A pending change to New York’s Medicaid program known as the pharmacy “carve-out” is drawing opposition from a range of interests, including insurers, AIDS clinics and the health-care labor union 1199 SEIU.

New Yorkers concerned about good fiscal management should be leery, too – because this belt-tightening move could backfire and drive up the state’s already high Medicaid spending.

The new policy, part of a reform package recommended in March by Governor Cuomo’s Medicaid Redesign Team, is meant to boost the state’s revenue from rebates paid to Medicaid by drug manufacturers. However, those additional rebates would come at the expense of safety-net providers in the federal 340B program. 

Meanwhile, the state Health Department would take charge of directly processing drug claims, when experience in New York and elsewhere shows that the private health plans currently handling that job are more effective at controlling costs.

Under the carve-out, which is due to take effect on April 1, private plans who participate in Medicaid managed care will no longer handle the prescription drug claims of their enrollees. Instead, the state Health Department would pay the pharmacies directly for those claims, a system known as “fee for service.”

This reverses a policy that was adopted in 2011, as part of a package of reforms from Cuomo’s original Medicaid Redesign Team. At that time, drugs were added to the package of benefits covered by Medicaid managed care plans – and enrollment in those privately managed plans was made mandatory for most recipients.

This “carve-in” was meant to enable plans to more effectively manage the quality and cost of the care their enrollees received. Among other things, plans were expected to substitute brand-name prescription drugs for their less expensive equivalents, and thereby save money.

The cost-cutting aspects of the carve-in were notably effective, as confirmed by an Empire Center analysis in 2018. Per-prescription spending by New York’s Medicaid program dropped by almost one-quarter in two years, going from 19 percent above national average in 2011 to 6 percent below the average in 2013. The state’s costs rose after that, but stayed below the U.S. norm.

In recent years, however, those savings have been undercut to a degree by growth in the 340B program, a federal law dating to 1992 that requires pharmaceutical manufacturers doing business with Medicaid to provide discounts of 20 percent to 50 percent to certain safety-net providers.

The law does not require that the savings be passed along to customers, enabling the providers to keep the difference – and resulting in a substantial revenue stream for those who participate.

Use of the program among Medicaid providers in New York has more than doubled over the past four years, from $254 million in state fiscal year 2017 to $806 million in 2020, according to figures from the state Health Department.

The trend is partly the result of 340B providers increasingly contracting with commercial pharmacies to fill prescriptions instead of directly dispensing the drugs themselves.

This trend affects the state’s bottom line because the rebates drug companies would otherwise have to pay do not apply to prescriptions filled through 340B. The Health Department has estimated its forgone rebates to be worth $273 million per year and growing.

Under the new carve-out, the Health Department will either pay lower reimbursements to 340B providers – recouping the discounts they receive – or, if providers choose to leave the program, collect rebates from manufacturers.

After factoring in certain increased costs associated with the takeover – and returning a portion of the savings to 340B providers – the Cuomo administration estimates that the carve-out will save Medicaid a total of $234 million in the first year. Of that amount, $87 million would be the state’s share and the rest would accrue to the federal government.

The savings would come at the expense of safety-net providers, which the state would only partially reimburse.

In a recent press release about the state’s efforts to combat AIDS, the governor’s office said: “New York will provide more than $100 million in Medicaid Redesign savings directly to 340B providers in the upcoming year to mitigate changes in reimbursement and ensure continuation of critical services.”

The state is effectively promising to give back part of the money it is diverting from AIDS clinics and other providers – which will still leave 340B providers as a group with less money than they had before.

In calculating its savings from the carve-out, the Cuomo administration assumes that cost efficiencies achieved under the 2011 carve-in will continue – but that is far from clear.

An analysis commissioned by the New York Health Plan Association found that states that switched to a carve-in between 2011 and 2019, including New York, saw their per-prescription drug costs drop by 1.2 percent during that period, while fee-for-service states experienced an 18.4 percent increase.

Based on that differential and other factors, the analysis by the Menges Group estimates that lost efficiency savings will more than offset the additional rebate revenue related to 340B. It forecasts a net increase in state costs of $154 million in the first year and $1.5 billion over five years.

The state’s Medicaid spending has spiraled at an unsustainable rate in recent years, so the general goal of controlling costs deserves support – especially given the pandemic-related fiscal crisis. The carve-out proposal in particular, however, would undo a cost-cutting effort with a demonstrated record of success while also disrupting revenue for many safety-net providers – a loss that officials are already coming under pressure to reimburse.

As the state prepares a budget for fiscal year 2021-22, the Cuomo administration and the state Legislature should rethink the pharmacy carve-out – and the risk that it will do more harm than good.