Given tight budget conditions, rising numbers of enrollees in Medicaid, and growing costs, Texas legislators are considering ways to reduce the cost of Medicaid (as they must). Recently, several options for changing the structure of the pharmacy benefits within the program have surfaced. Unfortunately, some of those actually create more expense and are counterproductive to the goal of greater efficiency.
I have just completed a study of the economic consequences which could arise based on various cost-reduction proposals. We found that each of these proposals will cause large numbers of community-based pharmacies to close, leading to decreased quality of and access to service for both Medicaid and non-Medicaid patients, dramatic permanent job losses, and significant overall economic harm to the state. Proposed changes could reflect one of three scenarios; I’ll summarize a few of the key findings for each.
First, Texas currently uses a “carve-out” method to provide pharmacy benefits for Medicaid patients, which excludes certain health and pharmacy services from Medicaid Managed Care. The Texas Health and Human Services Commission (THHSC) has proposed a move to “carve-in” or shift of pharmacy benefits to fall within the role of a middleman such as a Managed Care Organization (MCOs) or Prescription Benefit Manager (PBM, a for-profit firm which acts as administrator of the prescription drug programs put in place), alongside fee reductions currently proposed by the Texas Legislature. Any purported savings, however, are likely more than offset by the combination of added administrative fees plus the benefits of greater generic drug utilization achievable in the current environment.
If these changes are implemented, it is likely to have the additional consequence of reducing network size or restricting contracts, which is normally part of the managed care model. In this case, the total annual impact of community-based pharmacies and incremental outlays for health care among all patients (Medicaid and Non-Medicaid) associated with the potential network reductions include $3.1 billion in output (real gross product) each year and 42,923 permanent jobs. The cost-saving measures outlined by the THHSC and the probable associated network limitations also have the potential to cause notable harm to the pharmacy sector, including the loss of more than 770 (primarily independent and small chain) locations. Moreover, the dynamic revenue losses to the State are several times as large as any purported savings.
The second scenario reflects the fee cuts discussed by the Texas Legislature (two 1% reductions now in place and an additional $1.00 reduction being discussed), but assumes that a broad pharmacy network is maintained irrespective of whether a “carve-in” or “carve out” approach is implemented. In this case, the annual reduction in output (real gross product) was found to be $722.3 million as well as 9,904 permanent jobs. This scenario assumes networks are kept in place, whether in a carve-in or carve-out system. The Perryman Group estimates the reduction in annual business activity within the pharmacy sector will include about 175 store closures. While some fee reductions may be inevitable in the current budget environment, they should be minimized in light of the extensive adverse consequences.
The third scenario involves dispensing fees as outlined in a widely circulated study by The Lewin Group. In this case, the annual losses would include an estimated $4.7 billion in reduced output (real gross product) and 64,632 permanent jobs. Within the pharmacy sector, such a scenario leads to losses of more than 1,150 pharmacies.
Our analysis indicates that the purported savings due to “efficiency” under each of these three options are not only “illusory,” but also harmful. I examined the underlying rationale behind studies purporting to quantify savings and found that they incorporated assumptions and methods which would not likely hold true in a dynamic context. Moreover, the economic losses outlined above also lead to an associated reduction in tax receipts to the State, which further diminish their attractiveness. In a time of fiscal stress, it is important to examine policy options with an eye toward their overall effects on business activity and the State budget. To do otherwise only makes the situation worse.
Changing the Texas system of providing pharmacy benefits to Medicaid recipients to a carve-in method or otherwise limiting pharmacy access would involve substantial negative fallout and should be carefully evaluated within a framework that fully reflects the overall consequences of policy changes. Otherwise, we risk a significant step in the wrong direction.