Manufacturers Must Navigate Evolving State Approaches to Medicaid Drug Benefit Management

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As control of the Medicaid drug benefit continues to shift from managed care organizations to states, manufacturers should understand unique benefit dynamics in each state, particularly as Medicaid enrollment is likely to increase amid the COVID-19 pandemic.
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Under the Medicaid Drug Rebate Program (MDRP), manufacturers are required to provide mandatory rebates and, in exchange, states must cover rebated drugs. The MDRP governs coverage and rebate requirements for all outpatient drugs in Medicaid, though states retain some flexibility in designing the drug benefit through preferred drug lists (PDLs) and utilization management (UM) policies, including prior authorization (PA) requirements.

States consider drug net cost (after rebate) and clinical effectiveness to designate “preferred” drugs within a drug class that often must be tried before a “non-preferred” drug will be approved through the PA process. Manufacturers can often offer supplemental rebates to influence placement of their drug into preferred status on a PDL.

States have 4 basic approaches to drug benefit management, depending on whether the state manages through fee-for-service (FFS), contracts with Medicaid managed care organizations (MCOs), and/or whether the MCOs are responsible for coverage of drug claims and PDL management:

Figure 1. State and Plan Controlled Pharmacy Benefit 

  • FFS: Beneficiaries are not enrolled in MCOs and the state manages the pharmacy benefit, bears the financial responsibility for drug costs, and establishes PDL and UM policies
  • Carve In: State includes pharmacy benefit in MCOs’ contracts; MCOs cover and bear risk for drug costs, and establish their own PDLs and UM policies
  • Unified PDL: State includes pharmacy benefit in MCOs’ contracts; MCOs cover and bear risk for drug cost, but the state establishes a single PDL used by all MCOs and the FFS program
  • Carve Out: State excludes pharmacy benefit from MCOs’ contracts, manages the drug benefit, bears the financial responsibility for drug costs, and establishes the PDL and UM policies

In some cases, states may exclude certain drugs or classes from these approaches and manage them separately. As a result, drug coverage policies vary significantly between and within state Medicaid programs, requiring manufacturers to navigate a variety of payer entities to ensure adequate coverage and access to drugs.

Key Strategic Considerations for Payer Entity Engagement

Amid a complex payer landscape, manufacturers must have a strategy to identify and engage with key payer entities. Prioritized entities should include:

  • States that manage pharmacy benefit drugs on PDLs and/or have state-specific requirements that could impact coverage and access
  • MCOs and their associated PBMs that are responsible for managing the pharmacy benefit and supplemental rebate negotiation in states that do not manage the benefit themselves
  • Purchasing pools that are used across many state Medicaid programs and are responsible for supplemental rebate negotiation for multiple states

When engaging and prioritizing Medicaid payer entities, manufacturers should understand key variables across each payer:

  • Medicaid Enrollment and Scale: By quantifying Medicaid enrollment within priority payer entities, manufacturers can more effectively assess scale of potential drug uptake
  • Supplemental Rebate Negotiation: Manufacturers should understand expectations for supplemental rebate negotiation among the payers they are targeting for positioning on PDLs
  • Payer Engagement and Communication Strategy: When considering engagement with payer entities regarding potential supplemental rebates, manufacturers should prioritize payers based on coverage of competing drugs and policies in place for the therapeutic class
  • Key Milestones and Deadlines: To ensure adequate coverage and access to a drug, manufacturers must understand payer entities’ processes and timelines regarding PDL coverage and UM decisions
  • Engagement Preparation: Prior to engaging payer entities, manufacturers should consider their drug’s value proposition and be prepared to educate on clinical aspects of their drug and provide recommendations on appropriate UM

Over the past several years, many states have shifted control of the Medicaid pharmacy benefit away from MCO management and toward more state oversight through unified PDLs and carve outs. For example, NY and CA’s recently announced transitions to carve out the pharmacy benefit starting 2021 mark the latest shifts away from MCO management. Making up a significant portion of Medicaid enrollment in the US, CA and NY will represent a large shift of drug benefit lives to state control, potentially changing PDL and supplemental rebate negotiation dynamics. As states begin to assess budget shortfalls due to COVID-19 and how to achieve savings, more may look to increase drug benefit oversight in attempt to maximize rebate opportunities. Accordingly, manufacturers should monitor changing approaches at the state level to support efficient engagement with payer entities and ensure access to their products.

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