California Makes Waves With Pharma Benefits, Purchasing Plan

By Leslie Small

Under the direction of its new governor, Democrat Gavin Newsom, California is planning to take control of the pharmacy benefit for all of the state’s Medi-Cal beneficiaries — the vast majority of which currently have that part of their care administered by private insurers and their PBMs. What's more, the order directs state agencies to create bulk-purchasing arrangements for high-priority drugs and establish a framework for letting private businesses and insurers join the state's buying pool.

The idea of the state's Medicaid program shifting to an entirely fee-for-service drug benefits system is already sparking worries about what it will do to PBMs' bottom lines.

"We suspect that the fee-for-service aspect [of the executive order] may have an adverse impact on PBMs and potentially MCOs that provide managed Medicaid services in the state," RBC Capital Markets, LLC analyst George Hill wrote in a research note. Currently, California's Medicaid managed care organizations contract with 10 different PBMs to administer the pharmacy benefit for 10.64 million managed Medicaid lives — which comprise nearly 90% of the state's total Medicaid lives.

In addition, one concern for managed care plans is the fact that carving out benefits makes it more difficult to coordinate care, according to L.A. Care CEO John Baackes.

"I think one of the advantages of a managed Medi-Cal plan like ours is that for people who are in very difficult circumstances health-wise, we do provide an element of care management that's important," he says. "And if there's an element of the benefit that we don't control, then it's awkward."

Regarding the the concept of California starting a bulk-pharmaceutical buying program, Andrey Ostrovsky, M.D., former chief medical officer at CMS's Center for Medicaid and CHIP Services and current CMO at Solera Health, says it could indeed help drive down prices, current CMO at Solera Health, the idea of California starting a bulk-pharmaceutical buying program could indeed help drive down prices, since the PBMs that currently serve the state operate independently.

But other experts aren't so sure.

"If you're negotiating directly with the manufacturers on drug prices, how's the delivery system of that going to work, and how are the pharmacies, at the local level, going to be able to maintain a profit and not lose money?" asks Brian Anderson, a principal with Milliman, Inc. Just because a state can negotiate a large rebate from drug manufacturers doesn’t necessarily mean it's negotiating a lower drug price, he adds.

From RADAR on Drug Benefits