RD610 - Pharmacy Program Design and Fiscal Impact Analysis Final Report – November 26, 2019

Executive Summary:

The pharmacy benefit is an important and growing portion of Medicaid costs and many states are exploring new and innovative options to address the rising cost of prescription drugs, reimbursement to pharmacy providers and the cost of pharmacy benefit management over time. Pharmacy Benefit Management (PBM) revenue streams have historically been challenging for managed care organizations (MCOs) or Medicaid programs to quantify and monitor. As a result, many Medicaid programs are exploring or implementing new pharmacy program design models that incorporate increased transparency of PBM revenues, financial terms, pharmacy reimbursement requirements and administrative costs and are working to identify methods to monitor and track the impact that PBM revenues and administrative costs have on total drug costs to the Medicaid program. The Virginia Department of Medical Assistance Services (DMAS) engaged Mercer Government Human Services Consulting (Mercer), part of Mercer Health & Benefits LLC, to conduct a pharmacy program evaluation and fiscal impact analysis of three pharmacy program design models identified by the Virginia General Assembly. The three models included:

1. Mandatory Pass-Through Pricing (Transparent Pharmacy Program Design model) — In a mandatory pass-through pricing program design:

A. The subcontracted PBM is required to charge the MCO the same amount for a prescription as is paid to the pharmacy provider.

B. The PBM is required to pass-through 100% of rebates collected from drug manufacturers to the MCO.

C. The PBM may continue to pay pharmacies based on a negotiated contractual rate.

D. The PBM earns revenue to fund administrative operations through a transparent mechanism such as a per claim or per member administrative fee.

2. Pharmacy Benefit Carve-Out (Carve-Out model) — In a full pharmacy benefit carve-out program design:

A. All pharmacy services are carved-out of the Medicaid managed care program and would be administered directly by DMAS, its contracted fiscal agent or a DMAS selected pharmacy benefits administrator (PBA).

B. The Commonwealth of Virginia (Commonwealth) has the flexibility to decide which components of pharmacy management would be performed internally with DMAS staff and, which would be outsourced to vendors with expertise.

3. State Mandated Pharmacy Provider Reimbursement (State Mandated Reimbursement model) — In the state mandated pharmacy provider reimbursement program design:

A. MCO contracts would include a clause requiring the MCO’s PBM to pay the enrolled pharmacies using the same methodology as the DMAS fee-for-service (FFS) program.

B. The MCOs would remain at risk for the pharmacy benefit and could continue to contract with the MCOs using any contractual administrative fee model (including spread or pass-through).

The objectives of the project included:

• Quantitative Analysis: Completion of an actuarial analysis of the potential fiscal impact of each of the three identified pharmacy program design models.

• Qualitative Analysis: Identification of the advantages, challenges and other considerations associated with the selection of each pharmacy design model, including the projected operational impact to DMAS functions, staff requirements and oversight activities.


Mercer summarized the results of the actuarial analysis for State Fiscal Year (SFY) 2019 (July 1, 2018 to June 30, 2019) of the three models in Table 1 (see page 3). Fiscal estimates represent the combined impact to the Virginia Medicaid program during SFY 2019 and are broken out by state and federal funding sources. The fiscal impacts may be larger in future years as the Expansion population becomes fully integrated into the Virginia Medicaid program.

• Mercer estimates the pharmacy benefit carve-out model could potentially provide the greatest savings opportunity, but it would require the greatest implementation costs and create potential disruption for members, providers and MCOs. The potential disruption could be mitigated with a robust implementation and transition plan.

• The mandatory pass-through pricing model could potentially save the Virginia Medicaid program $10.1 million. However, it is possible that DMAS could achieve similar savings in the capitation rates by applying an administrative efficiency adjustment without mandating adoption of pass-through PBM contracts.

• The State mandated pharmacy reimbursement program design would potentially increase costs to the Virginia Medicaid program by $20.3 million. This model assumes a full Uniform PDL would be adopted. Without a Uniform PDL, the mandated pharmacy reimbursement model would increase total costs to the Virginia Medicaid program by $14.6 million or $5.4 million state share. Mercer’s ability to analyze the potential impact of the full uniform PDL was constrained by limited data on additional supplemental rebate opportunity. Mercer recommends that a more robust analysis of the supplemental rebate opportunity be completed prior to any decision regarding adoption of a full Uniform PDL. In the absence of a mandated pass-through methodology or administrative efficiency adjustment, Mercer assumes that the PBMs will retain their current amount of administrative revenue through a combination of spread pricing and administrative fees in this pharmacy program pricing model.

To accomplish the quantitative analysis objective, Mercer performed the following steps:

1. Summarized MCO encounter data with dates of service from July 2018 through December 2018.

2. Applied adjustments to this base data to estimate annual managed care pharmacy program costs for the time period between July 1, 2018 and June 30, 2019. These adjustments accounted for:

A. Relative enrollment changes that occurred through June 2019.

B. Seasonality to account for cyclical changes not represented in the base data. Mercer also estimated pharmacy costs for the Medallion 4.0 and Commonwealth Coordinated Care Plus (CCC Plus) Expansion populations for January 1, 2019 through June 30, 2019. These populations became eligible for Medicaid managed care effective January 1, 2019, and therefore their claim experience were not included in the base data.

The managed care programs in this analysis included:

• Medallion 4.0 — Mothers, Children, Adults Age 18–64.

• CCC Plus — Medically Complex Populations.

• Expansion population (adults with income levels up to 133% of the federal poverty level) enrolled in either Medallion 4.0 or CCC Plus. Mercer did not include the Family Access to Medical Insurance Security (FAMIS) and FAMIS Moms in the analysis.

• Mercer applied a series of adjustments to the annualized MCO encounter base data to estimate the potential fiscal impact for the pharmacy program design models. Table 2 (see page 5 )lists and describes the financial adjustments Mercer considered in the analyses. Adjustments were applied to each model as applicable; Mercer did not apply all adjustments to each model.

Further details of the methodology of each of the analyses may be found in Section 4 and Appendix A of this report.


To accomplish the qualitative objective of the analysis, Mercer performed the following steps:

1. Conducted a comprehensive policy and operational review of the current DMAS pharmacy program design:

A. Mercer included a detailed review of DMAS current pharmacy benefit design and operational structure in Section 2 of the report. The Section also includes background on the administrative fee structure arrangements used by PBMs.

B. There are two general forms of PBM contractual administrative fee structures used by PBMs in their contracts with MCOs: 1) pass-through pricing (transparent) and 2) spread pricing (traditional). In a pass-through pricing model, the PBM charges the MCO the same amount as is payed to the pharmacy provider for each prescription. In a spread pricing model, the PBM is able to charge the MCO an amount different from the amount paid to the pharmacy provider. The difference, or spread, is retained by the PBM as revenue to fund clinical or administrative operations. A per claim or per member administrative fee can be assessed by the PBM in either a transparent or traditional structure, although the fee is generally higher in a transparent structure because it is not supplemented by spread revenue.

C. In the subsequent table, Mercer provides a summary of the current administrative fee structure utilized by each of the DMAS contracted MCOs and their subcontracted PBMs in Table 3 (see page 6).

2. Performed a comprehensive review of each pharmacy program design model. The review of each option included multiple components:

A. Medicaid Environmental Scan:

i. Mercer performed an environmental scan of all Medicaid programs to identify programs that had implemented one of the three selected models. Mercer also provided a summary of the reported financial and/or operational experience of each model.

ii. Mandatory Pass-Through Pharmacy Program Design Model:

a. Ohio implemented a mandatory pass-through pharmacy program design model in January 2019. An early report has identified the implementation of the pass-through model resulted in a 5.74% increase in payments to enrolled pharmacy providers.(*1) Data on the total financial impact to Ohio’s Medicaid program is not yet available.

iii. Pharmacy Benefit Carve-Out Model:

a. West Virginia implemented a pharmacy benefit carve-out of managed care to FFS in July 2017.

iv. State Mandated Pharmacy Provider Reimbursement Model:

a. Mississippi and Louisiana have implemented this model. Since 2011, Mississippi has mandated that pharmacy provider payments in managed care follow the same methodology as the FFS program. Louisiana implemented a similar policy for a subset of independent pharmacy providers in 2018. Managed care capitation rates were adjusted upward to accommodate the new policy. The magnitude of the financial impact for the Mississippi and Louisiana models is not publicly available.

B. Operational Evaluation:

i. Adopting any of the three pharmacy program design models would represent a substantial change for DMAS staff and contracted vendors. Significant planning and resources would be needed for implementing any of the three program design models. Mercer identified and summarized several significant operational considerations in Table 4 (see page 8).

Implementation of a program design change would be expected to take between six and 36 months. Implementation of the mandatory pass-through pricing model and the mandated pharmacy provider reimbursement methodology model would be on the low end of that estimate; implementation of a pharmacy benefit carve-out would be on the high end of the range.

• Advantages and Challenges:

– Mercer identified the advantages and challenges of each pharmacy program design model from the perspective of the DMAS administration, the provider community and enrolled members.

– A summary of our findings are in the tables below. Additional detail on the analysis of each model is included in the full report.


There are many factors that must be considered before the final selection and implementation of a pharmacy program design model. DMAS must align final selection decision with department, agency and state goals. Additionally, fiscal and operational impact considerations must be evaluated. Stakeholder, provider and member concerns and/or suggestions should be considered, but DMAS must prioritize considerations that are most important for the program. For example, if transparency in the pharmacy program is the most important factor for consideration, then a pass-through pricing model or pharmacy benefit carve-out model should be considered. If provider reimbursement is paramount, then a state mandated pharmacy provider reimbursement methodology or pharmacy benefit carve-out model should be considered. Likewise, if DMAS would prefer contracted MCOs to share risk of pharmacy drug costs, then either the mandatory reimbursement methodology or the mandatory pass-through pricing models would be likely options. In the table below, Mercer summarizes the priorities for DMAS consideration and designates whether the pharmacy program design models would support each of those priorities.
(*1) https://medicaid.ohio.gov/Portals/0/Resources/PharmacyTransparency/ODM-HDS-Qtr1-Analysis.pdf