature adopts language that authorizes a statewide CDL.
Rebate Recipient Should Also Be Responsible for Purchasing Drugs. In a normal contracting environment, rebates are based on agreements between (1) a drug company and (2) an insurer responsible for both directly purchasing the drugs and establishing its own formulary and UM policies. The insurer, facing the direct cost of purchasing the drugs, accepts the drug company’s terms and conditions—usually, preferred formulary placement—in exchange for a net price reduction. This is an efficient arrangement in which both parties have good information and the opportunity to benefit from the transaction. Both FFS Medi-Cal and managed care plans have successfully negotiated drug rebates under this framework.
DHCS Is Not a “Purchaser” of Drugs for Medi-Cal Managed Care. The DHCS contracts with managed care plans to purchase and deliver drugs to Medi-Cal managed care enrollees. The department directly purchases drugs for FFS enrollees. As discussed earlier, the amount of the department’s FFS drug purchases has dropped significantly in recent years, reflecting the shift of beneficiaries from FFS to managed care.
For State, Proposal Temporarily Decouples Risks From Rewards of Rebate Contracting… The Governor’s proposal drives a wedge between the obligation to purchase drugs—which remains with plans—and the authority to determine formulary placement, which transfers to DHCS. Although the proposal allows the state to capture greater rebates for single-source drugs, plans do not receive net price reductions for these more expensive drugs.
…But May Have Negative Fiscal and Policy Consequences in Future. As explained below, the proposal’s attempt to maximize state rebates in the short run may eventually increase state costs in the long term. It may also diminish the value of including pharmacy benefits in managed care.
It is possible the additional drug costs borne by plans will exceed the additional rebates received by the state. (These rebate savings would not be passed through to the plans.) If so—that is, if the proposal creates a net cost for the Medi-Cal system as a whole—then the proposal may eventually create a net cost for the state through increased capitated rates. This is because the additional costs for purchasing drugs would eventually be incorporated into the capitated rates in the form of rate increases, which could partially, fully, or more than offset the rebate savings.
Due to the time lag between capitated rate-setting and actual cost data in managed care, the Governor’s proposal probably would generate net savings during the first few years of rebate contracting. The administration’s estimates of budget-year and ongoing savings are based on past state rebate collections from drugs provided through COHS plans. There are currently no requirements for COHS plans to cover single-source drugs without PA. Therefore, rebate revenue under the proposal may be higher than the administration’s current estimates.
During budget hearings, the Legislature asked DHCS to comment on the potential need to adjust capitated rates under the proposal. The department responded that any rate adjustments would depend on individual plans’ utilization and expenditures for pharmacy benefits. While we agree each plan’s experience would differ, we believe most plans would experience some cost increases related to single-source drug spending, as discussed immediately below.
It is likely the Governor’s proposal would shift utilization from multisource to single-source products for some drug classes in managed care. The administration’s fiscal case for the proposal rests on a central premise—that drug companies will offer rebates to DHCS in return for greater sales of their single-source products in managed care. Because single-source drugs are usually priced much higher than their multisource alternatives, greater sales and utilization of these products will create immediate cost pressures for plans, and eventual cost pressures for the state. It is misleading for the administration to promote increased rebate revenue while deemphasizing increased utilization and spending. In reality, these two effects go hand-in-hand.
Normally, insurers seeking drug rebates are fully aware of their own costs and utilization for competing products within a drug class. The insurers use this data to inform their rebate negotiations with drug companies. Because the Governor’s proposal disconnects the authority to negotiate rebate terms from the direct responsibility to purchase drugs, DHCS may not have the information—or inclination—to fully account for the fiscal effects of its rebate contracting decisions.
Additional Drug Costs for Plans May Be Greater Than State Rebate Revenue. Rebate contracts between DHCS and drug companies are confidential, as are managed care reimbursements for prescription drugs. This makes it difficult for DHCS and plans to share or coordinate information on net pricing for single-source drugs.
The Governor’s proposal gives DHCS the authority to select which drugs receive preferred status in Medi-Cal managed care. As a result, plans are unlikely to successfully negotiate their own rebates for single-source drugs. In addition, some drug companies may fund state rebates by charging higher single-source prices to plans. Plans have little ability to resist these increases without the authority to decide formulary placement or set UM policies. Finally, plans generally pay the lowest generic prices available to them for multisource drugs. Taken together, the difference between a plan’s cost for a single-source drug and the closest multisource alternative can be higher than the state’s rebate for that single-source drug. The DHCS may not be fully aware of this difference for various single-source drugs across all plans. Consequently, the department may pursue rebate contracts that end up increasing net costs for the Medi-Cal system as a whole.
Upfront Benefits and Deferred Costs for State. The DHCS may have the incentive to pursue rebate contracts even when the department is broadly aware that increases in drug spending for plans may be greater than increases in rebate revenue accruing to the state. This is because it takes several years for plans’ cost experience to be fully incorporated into capitated rate-setting. In other words, capitation can provide a “cover” for DHCS to defer greater drug expenditures into the future to realize upfront gains in rebate revenue. While this may serve as an expedient source of short-term revenue for the state, there is a real risk that the additional costs will catch up to the General Fund through future capitated rate increases.
Managed care plans need to strike the right balance between physician discretion and plan oversight. A doctor’s judgment and a plan’s clinical protocols both have a role in ensuring the prudent prescribing of medications. We are concerned that the Governor’s present proposal tilts the balance toward prescribers—and drug companies that influence prescribing behavior—in Medi-Cal managed care, and away from plan protocols and oversight.
Higher Prices and Aggressive Marketing for Single-Source Drugs… Drug companies market single-source drugs more aggressively than they market multisource drugs. They use direct-to-consumer advertising and promotional activities to pressure physicians to prescribe—and plans to pay for—single-source products. Generally, drug companies also price single-source drugs much higher than multisource alternatives.
… Do Not Always Translate Into Significant Clinical Improvements. Some drug classes contain many competing agents, such as drugs used to treat cholesterol and high blood pressure. For these classes, it is often unclear whether the newest single-source products offer major clinical advantages over their multisource competitors. The FDA may approve new drugs on the basis that they are “non-inferior” to—not necessarily better than—existing drugs that treat the same condition. Manufacturers continue to heavily market such products, sometimes at high prices, despite limited evidence that they outperform lower-priced substitutes.
Plan UM Serves As Check On Single-Source Drug Spending. Plans can use UM to successfully limit prescriptions and payments for expensive new drugs when older, inexpensive alternatives may be equally effective. For example, research shows that requiring PA for single-source antiulcer and anti-inflammatory drugs reduces Medicaid drug spending without increasing the costs and use of physician or hospital services.
Single-Source Manufacturers Will Use Rebate Contracts to Eliminate Plan UM. When a single-source drug faces many competitors without demonstrating a clear therapeutic advantage, the manufacturer is more likely to negotiate rebate contracts to increase sales and gain market share. Under the Governor’s proposal, it is likely that some drug companies will offer single-source drug rebates to DHCS in exchange for placing their products on the statewide CDL. As discussed earlier, it is unclear to us whether such rebates actually save money for the Medi-Cal system as a whole—that is, whether the additional rebate revenue for the state exceeds the additional drug costs for plans. From a plan perspective, these strategies may lead to inefficient purchasing of higher-cost drugs with little additional benefit for patients. Again, the state may eventually bear these costs through higher capitated rates to plans.
In Lieu of Data, DHCS Has Referenced Formulary Reviews and Comparisons. In an attempt to understand how frequently Medi-Cal patients experience therapy interruptions upon (1) newly enrolling in managed care or (2) switching plans or providers, we asked DHCS to provide administrative data from plan grievances. The department did not provide this data but instead gave the following responses.
As discussed below, these responses alone do not prove that access or continuity problems currently exist for managed care pharmacy benefits.
Differences Between Formularies Do Not Imply Inequity of Benefits. Differences between plan formularies do not themselves imply incomplete or inequitable pharmacy benefits across Medi-Cal managed care. There may be legitimate variations across plans that do not compromise enrollees’ access to safe and effective medications.
FFS CDL and Policies Not Useful for Comparison. According to DHCS, the statewide CDL will serve as a core drug benefit across the FFS and managed care delivery systems. The department claims this core benefit will be closer in design to clinically-based formularies in managed care than to the rebate-driven FFS CDL. If this is the case, we are unsure why DHCS compared plan formularies with the FFS CDL to draw conclusions about appropriate access and continuity of care. The FFS CDL may have made many brand-name and rebated products available without PA, possibly leading to unmanaged and inappropriate use in FFS Medi-Cal. The DHCS also indicated that plan formularies include nearly all cancer drugs that are listed on the FFS CDL. While access to cancer drugs is crucial, extensive off-label use of these drugs suggests that some level of UM may be reasonable in managed care.
We recommend the Legislature to reject the Governor’s proposal to establish a statewide CDL and collect MCO state rebates. In our view, the long-term fiscal and policy drawbacks of the proposal outweigh its estimated General Fund benefit in the budget year.
The administration contends its proposal addresses two problems:
To date, the administration has not provided clear evidence that plans unduly restrict or disrupt enrollees’ access to medically necessary drugs. Moreover, we are not convinced that declining state rebates are a problem. From the state’s perspective, two of the main purposes of managed care are to obtain (1) budget predictability through capitated rates and (2) better quality and efficiency of care through plans’ local decisions and clinical expertise. To achieve these purposes for pharmacy benefits, plans require the ability to administer their own formularies and UM policies, independent of state rebate considerations. Unlike the administration, we view the loss of state rebates as a necessary tradeoff to the clinical and financial advantages of including outpatient drugs in managed care.
The Governor’s proposal is an attempt to combine the fiscal benefits of two different delivery systems—keeping rebates at FFS levels while keeping managed care plans at financial risk for outpatient drugs. This mismatched framework may impair the cost-effectiveness of pharmacy benefits in managed care.
Potential Ongoing Net Cost to State. We are concerned the proposal shifts higher drug costs to managed care in return for greater rebate revenue to the state. Capitation dampens DHCS’ ability and incentive to weigh plans’ acquisition costs for single-source drugs against the state’s rebate potential for these more expensive drugs. As discussed earlier, this may lead the department to enter rebate contracts that eventually increase net costs to the state. Understanding these implications requires an extensive fiscal analysis of various factors. To our knowledge, the administration has not performed such an analysis to support its proposal.
Capitated Risk Without Plan Control Could Increase Budget Volatility for State. The proposal departs from a basic principle of managed care—that if plans are given financial risk for a benefit, they should also be given meaningful control over costs and utilization for that benefit. By following this principle, the state allows plans to manage appropriate access while keeping trends in spending—and capitated rate-setting—stable for their populations.
The options available to plans under the Governor’s proposal—(1) covering additional drugs outside the statewide CDL, (2) suggesting (not requiring) that prescribers first try less expensive alternatives to drugs on the statewide CDL, and (3) participating in the GSC to advise DHCS on the creation of the statewide CDL—do not constitute meaningful control over pharmacy benefits. These benefits represent roughly $650 million, or 18 percent, of General Fund support for Medi-Cal managed care rates. The proposal is likely to steer utilization toward single-source drugs on the statewide CDL in ways neither plans can manage nor the state can predict. If these unanticipated costs exceed a certain threshold, they may trigger interim rate adjustments and thereby increase volatility in General Fund spending. (Although DHCS generally sets capitated rates on an annual basis, if the department receives early indication that budgeted rates are too low to support plans’ costs for providing services, it may increase these rates through interim adjustments.)
A Step Backward Toward FFS-Style Process and Decisions. While the proposal keeps plans at financial risk for outpatient drugs, its model for drug contracting and formulary placement—in which DHCS, not plans, establishes and updates these policies—is closer to the government-driven approach to FFS pharmacy benefit design. We question whether DHCS can match the local clinical expertise of plans’ P&T committees. Although the GSC includes some plan representation, its statewide scope necessarily limits the contribution of (1) community physicians and pharmacists who sit on plans’ P&T committees, and (2) plans’ in-house analyses of utilization and outcome data for their enrollees. Moreover, the influence of the GSC is questionable, given DHCS’ final say on which drugs receive preferred status in managed care.
We agree that a Medi-Cal patient stabilized on a specific regimen for a life-threatening or disabling condition, such as epilepsy, should be able to continue this regimen without interruption. Plans maintain that their compliance with current statutory, regulatory, and contractual requirements—as well as their own clinical protocols—prevent undue lapses in therapy. The administration alleges that these existing measures do not adequately ensure continuity of care for patients who switch plans or providers. While we recommend the Legislature reject the Governor’s proposal, we also recommend the Legislature to investigate the access issues raised by the administration.
Do Problems Actually Exist? The Legislature should require DHCS to report at hearings to clarify—with concrete evidence from plan grievances or other sources, rather than anecdotes or formulary comparisons—what drug access problems exist or are imminent within Medi-Cal managed care.
If Problems Exist, Do They Relate to Standards or Monitoring? The Legislature should scrutinize the administration’s claims that any documented problems necessarily lie with the existing comparability standards. For example, most anecdotal concerns relate to the recent transition of Medi-Cal only SPDs from FFS to managed care, rather than beneficiary movement between plans. If the Legislature verifies these anecdotes, one possible explanation is that plans violated existing standards that should have been more carefully monitored and enforced by the administration during the transition.
If the Legislature’s investigation yields evidence that current standards are inadequate, it suggests two categories of options for legislative action. First, if the Legislature is not willing to continue giving plans meaningful control over access to certain drugs through UM, then it should discontinue placing plans at capitated risk for those drugs. We recognize there are some critical or lifesaving drugs that may be of special concern. For example, HIV/AIDS and mental health drugs are currently delivered through FFS. The second approach is for the Legislature to maintain these drugs as managed care benefits, while passing reforms that strike a reasonable balance between meaningful plan control and patient protection.
The Governor’s proposal, which mandates plans to provide blanket coverage of specific drug products without PA, is not a balanced approach to addressing continuity of care. For some conditions in which treatment is highly individualized, some patients may respond best to single-source drugs. But by the same token, other patients may fare as well or better on older, less expensive therapies. If a patient is newly diagnosed with such a condition, then—absent other clinical information to suggest which drug within a certain class will work best—it is reasonable for the plan to first authorize less expensive therapies. We note that the federal Medicare Program, which provides prescription drug coverage to 39 million seniors, allows regional differences among prescription drug plans (PDPs) that administer the Part D drug benefit. Generally, CMS only requires PDP formularies to contain two drugs for each disease category, with certain exceptions described immediately below.
Consider Medicare Part D “Protected Class” Model. Medicare Part D may offer some useful guidance for the Legislature’s work to balance continuity of care with meaningful plan control in Medi-Cal managed care. The CMS requires PDP formularies to include “substantially all” drugs in six “protected classes,” including anticonvulsive drugs used to control seizures, drugs used to prevent organ transplant rejection, and cancer drugs. The CMS defines “substantially all” to mean all drugs in all unique dosage forms, except that PDPs may cover generic versions of any multisource drugs within a protected class. For patients already stabilized on these drugs before enrollment, PDPs may not use UM policies such as PA or step therapy. However, PDPs may apply UM policies for beneficiaries beginning treatment for the first time with drugs in these protected classes.