The Myth that the State can do Better: Medicaid Drug Prices and Managed Care Organizations

Abstract

State Medicaid programs have two broad options when it comes to purchasing drugs for enrollees: they can directly manage the purchasing, or they can employ managed care organizations (MCOs) and their pharmacy benefit managers (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, which is something that PBMs have in abundance.

Michigan and Illinois chose different paths with respect to their specialty pharmacy benefits, which include some of the most expensive drugs on the market: Michigan opted to centralize purchasing of most specialty pharmacy products while Illinois used PBMs to manage purchasing and utilization of specialty pharmacy products.

The breakthrough curative therapies for the treatment of hepatitis C introduced in the early 2010s provides a useful lens through which to view this dichotomy. Hepatitis C is a viral infection that frequently spreads through injection drug use and can lead ultimately to devastating liver disease and death absent treatment. Prior to the breakthrough treatment, the only cure was a liver transplant.

We use data on drug purchasing from the Centers for Medicare and Medicaid Services (CMS) to compare unit spending on hepatitis C therapies from 2015 through 2019. We find that in Illinois PBMs were able to move much more swiftly into significantly cheaper generic alternatives when they became available in 2019. Our work highlights an often-overlooked aspect of the role of the private market in health care delivery: MCOs in general—and PBMs in particular—can move more nimbly in response to changing market conditions. Had Michigan been able to react with the alacrity of the PBMs in Illinois it could have saved taxpayers as much as $50 million per year.

Keywords: Prescription Drug Prices, Managed Care Organizations, Medicaid, Illinois, Michigan

JEL Classification: I13