Managed Medicaid boom could mean more generics

Now that most generics have declined in cost, plans will look for new ways to control health spend and ensure that generics are being used whenever possible. Prescription drug spending is down, and generic drugs made up 77% of all 2012 prescriptions, according to the Centers for Medicare and Medicaid Services. Could this generic utilization percentage go even higher as a result of recent healthcare legislation?

Medicaid is increasingly becoming a managed care program, and states are looking to entities like pharmacy benefit managers to help them manage their drug spend.

The coming boom in managed Medicaid

The market growth in government-based health care is likely to drive managed care organizations to utilize more generics. As more Medicaid enrollees gain access to coverage as a result of the Affordable Care Act, these patients may need to increasingly be managed by outside entities to keep costs low. The Centers for Medicare and Medicaid has estimated that Medicaid expansion could add 8.8 million more people by 2016.

Managed Medicaid is essentially an arrangement between a state Medicaid program and a managed care organization, or MCO. The program began in the 1980s as states were first moving Medicaid patients into MCOs for better care and fewer unnecessary services and costs. Under managed Medicaid, the MCO provides services to Medicaid enrollees for a fixed, per capita payment. These services are similar to those that the MCO provides to their commercial customers enrolled in private plans. There are two prevailing types of managed care models: 1) a risk-based MCO and 2) a fee-for-service primary care case management model, PCCM.

Before the 2010 passage of the Affordable Care Act, states were forbidden from collecting rebates on medications that MCOs purchased for Medicaid beneficiaries. In April 2010, the ACA expanded the Drug Equalization Act to managed Medicaid enrollees. This allowed CMS to get the same drug discounts under the managed Medicaid program as it did under a fee-for-service PCCM.

The shift from a fee-for-service to a capitated model has more than doubled the share of Medicaid prescriptions handled by managed Medicaid plans. IMS has calculated that from September 2011 to June 2012, the amount rose from 19% to 46%. Over the same period, the number of monthly prescriptions these plans dispensed rose from 4.9 million to 12.5 million. In their study, IMS determined that states using managed Medicaid had generic utilization rates of 3% to 14% higher than in states using fee-for-service. This could be indicative of future generic usage as states enroll more Medicaid patients into managed care plans.

States became eligible for drug rebates in 2010. Before then, many would carve out the pharmacy benefit from managed Medicaid contracts to maximize their reimbursement returns. States with capitated managed care contracts can “carve out” certain services from capitation rates and continue to provide them on a fee-for-service basis, meaning that the prescription drug benefit plan is managed separately from the other benefits in a health plan. But now that rebates are allowed, the number of states with carve-outs has declined.

A wrinkle in the new managed Medicaid equation is that now these plans are not required to provide access to all of the drugs from manufacturers that participate in drug-rebate programs. This may mean that fewer brand-name drugs will be given to enrollees, and more generics will be provided instead.

CVS Caremark is the managed Medicaid leader

States have a strong incentive to manage the cost growth associated with managed Medicaid. This is due partly to the previously mentioned expansion of drug rebates. New drug rebates will contribute to savings, but the management of capitation costs also will be essential.

It appears that PBMs, which also are large supporters of the use of generic and biosimilar medications, will drive managed Medicaid control. CVS Caremark recently revealed in its 2013 analyst day report that its PBM alone controlled 28% of the lives enrolled in managed Medicaid in 2013, making the company the leading PBM in the managed Medicaid market. The three biggest PBMs — CVS Caremark, Express Scripts and OptumRx — control half of managed Medicaid, versus 67% of the overall market, according to a report from Pembroke Consulting.

In addition, overall managed Medicaid enrollment is expected to grow by 42% by 2016, according to CVS Caremark. By that year, PBMs will therefore be managing more than 8 million new lives. CVS executives say this growth will come from two main sources: 1) members transitioning from fee-for-service Medicaid to managed Medicaid and 2) new enrollees from Medicaid-eligibility expansion.

Thanks to a recent deal with Cardinal Health, CVS also will benefit from improved generic sourcing. As a result, CVS will add critical scale at a critical time when the company has the most number of lives in its hands.