The state’s Medicaid program has effectively been double-paying for prescription drugs for the past six months due to a glitch with the roll-out of its pharmacy “carve-out.”

Since April 1, under a program dubbed NYRx, the state has been directly reimbursing pharmacies for filling the prescriptions of Medicaid recipients. This so-called carve-out separated prescription drugs from the package of benefits covered under Medicaid managed care, in which recipients are enrolled in commercial health plans.

However, the Health Department postponed updating its premium payments to the health plans through the first half of the year – meaning it continued to reimburse them for prescription drug coverage they were no longer providing.

The state is currently recouping the overpayments by temporarily reducing the plans’ monthly premiums, in some cases to near zero.

The situation helps to explain why the state’s share of Medicaid spending ran over budget through the first half of the fiscal year, and why it is projected to drop by almost 50 percent in the second half.

As seen in the chart, “DOH Medicaid” spending (which represents the bulk of the state share of the Medicaid costs) was $9.4 billion and $7.6 billion in the first and second quarters, respectively, but is projected to fall to $2.7 billion in the third quarter. As of Sept. 30, the program was almost $1 billion over budget. (Cash reports from the state comptroller, which don’t always perfectly align with Budget Division figures, showed a wider gap.)

The Budget Division disclosed the redundant payments, and its plan to recoup money from health plans, in the mid-year financial plan update released on Monday.

It said overspending on Medicaid through September was:

primarily attributable to the timing of payments related to the implementation of NYRx. Managed Care rates removing pharmacy costs were processed in September, and retroactive credits are pending the re-processing of claims to ensure spending is in line with projections.

The Health Department has delayed updating Medicaid managed care rates before, but the stakes were higher this year because of the change to drug benefits.

The department had plenty of notice: The policy change was first enacted in 2020 but postponed the following year.

The bumpy rollout raises further doubt about the department's ability to manage pharmacy reimbursements more efficiently than the commercial plans have done for the past dozen years.

New York first put managed care plans in charge of Medicaid drug benefits in 2011 as one of the reforms recommended by former Governor Andrew Cuomo's Medicaid Redesign Team. In the first two years after that "carve in" took effect, the state's per-prescription costs fell by 23 percent.

Over time, however, those savings were offset by growth of the federal government's 340B program, under which safety-net providers can buy drugs at discounted wholesale prices while collecting standard reimbursements from health plans. This arrangement has become a substantial source of revenue for many providers, but it also increased net costs for the state – because drugs purchased through 340B are not eligible for manufacturer rebates.

The state ultimately decided it would save money by carving the drug benefit out of Medicaid managed care again, reversing its 2020 policy. When 340B providers objected, the Hochul administration committed to reimburse them for lost revenue.

According to the Hochul administration's "scorecard" for the enacted Medicaid budget, the NYRx transition is expected to save $410 million in fiscal 2024 and $548 million in 2025. However, the state has committed to $519 million worth of "reinvestments" tied to NYRx, resulting in net projected loss of $109 million in 2024 and a net savings of $29 million in 2025.

In effect, the state has committed to spend several hundred millions dollars annually based on estimated savings it has not yet realized.

It remains to be seen whether this program will play out as planned – or whether it will hit further bumps going forward.