The joint federal-state nature of the Medicaid program affords states the discretion to administer their programs and pursue innovations that might ultimately save money. In doing so, successes can point the way for other states to save taxpayer money.
About twenty percent of the Illinois’ population is enrolled in Medicaid, and it spent about $23 billion providing health care to them last year. A significant expense for the state’s Medicaid programs is purchasing prescription drugs for enrollees; about four percent of its budget—or about $850 million—went to pay for prescription drugs.
State Medicaid programs have to purchase thousands of different drugs, some of which can cost thousands of dollars, and operating such a program can be complicated. Many insurers, unions, and large companies that self-insure use a pharmacy benefit manager (PBM) to help them manage their drug benefits, which entails not only negotiating the prices they pay for the drugs and also deciding which drugs to purchase but also utilization management techniques and efforts to improve patient adherence to drug regimes.
Medicaid programs have two broad options available for purchasing drugs for enrollees: they can directly manage the purchasing, or they can employ managed care organizations (MCOs) and PBMs. The appeal of the former is that many states, given the size of their Medicaid programs, would appear to have bargaining power. But the pharmaceutical market is a constantly changing landscape that requires continuous attention and deep industry knowledge, which is something that PBMs have in abundance.
Most drugs prescribed to enrollees can be filled by inexpensive generics, but a small subset are very expensive specialty drugs. One type of specialty drug are therapies that can literally cure hepatitis C, a devastating disease that could previously be treated only via a liver transplant. This extraordinary curative treatment came on the market in 2012, but at a high price.
Michigan and Illinois took different paths with respect to their specialty pharmacy benefits. Michigan opted to centralize purchasing of most specialty drugs while Illinois used PBMs to manage purchasing and utilization of specialty drugs.
As a way to assess the relative merits of the two very different approaches that Illinois and Michigan took, we looked at the prices that Illinois and Michigan paid for drugs that treat hepatitis C from 2016-2019. We chose this class of therapies because their price changed rapidly over that period as more treatment options became available. The new market entrants—often derided as "me-too" drugs—provided an opportunity for increased competition between manufactures.
In a recently published study we found that the unit price paid by both states started roughly equal in 2015 at $30,000 per treatment—which was well under the listed price at the time—and gradually fell to $25,000 by the beginning of 2019. At that point, however, generic treatments became readily available and the price Illinois paid fell substantially as PBMs rapidly responded by switching to the cheaper alternatives. By the end of 2019 Illinois was below $10,000 for a course of treatment. Michigan's price, by contrast, remained more than twice as high as it continued to purchase high-price brand name products. For Illinoisans this outcome is excellent news, as it means that the state can afford to treat more people with Hepatitis C without costing taxpayers more money.
Pharmacy benefit managers sometimes get accused of being little more than middlemen, but that facile perspective ignores the fact that they can create real value for their clients by using their experience and combined market power to obtain bigger discounts than the government could obtain on its own. Most importantly in our study is the nimbleness of the private market in responding to new opportunities that present in the rapidly changing landscape.
The bottom line is that states can often get a lot more bang for their buck when they use the private sector to help leverage this power when it comes to purchasing prescription drugs. Illinois successfully accomplished this when buying drugs that treat hepatitis C for the state’s Medicaid patients, and its success is a lesson for other states.
Tony Lo Sasso ,who co-authored this piece, is professor of economics at DePaul University
