Nonprofit PBMs Saving States on Medicaid Costs

July 7, 2003 ( - The purchasing pool for prescription drugs set up by Vermont, Michigan and South Carolina is already experiencing Medicaid savings of 25% to 50%.

The pool, established by the trifecta of states less than a year ago, leverages the combined market share of 1.5 million Medicaid beneficiaries to obtain more favorable pricing. For example, Vermont has already seen drug manufacturers agreeing to supplemental rebates skyrocket to 29 from just 12 since inception of the program, John Michael Hall, an assistant to Vermont’s Secretary of Human Services, told the National Legislative Association (NLA) on Prescription Drug Prices, according to Washington-based legal publisher BNA.

Thus, Vermont now has budgeted for only an 8%-increase in Medicaid drug costs this year. By comparison, prescription drug costs for state employees, who are not in a pool and are a unionized group, are expected to go up 18%, Hall said.

Separately, Michigan is reporting savings of $45 million by participating in the pool during its first year. No data on South Carolina’s current rates was given.

Set Up Rules

Under federal Medicaid regulations, the Centers for Medicare & Medicaid Services will approve supplemental programs only for the Medicaid population or for other low-income groups, according to David Viele of First Health Services, which administers the three-state pool. Prior authorization is an essential tool for achieving pool savings, Viele said. “States that do not require prior authorization do not achieve savings,” he stated. Michigan gives First Health authority to deny requests if doctors fail to provide adequate medical justification for prescribing drugs not on the preferred list.

So far, the result in Michigan has been close to 95% compliance with the preferred drug list, Viele said. Both doctors and drugmakers have become used to the list. Additionally, legal challenges to preferred drug lists by the pharmaceutical industry all have failed, Viele added.

Now Michigan is looking to extend the good fortune to other states, Viele said. While specific numbers were not given, other states that are looking into joining the pool will have their initial participation regulated to six months through an intergovernmental agreement, under federal rules.

Initial Proposals

NLA is currently hearing proposals from two nonprofit pharmacy benefit managers (PBM) seeking to set up a plan that could cut drug prices for large groups of people within NLA’s nine states and the District of Columbia:

  • AmeriHealth Mercy, a mid-Atlantic organization that manages pharmacy care for Medicaid beneficiaries in five states.
  • RegenceRx, an Oregon organization that administers commercial coverage in four Western states.

AmeriHealth Mercy emphasizes utilization management, which commercial PBMs do not design for Medicaid populations, said Thomas Lyman, a senior vice president. The trend in Medicaid prescription drug cost increases is 20% a year, while for AmeriHealth Mercy plans the increase is averaging 8.8% a year. Additionally, each participating state can customize its plan under AmeriHealth Mercy management.

RegenceRx recommends that all states adopt the same preferred drug list to achieve greater effectiveness in changing utilization patterns, said vice president David Clark. The company places great emphasis on its science-based clinical review program, he told the legislators. Commercial PBMs have not provided great savings because they keep a high percentage of rebates and they are not at risk for increased costs. Responding to a legislator’s query, Clark said the company would not object to importing drugs if it were deemed legal.