MEDICAID PREFERRED DRUG LIST OPTIONS FOR STATES
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MEDICAID PREFERRED DRUG LIST
OPTIONS FOR STATES
State Medicaid Alternative Reimbursement and
Purchasing Test for High-cost Drugs (SMART-D)
February 2020
Center for Evidence-based Policy
Oregon Health & Science University
3030 SW Moody Ave., Suite 250
Portland, OR 97201
Phone: 503-494-2182 • Fax: 503-494-3807
http://centerforevidencebased policy.org
The SMART-D Initiative
State Medicaid programs must navigate the
complicated landscape of drug purchasing.
To help states make informed drug coverage
decisions, the State Medicaid Alternative
Reimbursement and Purchasing Test for High-
Cost Drugs (SMART-D) initiative was launched in
February 2016 by the Center for Evidence-based
Policy at Oregon Health & Science University,
with financial support from the Laura and John In 2019, SMART-D began a new phase of work
Arnold Foundation, now Arnold Ventures. The on pharmacy policy interventions. This phase
initiative is a collaborative effort to support will run until September 2021 and provide
states in the development of alternative payment research and technical assistance to states on 2
models (APMs) for prescription drugs and focus areas: multi-payer purchaser partnerships
pharmacy policy interventions. involving Medicaid, other public purchasers, and
private insurance carriers; and single and aligned
From 2016 to 2018, the SMART-D initiative preferred drug lists (PDLs) for Medicaid managed
focused on helping states identify potential APMs care states.
for managing Medicaid prescription drug costs.
These APM options are designed to improve This brief on preferred drug list options compiles
access to evidence-based therapies for Medicaid our survey of the existing evidence and blends
enrollees, while helping policymakers predict it with states’ experiences to date. The analysis
and manage prescription drug costs in a manner will serve as the basis of the SMART-D team’s
that connects price, payment, value, and health technical assistance to a selection of states as
outcomes. Drawing upon international and they seek to innovate in the areas of multi-agency
U.S. commercial market models, our research purchasing and preferred drug lists. Both the
identified a series of alternative payment options multi-agency purchasing and PDL options brief
and existing legal pathways for state Medicaid will be posted at http://smart-d.org/research-and-
programs to use when paying for high-cost drugs. reports when final.
The Phase 1 SMART-D reports are listed below and can be found at:
http://smart-d.org/research-and-reports.
• SMART-D Phase 1 Summary Report, September 2016
• Medicaid and Specialty Drugs: Policy Options, June 2016
• SMART-D Economic Analysis, September 2016
• SMART D Alternative Payment Model Brief, October 2016
• SMART-D Legal Brief, September 2016
Medicaid Preferred Drug List Options for States • 2Contents
The SMART-D Initiative............................................................................................................................... 2
Executive Summary...................................................................................................................................... 2
Purpose and Scope ...................................................................................................................................... 3
Introduction ................................................................................................................................................... 4
State PDL Structural Options..................................................................................................................... 4
Regulatory and Policy Framework for State Medicaid PDL Decisions............................................... 6
Problems States are Trying to Address Through PDL Structure.........................................................................9
1. Administrative Efficiencies .................................................................................................................9
2. Patient Access and Care Management...........................................................................................11
3. Managing Drug Cost Growth and Transparency ........................................................................ 13
4. Population Health and Reform Efforts...........................................................................................16
Key Questions When Considering a Shift to Single or Aligned PDLS..............................................17
Conclusion....................................................................................................................................................19
Sources..........................................................................................................................................................21
Appendix A. List of Interviewees and Advisors....................................................................................26
Appendix B. Overview of Key Considerations by State Medicaid PDL Structures ......................28
Acknowledgments
This report was prepared by the Center for Evidence-based Policy with funding from Arnold Ventures.
Authors: Gretchen Morley, MPA; Susan Stuard, MBA; and Virgil Dickson
Contributing team members:
Pam Curtis, MS
Rachel Currans-Henry, MPP
Rhonda Anderson, RPh
Mike Bonetto, PhD, MPH, MS
Galen Gamble
Suggested citation: Morley G, Stuard S, Dickson V. Medicaid preferred drug list options for states: state
Medicaid alternative reimbursement and purchasing test for high-cost drugs (SMART-D). Portland, OR:
Center for Evidence-based Policy, Oregon Health & Science University; 2020.
Medicaid Preferred Drug List Options for States • 1Executive Summary either carved out of or carved in to MCO
capitation rates.4
Introduction
The overall PDL structure has implications for
State officials across the country are looking how pharmacy benefit management functions are
for ways to control Medicaid drug costs. One organized. Some key takeaways include:
cost control lever is the preferred drug list
• A Medicaid single PDL allows for the most
(PDL), which creates preferred or open access
alignment of pharmacy benefit functions
for outpatient drugs deemed to be medically
across the entire Medicaid population, but
appropriate and cost effective. PDLs are
may work against MCOs’ efforts to align
developed and deployed in states within their
benefit functions across their broader book
fee-for-service (FFS) and managed care delivery
of business (Medicaid, Medicare Advantage
systems.1-3 States are exploring how to leverage
and commercial).5
the PDL tool in new configurations, such as the
use of single or aligned PDLs that would span a • Conversely, multiple PDLs allows the most
state’s FFS and managed Medicaid enrollees. flexibility for MCOs to align functions
across their public and private lines of
There is a lack of independent policy analysis business but diminishes a state’s direct
on Medicaid PDL structures to guide state ability to align drug selection across their
decision making. This brief provides a resource by entire Medicaid population.3
highlighting states’ experiences with various PDL
approaches, as well as the perspectives of key • Under multiple or aligned PDL approaches,
stakeholders, such as managed care organizations the state will always have a parallel
and pharmacists. duplication of pharmacy benefit management
functions for its FFS population.4
State PDL Structures • Aligned PDLs provide the possibility for a
State Medicaid agencies use 3 PDL structures: middle ground to coordinate preferred status
and other drug management elements, while
1) Multiple PDLs: A multiple PDL structure
allowing MCOs to continue to directly manage
allows each managed care organization
the pharmacy benefit for their enrollees.
(MCO) to develop and maintain its own
While this alignment is beneficial for patients
PDL, and the state also maintains a PDL
and providers, there is no streamlining of
for its FFS program. Multiple PDL models
benefit management functions, and the state
operate within a managed care structure
and MCO continue to have duplication of
where customarily the MCOs are financially
pharmacy benefit functions.6
at risk for its enrollees’ drug costs.4
2) Aligned PDLs: Under an aligned PDL Problems States Are Trying to Address
structure, MCOs are at financial risk for the Through PDL Structure
cost of drugs for their enrollees. In contrast
Interviews with state policy leaders (see
to a multiple PDL model, an aligned PDL
Appendix A) identified several concerns that
approach selects the same preferred drugs
drive decision making to a single or aligned PDL
for MCOs and the state’s FFS program.4
structure. These concerns include:
The state and MCOs typically use a
collaborative process to establish alignment • Streamlining the administration of the
criteria on a class-by-class basis.4 pharmacy benefit at multiple levels,
providing a single PDL for providers,
3) Single PDL: Under a single PDL structure, prescribers, and consumers to navigate.
there is one PDL used by the state’s FFS
program and any contracting MCOs. • Ensuring common access to medications
Financial risk for a single PDL can be and supporting care management needs
Medicaid Preferred Drug List Options for States • 2through minimizing disruption and tradeoffs for a state and its constituents when
confusion, particularly when enrollees trying to manage escalating drug costs.
change managed care plans.
• Managing drug cost growth through Purpose and Scope
leveraging the purchasing power of
both managed care and FFS lives, and State Medicaid officials are looking for new ways
gaining transparency on rebate collection, to control drug expenditures as costs continue
pharmacy benefit manager payments, and to soar. Since 2003, Medicaid programs have
other financial transactions. implemented preferred drug lists (PDLs) for their
outpatient drug benefit in an attempt to shift
• Providing a common base to support utilization to more cost-effective products, control
population health and reform efforts across expenditures and improve patient outcomes.
all Medicaid lives and perhaps other public Preferred drug lists identify outpatient drugs
health, public employee, or other programs. deemed by payers as medically appropriate,
cost effective, and not generally requiring prior
Key Questions When Considering a Shift to authorization. This brief explores options for PDL
Single or Aligned PDLs structures by drawing on states’ experiences and
This brief lays out questions for states to available literature to identify key considerations
explore, in collaboration with provider, pharmacy, and decision points. The brief gives state Medicaid
managed care, and consumer stakeholders, when officials a resource for working with policymakers,
considering changes to their PDL structure. executive leadership, and stakeholders as changes
These include: in PDL structure are considered.
1) What are the state’s goals for health care
There is a lack of independent evaluation on
reform and how does its Medicaid program
the topic of PDL structure as most studies,
and the role of pharmacy fit into the picture?
analyses, and policy documents are put forward
2) What is the current situation across MCO by a particular stakeholder perspective. This
PDLs and pharmacy benefit managers (PBMs)? brief provides a range of perspectives, including
those of key stakeholders such as managed care
3) What impact would a new structure have
organizations (MCOs) and pharmacists, on the
on Medicaid program costs?
use of single PDLs where possible, and highlights
4) How are MCO capitation rates affected by current state experiences with this approach to
the PDL structure being considered? pharmacy management. The focus of the brief
5) What implementation approach is appropriate is on outpatient drugs, but we recognize that
for your state given all other considerations? many states are increasingly concerned about the
cost of clinician-administered drugs not typically
6) How will the state’s administrative structure included on state PDLs.
need to be changed or expanded?
7) What data exchange and analytic support This report is based on a review of publicly
will be needed under the new structure? available reports, policy literature, and key
informant interviews with state leaders, including
Conclusion state Medicaid agency directors, medical
directors, pharmacy directors and program
States need to weigh a wide range of interacting
managers, as well as executive branch health
variables when determining the best PDL
policy advisors. Participating states represented
structure for their Medicaid program. This brief
a range of Medicaid program sizes and benefit
seeks to draw out key themes, experiences,
design structures (fee-for-service, administrative
and considerations based on a range of state
service organizations, and managed care) and
agency and stakeholder perspectives. There is
included: Connecticut, Delaware, Louisiana,
no one right decision; rather PDL structures offer
Medicaid Preferred Drug List Options for States • 3Michigan, Missouri, New Mexico, Ohio, Oregon, Because the federal rebates are based on a
South Carolina, Texas, Virginia, Washington, and formula, states do not negotiate rebate levels, but
Wisconsin. (See Appendix A for a detailed list may shift utilization to drugs with higher rebates.
of interviewees.) Any concepts not specifically Some states invite drug manufacturers to provide
cited with published literature are based on “supplemental rebates,” which are additional
the authors’ synthesis of information obtained rebate dollars to encourage the state to prefer
through interviews of state representatives. their products. Supplemental rebates are not set
based on a formula but instead are negotiated by
Introduction states or their vendors.
The Medicaid program is one of the largest States leverage placement on their PDL to obtain
payers for health care services in the nation, supplemental rebates.12 States have begun to
covering an estimated 65 million people as of explore the use of centralized single PDLs to
August 2019.7 Medicaid spending grew 2.9% from span all Medicaid enrollees, both those in FFS
the previous year, totaling $581.9 billion, equal and managed care.13,14 Medicaid officials theorize
to 17% of U.S. health care spending in federal making such a change could increase rebates
fiscal year (FY) 2017.8 Medicaid enrollees are from drug manufacturers by negotiating on
more likely to have chronic health conditions, be behalf of the entire enrolled population, resulting
disabled, and have lower incomes compared to in overall lower or more controlled growth in
those in private insurance.9 drug costs, while reducing administrative burden
for health care providers, increasing access for
Also, in federal FY 2017, Medicaid spent beneficiaries, and supporting population-based
approximately $64 billion on outpatient health initiatives.15,16
prescription drugs, an increase of 40% from
$43.2 billion in FY 2014.10 The primary reasons State PDL Structural Options
cited for the increase in spending are the
introduction of new high-cost drugs and price State Medicaid agencies currently employ a range
inflation for existing drugs.10 The average of PDL structures that go hand-in-hand with their
expenditure for these high-cost drugs has managed care approaches as noted in Table 1:
increased from $2,600 per claim in FY 2014 Overview of Medicaid PDL Continuum. While
to more than $3,100 in FY 2017.10 A principal each state’s structure and histories are unique,
way states attempt to contain drug costs is there are 3 overarching PDL arrangements based
requesting discounts from drug makers under on the authors’ synthesis of information obtained
the Medicaid Drug Rebate Program (MDRP).11 through interviews with state representatives:
Congress created the program in 1990 to ensure
state Medicaid agencies receive the lowest price 1) Multiple PDLs: A state has a multiple PDL
available for all prescription drugs.11 structure when it allows each MCO to
have its own PDL.4 In addition, the state
Under the federally managed program, drug typically runs its own separate PDL for
manufacturers pay a rebate based on a set the FFS population.4 MCOs establish their
formula to state Medicaid programs for each of own PDLs privately, using their own prior
the manufacturer’s drugs.11 For most brand-name authorization criteria and utilization review
drugs, the minimum rebate amount is 23.1% of processes.4 Multiple PDL models operate
the average manufacturer price (AMP) and 13% within a managed care structure where
of AMP for generic medications.11 In FY 2014, customarily the MCOs are financially at risk
states collected $19.9 billion in rebates, and by for its enrollees’ drug costs.4
FY 2017, states almost doubled that amount,
2) Aligned PDLs: Under an aligned PDL
collecting $34.9 billion. 10
structure, MCOs are at financial risk for
Medicaid Preferred Drug List Options for States • 4Table 1: Overview of Medicaid PDL Continuum
Multiple PDLs Aligned PDLs Single PDL Single PDL
Carved In to MCOs Carved In to MCOs Carved In to MCOs Carved Out of MCOs
• Each MCO and the • MCO PDLs are aligned with • MCOs and FFS • MCOs and FFS program
FFS program set FFS on a class-by-class basis program use the use the same single PDL
their own PDLs or % of classes basis. same single PDL set set through state’s P&T
through state’s P&T and DUR process
• Pharmacy is • May be a “floor”— MCO and DUR processes
included in MCO variation allowed that is not • Pharmacy is carved out
Risk more restrictive (e.g., generic • Pharmacy is included of MCO risk
substitution) in MCO risk
• Pharmacy is included in MCO
risk
Abbreviations. DUR: drug utilization review; FFS: fee-for-service; MCO: managed care organization; P&T: Pharmacy
and Therapeutics; PDL: preferred drug lists.
the costs of drugs for their enrollees. In The overall PDL structure has implications
contrast to a multiple PDL model, an aligned for how a state provides pharmacy benefit
PDL approach seeks to coordinate MCOs management functions. Figure 1 on the next page
and the state’s FFS PDLs by selecting provides an overview of some of the functions
the same preferred drugs.4 The state either the state and/or the MCOs need to
and MCOs typically use a collaborative perform under the various PDL structures. Some
process to establish alignment criteria on a key takeaways include:
class-by-class basis.4 The process is made • A Medicaid single PDL allows for the most
public through the state’s Pharmacy & extensive alignment of pharmacy benefit
Therapeutics (P&T) Committee and Drug functions across the entire Medicaid
Utilization Review (DUR) Board activities. population, but may work against MCOs’
The aligned PDL may be viewed as a “floor” efforts to align benefit functions across
and MCO variation is generally allowed their broader book of business (Medicaid,
as long as these variations are not more Medicare Advantage, and commercial).5
restrictive (e.g., generic substitution).4 State
approaches to clinical criteria used for prior • Conversely, multiple PDLs allows the most
authorization may vary from requiring the flexibility for MCOs to align functions
use of specific criteria, to fostering voluntary across their public and private lines of
alignment among the MCOs, or allowing business but diminishes a state’s direct
MCO autonomy to set clinical criteria. ability to align drug selection across their
entire Medicaid population.3
3) Single PDL: Under a single PDL structure,
there is one PDL used by the state’s FFS • Under multiple or aligned PDL approaches,
program and any contracting MCOs.4 the state will always have a parallel
Financial risk for a single PDL can be duplication of pharmacy benefit management
either carved out of or carved in to MCO functions for its FFS population.4
capitation rates. The state’s P&T and • Aligned PDLs provide the possibility to
DUR processes are used to establish and coordinate preferred status and other drug
maintain the PDL.4 States without managed management elements, while allowing
care delivering services to enrollees and MCOs to continue to directly manage the
with an all FFS benefit design are by pharmacy benefit for their enrollees. 2 While
definition single PDL states.4 this alignment is beneficial for patients
Medicaid Preferred Drug List Options for States • 5and providers, there is no streamlining of the administrative services they provide, but
benefit management functions, and the also from discounts negotiated with drug
state and MCO continue to have duplication manufacturers or the spread in reimbursement
of pharmacy benefit functions. 2 to pharmacies.
Pharmacy benefit managers (PBMs) are key Table 2 on the next page provides examples of
actors in consideration of state PDL structures. various PDL structures used in state Medicaid
PBMs administer prescription drug coverage programs. In some cases, states may deploy an
on behalf of payers such as Medicaid agencies, overall approach, as outlined in Figure 1 below,
Medicaid MCOs, private insurance companies, but also create exceptions for specific access or
and Medicare Part D.17 Each MCO has their own areas of cost concerns (e.g., carve out hepatitis C
contract with a PBM, as often do state Medicaid medications and utilize a single PDL specifically
agencies for FFS populations, so pharmacies for that drug category).
must navigate multiple PBMs in most states.18
The use of PBMs to aid state staff in overseeing Regulatory and Policy
their drug benefits has increased over time.17 As
state Medicaid officials seek to better control Framework for State Medicaid
drug costs with limited state staffing resources, PDL Decisions
their relationships with PBMs have evolved.17
Once primarily contracted for administrative State decisions on PDL structure are nested in a
support, such as claims processing, PBMs are complicated framework of federal statutory and
often now used to negotiate supplemental administrative guidance. Elements such as best
rebates, to conduct clinical drug class reviews to price, consumer price index penalty, and 340B
inform PDL decision making, and for advanced purchasing shape how Medicaid reimburses drugs
analytics to manage and predict drug spending.17 and, in some cases, creates disparate incentives
Unlike an administrative services organization, for Medicaid versus non-Medicaid purchasers.
a PBM may generate revenue not only from Federal support for the development of state
Figure 1. Typical Locus of Medicaid Pharmacy Benefit Functions by PDL Structure
Multiple Aligned Single PDL Single PDL
Carved in to Carved out of
PDLs PDLs MCOs MCOs
PDL development & maintenance
Drug utilization review/P&T functions
Prior authorization & clinical edits MCOs & their PBMs
Appeals processes State Medicaid Agency
Analytics & data support to
providers/pharmacies
Pharmacy claims processing
Supplemental rebate negotiation
Note: States are federally required to maintain many of these functions for their FFS population regardless of
managed care structure. Abbreviations. FFS: fee-for-service; MCO: managed care organization; P&T: Pharmacy and
Therapeutics; PBMs: pharmacy benefit managers; PDL: preferred drug lists.
Medicaid Preferred Drug List Options for States • 6Table 2: Examples of State Medicaid PDL Structures
PDL Structure State Description
Entirely FFS Connecticut Medicaid program operates under a FFS self-insured model with a single
PDL.19
The state oversees and manages the pharmacy benefit. All pharmacy is
done in-house with the exception of select prior authorization reviews.19
Single PDL Tennessee TennCare has a statewide PDL for the pharmacy program that is the same
for all members, no matter which MCO they are enrolled in. 20
Carved out of
MCOs TennCare has a single PBM to process all TennCare pharmacy claims and
respond to all prior authorization requests. 20
Single PDL Texas Texas operates a single PDL for both FFS and MCOs. 21
Carved in to The MCO must adopt the state’s prior authorization policies unless the
MCOs state grants a written exception, and the state’s approval is required for all
clinical edit policies. 21
Aligned PDLs Michigan Medicaid MCO PDLs may be less restrictive, but not more restrictive, than
the coverage parameters of Michigan’s central common formulary. 22
Selected drugs are carved out from MCO risk and are paid by FFS. These
include HIV, psychotropics, hepatitis C, and hemophilia clotting factor
medications. 22
Multiple PDLs South There are 6 Medicaid PDLs in the state, 1 for the state’s FFS program and
Carolina the 5 MCOs each operate their own. 23
All drugs used in the treatment of hepatitis C are carved out of MCO risk
and paid for by South Carolina’s FFS Medicaid program until July 1, 2020. 23
Abbreviations. FFS: fee-for-service; MCO: managed care organization; PBM: pharmacy benefit manager; PDL:
preferred drug list.
Medicaid PDLs, coinciding with the growth of • Reported by the drug manufacturer to the
Medicaid managed care, has also affected state Centers for Medicare & Medicaid Services
pharmacy management decisions. What follows (CMS); and
is a high-level summary of these issues.
• Is confidential as per statute and can only
be disclosed in limited situations. 24
Medicaid Drug Rebate Program (MDRP) and
Best Price Drug manufacturers are required to report to
The MDRP, as codified in section 1927 of the Social CMS the best price at which a brand-name
Security Act, ensures state Medicaid programs drug is sold in the commercial market and must
receive a discount on a drug’s AMP and never pay offer this price, plus a statutory rebate, to state
more than a brand-name drug’s best price in the Medicaid programs. 24 Drug manufacturers will go
U.S. pharmaceutical market.24 Best price is: to great lengths not to set a new best price in the
• The lowest price a drug is sold to any commercial market—which includes corrections,
wholesaler, retailer, provider, health public employees, and other non-Medicaid
maintenance organization, nonprofit entity, populations—because this new price will be a
or government agency24; discount passed through to all state Medicaid
Medicaid Preferred Drug List Options for States • 7agencies nationwide and 340B programs Federal Statutory and Administrative
(described below). 24 Guidance on Medicaid Pharmacy Benefit
Management
Medicaid programs, however, can negotiate
voluntary supplemental rebate agreements Changes in federal requirements and policy
with drug manufacturers that do not create a guidance have altered the financial incentives for
new best price threshold because Medicaid state Medicaid agencies, leading to an evolution
supplemental rebate agreements are excluded in state PDL approaches over time. In 2002, CMS
from best price determinations. 25 In addition, issued guidance regarding development of state
the MDRP includes a consumer price index (CPI) Medicaid PDLs and their role in negotiating for
penalty intended to protect Medicaid programs supplemental rebates. This guidance spurred
from price increases greater than the CPI. 24 state activity and by 2008, 37 states had
This penalty can reduce the price of the brand- implemented a PDL. 28 CMS guidance in 2004
name drug to the Medicaid program so it is less regarding multistate purchasing pools galvanized
expensive than a new generic equivalent. 24 another round of state activity, resulting in 29
states participating in such pools as of 2019. 29
340B Drug Pricing Program
In 2010, 20 of the 36 states (or 56%) with
The 340B Drug Pricing Program provides
comprehensive risk-based MCOs had carved
discounted prescription drugs to certain health
the pharmacy benefit into managed care risk.30
care facilities (referred to as “covered entities”)
Then the Patient Protection and Affordable
participating in the program and creates drug
Care Act of 2010 authorized states to claim
discounts for government-supported facilities
federal drug rebates on managed care pharmacy
that serve vulnerable populations. 24 Covered
claims, providing an incentive for states to
entities include qualifying hospitals (e.g.,
delegate pharmacy benefit management to their
children’s hospitals, critical access hospitals,
MCOs.31 By 2017, the number of states with
disproportionate share hospitals) and federal
comprehensive risk-based MCOs that carved in
grantees from the Health Resources and
the pharmacy benefit had increased to 35 of 39
Services Administration (e.g., federally qualified
states, or 95%.32
health centers), the Centers for Disease Control
and Prevention (e.g., sexually transmitted In April 2016, CMS issued a Medicaid managed
disease clinics), the Department of Health and care rule reinforcing the expectation that
Human Services’ Office of Population Affairs MCOs are subject to the same prescription drug
and the Indian Health Services (e.g., tribal/ coverage requirements as FFS.33 This clarification
urban American Indian health centers). 26 eliminated some flexibility MCOs used to
Manufacturers must offer discounts to 340B align formularies across their lines of business,
entities as a condition of Medicaid coverage of including Medicaid, Medicare Advantage, and
the manufacturer’s drugs. The 340B program commercial insurance.33 Coupled with the
provides covered entities with statutorily defined continuing introduction of highly expensive
drug discounts (340B ceiling prices), and these breakthrough therapies for orphan diseases and
covered entities can also negotiate with drug rising prices for everyday pharmaceuticals, states
manufacturers for further “sub-ceiling” rates. 24 have increasingly looked to a centralized PDL as a
340B prices are often similar to or lower than the strategic pharmacy management tool.34 By 2018,
Medicaid prices and participating covered entities 14 states reported a single PDL for at least 1
report savings that range from 25% to 50% of drug class, 3 states indicated plans to implement
Average Wholesale Price. 27 a single PDL in FY 2019, and 4 states have
announcing similar plans in FY 2020.17
Medicaid Preferred Drug List Options for States • 8State-level Authority to Shape Preferred single PDL for its Medicaid program and performs
Drug Lists all pharmacy claims adjudication. An administrative
service organization is contracted to perform
As changes are contemplated to the PDL
some prior authorization functions.
structure within this federal framework, states
need to assess their own regulatory authority,
including statutes and administrative rules Problems States are Trying to
potentially necessary to make these programmatic Address Through PDL Structure
changes. Some states will be able to modify PDL
structures using their agency decision-making and Interviews with state policy leaders (see Appendix A)
contracting authority, while other states may need identified several issues that drive decision making
a legislative mandate to generate the necessary about PDL structure, including administrative
political and budgetary support. efficiencies and simplification, patient access and
care management, the need to manage and predict
In either scenario, states should plan for a the growth in drug cost, transparency, population-
concerted education and outreach effort to based health initiatives, and reform efforts.
legislators, affected executive leadership, Appendix B provides an at-a-glance table of these
pharmacies and other health care providers, characteristics by PDL structure.
beneficiaries, managed care organizations, and
key stakeholders to gather input, explain the 1. Administrative Efficiencies
rationale for any change, and articulate the state’s
plan for a smooth transition. States frequently cite improving the administration
of the Medicaid drug benefit as a goal for having a
Effect of State-specific Policy Priorities single or aligned PDL structure. The administrative
or Values improvements may be sought at multiple levels in
the administration of the program; from the state
As a final note on the context for state PDL
Medicaid agency, to the prescribing providers,
decisions, while states operate within broader
the pharmacies filling the prescriptions, and the
statutory and regulatory requirements, each state
patients accessing needed medications.
program is unique in structure and culture for a
wide range of historical reasons. An overarching Centralizing Prescription Drug Management
state philosophy may play a key role to support
or hinder changing PDL structures. For example, By centralizing pharmacy benefit management
a state’s legislature may place a higher priority through a single PDL or aligned PDLs across
on privatizing services—contracting out services FFS and MCOs, states have a more significant
to private MCOs—over operating services from centralized role in coverage decisions for
within the agency. Another state may value local their entire population.3,4,35 A single drug list
community decision making over a centralized means all beneficiaries have access to the
state approach. same medications without the need to go
through a prior authorization process if the
Connecticut and Oregon provide contrasting beneficiary switches managed care plans.3,4,35
examples to illustrate this point. Oregon’s States report that having one PDL also allows
coordinated care organizations (CCOs) were the Medicaid agency to move quickly in making
designed to innovate at the local level through and implementing coverage decisions as new
full-risk global budget payments tied to quality medications gain approval from the FDA, or
outcome expectations. Currently 15 CCOs reports of adverse drug events emerge, rather
manage their own PDLs. than needing to work through MCOs to identify
and correct emerging concerns. Also, in single
Connecticut, after a significant history of managed PDL states where pharmacy is carved out of
care, transitioned to a fully self-insured FFS MCO risk, the state is not compelled to adjust
delivery model in 2012. The state now oversees a
Medicaid Preferred Drug List Options for States • 9MCO capitation rates when new high-cost drugs has been some variability in how MCOs’ PBMs
are added to the PDL. code their systems for the aligned PDL, creating
statewide inconsistencies.
As outlined above, the state will always have to
administer pharmacy benefit functions for its FFS The impact of PDL shifts is largely anecdotally
population, so in the case of aligned or multiple framed in policy discussions, with very little
PDL structures, many functions are being empirical evaluation of administrative burden.
duplicated between the state and MCOs. When For instance, a group of physician practices
a state moves to a single PDL, the state will interviewed by researchers at the Commonwealth
likely build on its underlying FFS infrastructure, Fund revealed they were spending 24 minutes
although the potential increased volume of both to readjust prescriptions to be compliant with
drug classes and broader populations may require multiple formularies.41 That is longer than the
some increased administrative investment. average patient visit time of 17.5 minutes.42
Streamlining Pharmacy Management for These modifications typically involve receiving
Prescribers, Pharmacies, and Enrollees calls from pharmacists who would suggest an
on-formulary alternative after doctors attempted
States and proponents of a Medicaid single PDL
to prescribe another medication.41 These
structure cite a number of benefits for providers,
conversations place burdens on both pharmacists
pharmacies, and the patients themselves including:
and physicians, and delay the drug dispensing
• Decreasing the number of prior process, which can be frustrating to patients.41
authorization requests providers and According to their interviews, physicians with a
pharmacists need to submit each year4,18,36-38 single formulary spent the least amount of time
• Reducing the need for providers to stay readjusting prescriptions.41 However, those time
abreast of varying coverage criteria of differences were not quantified.41
multiple PDLs4,18,36-38
States should bear in mind that significant
• Creating consistency with coverage criteria changes to PDL structure will create a short-
across enrollees as they change plans39 term workload increase for prescribers and
pharmacies as preferred drugs are prescribed for
The reduction of administrative burden for enrollees renewing prescriptions. In Louisiana,
prescribers, pharmacies, and enrollees may be less which moved to a single PDL in May 2019, family
clear under PDL structures that leave the financial physicians who were not aware of the change
risk and pharmacy benefit management to the may have potentially seen an increase in burden
MCOs, whether single, aligned, or multiple PDLs. and needed to come up to speed on the new PDL
This delegation, even with a single or aligned list (Louisiana Association of Family Physicians,
PDL, may bring variability in implementation. For personal communication).
example, MCOs in Texas are able to make their
own clinical coverage criteria, creating variations Washington phased in a single PDL during 2019.
in access across plans despite the presence The state has heard commentary from pediatric
of a single PDL.40 Texas clinicians report this clinicians who appreciate the streamlined process
variation in clinical editing leads to lack of clarity across the Medicaid MCOs for prescribing
in when drugs can be prescribed, and no standard commonly used drugs for children, such as those
procedure exists for requesting the deletion or for attention deficit hyperactivity (ADHD) disorder.
disuse of that edit.40
Historically, the administrative simplification
Likewise, in Michigan where pharmacy is carved argument has been criticized for looking at
into MCO risk but is governed by an aligned PDL, PDLs only through a Medicaid lens, whereas the
the same variability occurs. In Virginia, there pharmacy community faces a much broader set
Medicaid Preferred Drug List Options for States • 10Table 3: Characteristics of Pharmacy Administrative Functions by PDL Structure
Multiple PDLs Aligned PDL Single PDL
• Least centralized for Medicaid • More centralized decision • Most centralized and streamlined
administration making with aligned criteria decision making
• Duplication of administrative • Duplication of administrative • Least duplication of effort as all
functions across Medicaid FFS, functions across Medicaid FFS, administrative functions are the
multiple MCOs and their PBMs multiple MCOs and their PBMs same for all Medicaid enrollees
• Multiple Medicaid PDLs for • Allows some alignment across • One Medicaid PDL for
prescribers and pharmacies to MCOs and FFS for prescribers prescribers and pharmacies to
follow and pharmacists to follow follow
• Allows MCOs to use same PBM
and PDL approach across public
and private enrollees
Abbreviations. FFS: fee-for-service; MCOs: managed care organizations; PBM: pharmacy benefit manager; PDL:
preferred drug list.
of dynamics across public and private providers.6 Minimized Disruption When Enrollees
Aligned PDLs across the Medicaid population Change MCOs
may only be a small portion of prescriptions in
States assert that varied formularies and policies
some pharmacy locations. A state needs to weigh
have created difficulty for Medicaid patients in
the importance of alignment across the Medicaid
obtaining their medications, particularly as they
population against other system-wide goals.34
switch between different MCOs.44 Medicaid
This consideration may be different in a state
has a higher level of churn than commercial or
that expanded coverage under the ACA, where
Medicare coverage, with 1 of 4 beneficiaries
Medicaid may cover more than 25% of the
experiencing a change in Medicaid coverage
state’s population, versus states who did not
within a given year.45 Allowing managed care
expand.43 Also, states such as Washington that
plans to maintain their own PDLs means
are working to align purchasing across Medicaid
Medicaid enrollees may be asked to switch to
and public employees may decide to develop
a different but therapeutically equivalent drug
a single PDL to allow greater alignment across
if it is preferred by the enrollee’s new managed
programs where possible.34
care plan, or the prescriber will need to obtain
a prior authorization for nonpreferred drug.4
2. Patient Access and Care Management
Ohio Medicaid officials cited variation in prior
Ensuring access to medications and supporting authorization for medications for treatment of
enrollee’s care management needs are commonly asthma, diabetes, hemophilia, HIV, and seizures as
cited as reasons to utilize a single or aligned a motivation for its transition to a single PDL.46
PDL, particularly in states where enrollees can
frequently transition between MCOs. However, States that modify their PDL structures may wish
many of the same reasons are cited for delegating to implement phase-in or grandfather policies
pharmacy benefit management to MCOs. States that give prescribers and enrollees time to
need to consider a range of issues to determine manage prescription changes between preferred
which PDL structure would best support enrollee drugs. Minnesota included a provision in its PDL
access to high-quality care within their state transition policy that patients with an existing
Medicaid program configuration. prior authorization will continue to have their
Medicaid Preferred Drug List Options for States • 11prescription covered until the prior authorization the prescribed regimen resulting in better health
expires.47 Washington asked its DUR Board to outcomes.50 Florida Medicaid officials said having
determine which drugs should be grandfathered a single PDL resulted in a broader range of cost-
during the transition to a single PDL, so prescribers effective drug choices compared to when there
did not need to obtain prior authorization for were various MCO PDLs.
enrollees to continue the medication.48
Conversely, MCOs assert they have unique
Clarity of Coverage and Process to Improve insight into their beneficiaries’ care needs.
Responsiveness to Patient Needs Charged with managing both medical and
pharmacy costs, MCOs are able to leverage
A range of states, providers, pharmacists, and
clinical data to ensure access to the least
consumer groups assert a single PDL approach
expensive, clinically effective medication.39
could improve access through a more clear and
MCOs can utilize care coordination teams
consistent coverage methodology.40,49 In one
that work with physicians and pharmacists to
American Medical Association survey, 69% of
manage pharmacy benefits and avoid harmful
physicians report typically waiting several days
drug interactions, monitor opioid prescription
to receive preauthorization for drugs while 10%
misuse, avoid unnecessary hospitalizations,
wait longer than a week.40,49 Likewise, more than
and ensure patients take their medications for
67% of physicians report difficulty determining
chronic medical conditions.51 MCOs fully at
which drugs require preauthorization by insurers’
risk for pharmacy can integrate drug utilization
PBMs.49 Clinicians in states moving to a single
and claims data with other medical utilization
PDL anticipated the changes would result in eased
data for their enrollees, providing the ability to
access to medications for Medicaid enrollees, as
apply preferred drug status and other utilization
there would be universal understanding of which
management approaches with the full context
drugs were covered without a prior authorization
of enrollees’ needs.4 MCOs express concern
and a predictable process to access nonpreferred
that they cannot successfully manage this
drugs when necessary.40
whole person care when pharmacy is carved
Support Appropriate Care Management out because the MCO will not have access to
drug utilization and claims data in real time.39 In
Through minimizing disruption and a clear, Missouri, where pharmacy is carved completely
centralized PDL process, proponents assert a out of MCO risk, the state has constructed a
single PDL structure promises to reduce delay real-time portal for MCOs, pharmacies, and
in starting new medications or abandoning prescribers to access real-time pharmacy data to
medication therapy while improving adherence to support care management.
Table 4: Access and Care Management Characteristics by PDL Structure
Multiple PDLs Aligned PDL Single PDL
• Multiple PDLs hold potential • Reduced potential for disruption • Minimizes access disruptions as
for disruption as enrollees within aligned classes patients move between MCOs
change plans
• Allows some potential for MCO • Creates clear process for
• Allows for maximum amount implementation discretion (e.g., providers to understand
of MCO control to manage safety edits) what is preferred and to ask
physical health and pharmacy for nonpreferred only when
access for enrollees • May result in variability across MCOs necessary, reducing PA time
that may reduce clarity of PDL
Abbreviations. MCO: managed care organization; PA: prior authorization; PDL: preferred drug list.
Medicaid Preferred Drug List Options for States • 123. Managing Drug Cost Growth and America’s Health Insurance Plans estimated the
Transparency same carve out had cost the state a net $9 million
in the same year.54
States cite a range of cost goals for implementing
centralized PDLs, including reducing overall Analyses commissioned by managed care plans
net costs to the state or maintaining budget consistently indicate the move to a single PDL
neutrality while enhancing patient access, will increase costs for MCOs.35 A primary concern
administrative efficiency, or population health is whether a state’s single PDL will prefer some
initiatives. Careful analysis is needed to brand-name drugs over generics because the
understand the cost and transparency potential brand-name drugs’ net cost to the state is
of a PDL structure, ensuring the state is making lower due to the CPI penalty described earlier
realistic expectations for cost savings or in this brief.35 If the MCO is at financial risk for
increases over time. (See highlight box on page drugs, then the MCO will incur greater costs for
15, Financial Analyses to Support Planning for a preferred brand-name drugs on the single PDL
PDL Shift.) because the MCO does not get the benefit of the
state’s CPI penalty as part of the MDRP.
Cost Impact of Single PDL Implementation
A study of Florida’s single PDL implementation
Overall, there is limited published data about the
found overall drug costs rose for MCOs, due in
cost impact of states moving from multiple PDLs
large part to increase use of brand-name drugs.50
to a single or aligned PDL. Much of the literature
The MCOs experienced an increase of more
published is prospective analyses about the
than 45% in overall plan drug costs in the post-
potential implications of a state move to a single
policy period, largely driven by a 49% increase in
or aligned PDL. There is mixed evidence that
brand drug costs and a 13% decrease in generic
moving to a single PDL reduces overall Medicaid
utilization.50 This study acknowledged it could
spending on drugs.
not estimate the state’s savings because of
There are examples of states that have lack of access to information about federal or
implemented a single PDL structure and supplemental rebate amounts.50
experienced savings over time. Tennessee
Potential Cost Levers with a Single PDL
Medicaid officials report that after they carved
out pharmacy and instituted a single PDL, their
Structure
pharmacy costs averaged $30 per member, per Proponents of single PDLs point to a number of
month (PMPM) as compared to $46 PMPM structural advantages for managing costs through
in states without the carve out (Tennessee increased leverage for negotiation and collection
Medicaid staff, personal communication). of rebates, better management of high-cost
Similarly, Wisconsin reported an average of $30 drugs, and increased cost transparency.
PMPM in pharmacy costs for more than 11 years
after implementation of a pharmacy carve out Maximize Rebate Collection and Increase
and single PDL.52 Negotiating Leverage
Conversely, the Menges Group (a consulting A single PDL structure allows a state to maximize
firm) found Florida and other states with a single the rebates and discounts available under the
PDL, including Kansas, Texas, and West Virginia, MDRP.4,36 States can more easily shift all Medicaid
were averaging $39.26 PMPM, 5% above other drug purchasing and prefer drugs that garner
states.53 In West Virginia, one study prepared the lowest net unit cost after considering federal
for the state found an estimated $14 million statutory rebates, supplemental rebates, and CPI
was saved in 2018 after the implementation of penalties.4,36 A single PDL also creates a platform
a single PDL, while a follow-up study funded by for states to maximize their negotiating power for
Medicaid Preferred Drug List Options for States • 13Table 5: Cost and Transparency Characteristics by PDL Structure
Multiple PDLs Aligned PDL Single PDL
• Enables for MCO level control of • Allows for some • Most transparent for collection of drug
total cost of care increased transparency rebates and PBM fees
and predictability on
• Allows MCOs to customize PDLs rebate collection within • Most leverage for rebate negotiation
for local or VBP initiatives aligned classes
• Control of total cost of care and clinical
priorities across Medicaid population
Abbreviations. MCO: managed care organization; PBM: pharmacy benefit manager; PDL: preferred drug list; VBP:
value-based purchasing.
supplemental rebates because the manufacturer emerging high-cost drugs are clinician administered
knows the state reliably controls the PDL decisions and these drugs are commonly not governed by
and prior authorization processes.18,55 a state’s PDL. See the highlight box, Clinician-
administered Drugs on page 20, for a discussion and
Additionally, many states form drug purchasing states initial thinking about management strategies.
pools to combine their volumes for even greater
negotiation and purchasing power.18 A single Increased Transparency for State Medicaid
PDL enables participation in multistate pools for Spending and Reimbursement
all lives covered under the Medicaid pharmacy
benefit.36 In Florida, state officials report Centralizing the PDL structure allows states
maintaining a single PDL provided stability in the greater clarity on all transactions, including
state’s ability to negotiate greater supplemental rebate collection, pharmacy benefit manager
rebate agreements with pharmaceutical payments, pharmacy reimbursement, and total
manufacturers to offset the retail reimbursement cost of care across all Medicaid lives. As stewards
cost of drugs.56 of taxpayer funds, this visibility into spending
and reimbursement is a critical tool for stretching
Levers to Manage New High-Cost Drugs state government dollars.
A single PDL allows for centralized mechanisms Connecticut had managed care with pharmacy
to manage high-cost outpatient drugs as they both carved in and carved out before 2011,
enter the market. For example, Missouri Medicaid becoming a self-insured FFS state in 2012. Under
was able to implement a clear approach to their current self-insured FFS model, Connecticut
coverage of the new high-cost hepatitis C drugs Medicaid officials assess the total cost of care
in 2014 because the state had pharmacy carved perspective for a condition, weighing both drug
out of their managed care capitation rates and and medical costs, and base drug coverage
governed centrally by a single PDL. decisions on improved outcomes and greater
cost control across the entire benefit. In a state
For states where MCOs are at financial risk for with multiple PDLs, there are also multiple PBMs
the drugs, the state can temporarily carve out a contracted to manage pharmacy benefit functions.
new high-cost drug therapy as it develops claims
experience for capitation rates. States can also As states such as Ohio have identified the
employ a quality-driven payment pool where prevalence of PBM spread pricing, there is
MCOs are eligible to access additional payments growing concern that PBMs are keeping a portion
if they meet specific quality thresholds for the of the amount paid to them by MCOs instead of
overall care, both medical and pharmacy, of passing the full payments on to pharmacies.57
the enrollee receiving the high-cost drug. Many In response, Ohio eliminated spread pricing
Medicaid Preferred Drug List Options for States • 14Highlight: Financial Analyses to Support Planning for a PDL Shift
Cost impact associated with a projected shift Impact on MCO capitation rates. States should
in the mix of drugs under new PDL scenario, work with their MCOs to understand the
net of rebate collection. A change in PDL potential operational and financial impact of a
structure will shift the mix of drugs the state new PDL structure. Capitation rates will likely
is reimbursing, so the state should undertake need to be revised to account for projected
projections for this change and estimate shifts in the mix of drugs under the new PDL
any resulting cost savings or increases. This scenario. Careful consideration of the use
analysis requires estimating an average unit of carve outs from MCO risk, risk-corridors,
cost change per claim per drug as well as or kick payments is key to translating the
the shift in the mix of drugs under a new cost impact assessments outlined above into
centralized PDL. When estimating the savings, successful implementation.
states need to make adjustments, to the
extent possible, for population risk factors, Impact on payment to pharmacies. States should
cost and utilization trends, and introduction of assess how payments to pharmacies may be
new therapeutics to be sure the comparisons affected under any new proposed single PDL,
and calculations are robust. Focusing on particularly when pharmacy is carved out of
selected drug classes that are high cost, high managed care risk. There are multiple dynamics
volume, variable, or otherwise high priority to be weighed in the state’s analysis. One
will allow states to tailor the analysis more dynamic is estimating the spread between
accurately, including understanding how the what MCOs pay to their PBMs and what
collection of rebates is likely to change under pharmacies receive in payment from the PBMs
a proposed scenario. in the current managed care structure. If the
state is contemplating a move to a carved-out
Impact on total administrative costs (state single PDL structure, the state FFS payment
and MCO administrative costs). Estimates structure to pharmacies will replace this MCO-
of impact on administrative costs should PBM payment dynamic. Another dynamic
consider which activities will result in an involves estimating the average change in
increase to the state’s direct costs versus dispensing fees paid under state FFS versus
those built into MCO rates. Estimates should the amount previously paid under the MCO-
take into account duplication between the PBM structure. State FFS dispensing fees are
state FFS management and MCOs, such commonly in the $9 to $12 range and MCO
with as prior authorization and member dispensing fees are often significantly lower.
communications. There may additional
initial costs for processing and managing Impact on state tax structures. A number of
exception requests if the state PDL is very states have a tax that is applied to managed
different from current PDLs. States should care premiums or claims, to providers, or a tax
also consider analytics and reporting tools applied to pharmacy claims. Thirty-two states
that may need to be developed or maintained use federal rules to administer these taxes to
to support the delivery of care under a new finance Medicaid programs. If a state elects
structure. These may be as simple as basic to carve the pharmacy benefit in or out of
PMPM trend reports, or as complicated and managed care risk, it will need to forecast the
resource intensive as frequently updated change in revenue generated by these taxes
predictive models to spot potential high-cost due to the increase or decrease in premiums
members and/or online portals that need or number of claims.
ongoing maintenance.
Medicaid Preferred Drug List Options for States • 15You can also read
