California is planning a major overhaul of its Medicaid Pharmacy benefit, called Medi-Cal Rx, that will result in a “carve-out” of the entire pharmacy benefit from managed care to fee-for-service (FFS). The move is designed to standardise the Medi-Cal pharmacy benefit across California, strengthening the state’s ability to negotiate supplemental drug rebates with drug manufacturers. A carve-out already exists for certain drug classes such as HIV/AIDS drugs, blood factors, anti-psychotics, and drugs to treat substance use disorders. However, under this initiative, nearly all outpatient drugs and some physician administered drugs would be processed and billed under Medi-Cal Rx via Magellan Health (US), the new pharmacy administrative services vendor that has been selected for the programme on a five-year contract.
Medi-Cal-Rx was set to launch on 1 April 2021, however, California delayed the official start date of this major initiative after Magellan Health announced unexpectedly that it was in the process of being acquired by Centene Corporation (US) earlier this year. The California Department of Health Care Services (DHCS) needed additional time to ensure conflict avoidance protocols were in place. In May, a budget revision was introduced that assumed implementation of Medi-Cal Rx would start by 1 January 2022. The new start date was further confirmed this month after the DHCS announced that it had completed a review of the Conflict Avoidance Plan (CAP) submitted by Magellan and reiterated that implementation will begin on 1 January 2022.
The major overhaul of the prescription drug benefit for Medicaid in California is expected to put notable pricing pressure on the pharma industry.
CDL: A centralised Medicaid prescription drug formulary
Prescription drugs would effectively be removed from managed care plan (MCP) formularies to become part of the statewide Contract Drug List (CDL) with a few exceptions. Patients with prescriptions covered by MCPs might require prior authorization (PA) to receive the treatment if the drug is excluded from the CDL under FFS, although there will be exceptions made during the transition phase. The pharmacy benefit under Medi-Cal Rx will therefore be standardized across the state and will be subject to the same utilization management protocols under a single formulary.
Newsom’s EO, bulk purchasing, and IRP
The major overhaul of the Medicaid Pharmacy benefit in California was outlined as part of California Governor Gavin Newsom’s EXECUTIVE ORDER (EO) N-01-19 signed on 7 January 2019. The EO, which was signed within hours of Newsom taking office in 2019, laid out an ambitious plan to achieve cost savings for drugs purchased by the state through a major bulk purchasing initiative. The DHCS and the California Pharmaceuticals Collaborative (CPC; a coalition of state and local agencies) were tasked with developing a prescription drug list – likely to include some of the 25 highest-cost prescription drugs – which would be prioritised for bulk purchasing or renegotiation with the manufacturer. The state’s bulk purchasing programme is intended to involve local governments, and eventually even private purchasers including small businesses, health plans, and self-insured individuals, who would benefit from savings.
Furthermore, a Trailer Bill was passed as part of 2020-21 Budget, that altered the definition of “best price” as it applies to the Medi-Cal formulary (CDL) to mean “the negotiated price, or the manufacturer’s lowest price available to any foreign or domestic class of trade organization or entity… inclusive of cash discounts, free goods, volume discounts, rebates, and on- or off-invoice discounts or credits” ( W&I Code Section 14105.31). This authorizes DHCS to enter into contracts with drug manufacturers for inclusion of prescription drugs on the CDL formulary based on this new best price definition, thus, referencing drug prices both within and outside the United States. It is worth noting that there are no restrictions on which countries the “best price” could reference, as is traditionally done with international reference pricing (IRP) formulas.
Unprecedented leverage over negotiated rebates
The Medi-Cal Rx programme will give the state direct leverage over negotiated rebates for drugs prescribed to around 13.5 million Medicaid beneficiaries (up from 2 million previously covered under FFS), which is intended to achieve cost savings for the state. Most of the payor benefits are only likely to become clearer further down the line. Based on Governor Newsom’s EO, the state intends to establish a bulk purchasing programme that could further be expanded to private purchasers. Meanwhile, California’s definition of “best price” for inclusion in the FFS formulary will likely result in an unprecedented use of IRP in the state. Prices in the US are markedly higher than the rest of the world. In fact, last year we found that the list prices for the top 10 Part B and Part D Medicare drugs were over 80% lower in France and Australia compared to the US (source: POLI). Prices could be even lower in developing countries.
Other states will certainly be looking at California to see how successful this major overhaul is both in terms of implementation and savings generated; and could end up following suit. New York state had also planned to introduce a similar “carve-out” for its Medicaid pharmacy benefit in May 2021, but has since enacted legislation that will delay its implementation by two years until 1 April 2023.