Separating Pharmacy, Medical Benefits in Medicaid Plans Increases Costs

States that decide to carve out their pharmacy benefits from Medicaid plans have significantly higher costs, according to a report requested by America’s Health Insurance Plans (AHIP) from The Menges Group.

The paper analyzed 28 states and the District of Columbia that carve in the pharmacy benefit, 7 states that carve out the benefit, and 15 states that do not use the capitated Medicaid managed care organization (MCO) model. The report then compared the experience of states that recently carved-in pharmacy benefits to those that continue to carve them out.

“The findings from these three approaches were consistent and compelling—the carve-in model is out-performing the carve-out approach by a wide margin with regard to cost savings,” the authors wrote.

Overall, MCOs are more likely to use generic drugs, with these less expensive drugs making up 82.8% of all MCO prescriptions compared with 78% of all fee-for-service prescriptions. Among the states utilizing the MCO model, the 28 states and the District of Columbia using the carve-in model had a net cost per prescription in fiscal year 2014 that was 14.6% lower than the average for carve-out states.

From fiscal year 2011 to 2014, carve-out states reported a 20% increase in net costs per prescription. However, the 6 states that switched to the carve-in model during that time frame essentially had flat costs, according to the report. In total, carve-out states missed out on an estimated $307 million in savings had they used the carve-in approach.

Overall, the report found that carving out pharmacy benefits undermines the objective of achieving cost-effectiveness in Medicaid and separating pharmacy and medical benefits will likely have implications for efforts to reduce unnecessary hospitalizations and improve quality of care through medication adherence, care coordination, and timely provider interventions.

“Medicaid plans’ ability to provide coordinated care through pharmacy benefits is crucial for beneficiaries and critical to protecting taxpayers and state budgets,” AHIP President and CEO Karen Ignagni said in a statement. “Allowing health plans to coordinate health and pharmacy benefits is essential for improving and maintaining the health of Medicaid beneficiaries and protecting limited state resources.”