Too many politicians are willing to fleece taxpayers for political gain. Repealing Obamacare failed last year because lawmakers feared a backlash if they cut Medicaid and Obamacare spending. Another example is recent proposals in Kentucky, Arkansas and Ohio to further expand Medicaid budgets by increasing payments to pharmacies that fill Medicaid prescriptions. Interest groups, such as pharmacy lobbyists, are promoting a bill that would require Kentucky to return Medicaid drug benefit management to state bureaucrats, who have less incentive to control costs.
One goal lobbyists hope to achieve is to persuade lawmakers to raise fees for dispensing drugs (i.e., counting and bottling pills). State Medicaid drug programs typically pay much higher dispensing fees than the private sector. It is estimated that every $1 enhance in Medicaid prescription drug dispensing costs in Kentucky will cost federal and state taxpayers about $27 million.
Medicaid is a partnership between the federal and state governments. States can slightly customize how they administer Medicaid drug benefits. One positive thing Obamacare did (yes, there was one) was encourage states to hire private companies to administer Medicaid drug benefits. Regardless of how the program is administered, Medicaid enrollees receive their medications at local pharmacies. The pharmacies are then reimbursed for the drug for each prescription filled, plus a dispensing fee. When a state administers Medicaid drug benefits, the state agency sets fees and reimburses pharmacies through a system called fee-for-service (FFS). About half of states still “carve out” and administer their own drug benefits, usually paying higher fees than private companies. The remaining 26 states hire private companies to administer Medicaid drug benefits, called pharmacy benefit managers (PBMs).
Another problem with state Medicaid FFS programs is that they are also susceptible to lobbyists who influence lawmakers to intervene in state policy. Here’s the crux of the matter: When private companies administer Medicaid drug benefits, politicians can’t so easily interfere with the program and cater to pharmacy owners who lobby for higher fees.
This is essential because employers, insurers and PBMs want to keep costs down. In turn, some Kentucky politicians want to enhance costs by paying pharmacies hundreds of millions of dollars more. Their ultimate goal is to enhance pharmacy profits.
PBMs span many states and have a variety of public and private clients. These are the same private drug plans that manage Medicare benefits for seniors, as well as benefits for employee health plans and health insurers. In other words, using private companies to manage drug benefits is standard practice for virtually every other health plan. In the past few years, states have been moving away from FFS and contracting with PBMs to save money. But Kentucky lawmakers are trying to buck that trend for political gain by requiring the state to manage Medicaid drug benefits.
PBMs have much more purchasing power and experience than any state agency. They also do a better job at a lower cost than state Medicaid programs. For example, FFS drug prices often vary unnecessarily from pharmacy to pharmacy. State Medicaid FFS programs arbitrarily pay much higher dispensing fees than they would in a competitive market. State Medicaid FFS programs are less likely to exploit low-cost, generic drugs than managed drug plans. In addition, unnecessary and redundant prescriptions are often higher in state-managed FFS drug plans.
A 2013 report commissioned by former Alabama Gov. Robert Bentley estimated that the state could save as much as $35 million annually by turning over Medicaid drug management to private companies. A 2016 study estimated the state’s share of the savings at more than $500 million over 10 years. Kentucky’s governor has warned that if the state’s Medicaid agency takes over drug management from PBMs, it would enhance taxpayer costs by $161 million.
Medicaid costs are paid for by federal and state taxpayers. Whether we are Republicans or Democrats, most of us believe our taxes should be used wisely. Medicaid drug programs are no exception. Too often, public programs like Medicaid can become state and local economic development programs whose advocates hope to pass on some of the costs to taxpayers in other states. That’s a bad deal for taxpayers in Kentucky, Arkansas and residents with similar proposals in other states. It’s also a bad deal for federal taxpayers who share the costs.
Devon M. Herrick, Ph.D., is a health economist and policy advisor at the Heartland Institute.
