Medicaid's Rising Prescription Drug Costs: Challenges and Opportunities

The Kaiser Family Foundation (KFF) is renowned for its comprehensive policy research and analysis on health policy issues and public programs. Medicaid, a critical system under KFF's focus, provides extensive medical and long-term care services to low-income individuals in the U.S., covering one in five Americans. In recent years, Medicaid's pharmaceutical spending has surged due to high-cost drugs such as GLP-1s and innovative therapies for rare diseases, amid a challenging fiscal environment marked by federal funding reductions and recent policy shifts.

Although prescription drugs account for a modest 6% of total Medicaid expenditure, managing these costs is a priority for state and federal governments. From fiscal year 2019 to 2024, prescription drug spending increased by 46%, paralleling the rise in overall Medicaid spending. This surge places considerable budget pressures on states, primarily due to escalating pharmacy costs.

Federal law provides Medicaid beneficiaries with minimal out-of-pocket expenses for prescription drugs. Copayments are nominal for those earning up to 150% of the federal poverty level, with certain groups exempt from cost-sharing. Despite these measures, low out-of-pocket costs can still present financial challenges. Recent federal drug initiatives may influence Medicaid spending but are unlikely to impact affordability for beneficiaries significantly.

All state Medicaid programs provide prescription drug coverage, though service delivery varies. Services are often administered through managed care organizations (MCOs), with some states opting for a fee-for-service (FFS) model for drug coverage. MCOs, frequently partnered with pharmacy benefit managers (PBMs), manage pharmacy benefits in a capitation model, though individual drugs may still be exempt from capitation payments.

PBMs are integral to Medicaid, handling pharmacy benefits, negotiating rebates, and managing drug utilization. Enhanced scrutiny and legislative changes for PBMs in Medicare and employer health plans have led to state-level reforms aimed at increasing oversight and transparency, though Medicaid-specific measures remain largely unchanged.

Medicaid's total drug spending is calculated by subtracting manufacturer rebates from pharmacy payments. State agencies use benchmarks like the National Average Drug Acquisition Cost (NADAC) to set reimbursement rates, ensuring cost efficiency through Medicaid's Drug Rebate Program (MDRP), where manufacturers rebate a portion of drug payments. States further negotiate supplemental rebates and use preferred drug lists and prior authorization to manage costs and ensure safety.

Ongoing initiatives and proposed policy reforms are geared towards controlling Medicaid prescription drug costs, particularly for high-cost specialty drugs. While federal efforts offer potential solutions for cost management, their long-term effects on Medicaid's fiscal health remain uncertain.