Pharmacy Benefit Changes Are Coming for Medi-Cal Beneficiaries

Drug Topics JournalDrug Topics February 2021
Volume 165
Issue 2

What pharmacy needs to know about the transition to the new fee-for-service program in California for Medi-Cal

pharmacy benefits

Last year, California Gov Gavin Newsom announced the state would transition the pharmacy benefit for Medi-Cal beneficiaries from managed care plans to a fee-for-service (FFS) program, bringing approximately 13 million Medi-Cal beneficiaries to a new pharmacy program by January 2021.1

Because of the ongoing challenges and evolving health care landscape associated with the coronavirus disease 2019 (COVID-19) pandemic, the Department of Health Care Services (DHCS) has delayed implementation until April 1, 2021.1

This change was implemented pursuant to an executive order, as opposed to legislative efforts. It reflects patient dissatisfaction with the performance of the Medi-Cal managed care organizations when it comes to pharmacy services and medication access, as well as state concerns about a system that was failing to control prices.

Ken Thai, PharmD, CEO of 986 Degrees Corporation, said the extension to April was welcomed because some details of the rollout needed to be finalized. He noted that during the last few months of 2020, more pharmacists voiced concerns that reimbursements were going from bad to worse—and independent pharmacies were hit especially hard.

“I think there’s optimism that this Medi-Cal FFS program changing back to the state will be very positive for the most part; however, there are concerns about the transition,” Thai said. “With 13 million lives being taken back on, there are some hiccups expected.”

Other concerns he’s heard involve how this structure will apply to higher-cost drugs such as HIV or mental health medications. “I do expect this to be easier for patients who didn’t really understand how the Medi-Cal system worked previously,” Thai said.

Lucas W. Morgan, an attorney in Frier Levitt’s life sciences department, explained that DHCS will reimburse pharmacies based on a combination of their actual drug acquisition cost and preestablished fees (eg, dispensing fees).

Magellan Medicaid Administration, Inc will be the sole pharmacy benefit manager (PBM) responsible for administering the program and was awarded a 5-year contract on December 12, 2019 with 5 optional 1-year extension periods.

The executive order states that California’s “spending on prescription drugs has increased at an unsustainable rate, including hikes of approximately 20% per year since 2012, constituting a substantial fiscal drain.”2

“The stated goal of the executive order is to achieve cost savings for California’s spending on prescription drugs,” Morgan said. “A relatively small subset of high-cost drugs accounts for a disproportionate amount of spending, with the 25 most expensive drugs accounting for approximately half of the state prescription drug expenditures.”

The executive order states that a major cause of skyrocketing prescription drug prices is unequal bargaining power, by which the pharmaceutical industry—often wielding monopoly power—is left unchecked in the absence of a strong counterparty at the bargaining table.2

“The language of the executive order and other related commentary suggests that this unequal bargaining power is related to drug manufacturers,” Morgan said. “While manufacturers certainly play a role in this, it is important to note the critical role PBMs have played in the rising costs of prescription drug prices.”

Sidebar. Medi-Cal Rx Transition to Fee-For-Service Objectives

California Governor Newsom’s executive order to transition all Medi-Cal pharmacy services from managed care to fee-for-service (FFS) seeks to2:

  • Marshal public and private entities to counterbalance corporate bargaining power to address rising prescription drug prices and promote broader access to affordable health care for Californians
  • Establish a single-purchaser for the highest-cost prescription drugs
  • Standardize the California Medicaid pharmacy benefit

The Department of Health Care Services (DHCS) noted that transitioning pharmacy services from managed care to FFS will better standardize the Medi-Cal pharmacy benefit statewide and will improve access to pharmacy services with a pharmacy network that includes approximately 94% of the state’s pharmacies, while strengthening California’s ability to negotiate state supplemental drug rebates with drug manufacturers.1

Furthermore, DHCS explains that expenditures for medical care and services administered to Medi-Cal certified eligibles can take many forms, including capitation payments to managed care health plans, Medicare premiums for low-income dual eligibles, and federal disproportionate share hospital payments to safety-net public hospitals.3

The Impact to Pharmacies

Harry Nelson, JD, managing partner of Nelson Hardiman, a health care law firm in Los Angeles, said this change will expand dramatically the number of pharmacies able to participate in dispensing outpatient prescription medications to the 14 million Medi-Cal members in California without the challenge of being part of the Medi-Cal managed care networks, which had been a barrier to patient access and a regulatory burden for pharmacies.

“Instead, pharmacies can directly enroll in Medi-Cal with DHCS and bill claims, which will be managed by a single, centralized pharmacy benefit manager,” he said. “My sense is that the majority of pharmacies see this as a positive change, particularly given that Medi-Cal has become the single biggest payer in the state, with almost 36% of state residents and growing.”

Because there will be a single payer for California’s pharmacy benefit, Morgan said this is in stark contrast to previous arrangements in which multiple PBMs managed the pharmacy benefit with varying reimbursement benchmarks.

“The FFS model will likely eliminate PBM spread pricing in California Medicaid, which is a widespread PBM practice where the PBM charges a plan sponsor a higher price for a medication but then reimburses the pharmacy a lower amount and retains the difference,” he said.

Many states have investigated the practice of PBM spread pricing within in-state Medicaid programs and found prominent use of such practices in Medicaid.

“Pharmacy reimbursement being based on pharmacies’ actual drug acquisition cost combined with predetermined fees should result in more reasonable [and] sustainable reimbursement for pharmacies, at least in Medicaid, especially independent pharmacies,” Morgan said. “This could be especially pronounced in reimbursement for generic drugs, which comprise that vast majority of the prescription drugs prescribed and dispensed throughout the country annually.”

Morgan further explained that with in-state Medicaid programs relying on multiple PBMs to manage the pharmacy benefit on behalf of various plans, generic drug reimbursement is often made under a Maximum Allowable Cost (MAC) framework created solely by that particular PBM. However, PBM MAC reimbursement is often inconsistent among the various PBMs and often occurs at levels that are so low, pharmacies are losing substantial amounts of money.

“MAC reimbursement is also one of the primary ways in which PBM spread pricing is implemented by PBMs at their sole discretion,” he said. “In addition, because PBM MAC lists are deemed by the PBM to be confidential and proprietary, they are not subject to public scrutiny, which enables the PBM to set arbitrary and unreasonable MAC reimbursement that is not subject to any meaningful challenges.” Therefore, more pharmacies will likely be able to participate in California Medicaid.

Impact on Patients

One of the primary benefits of the new program will be increased access and freedom for patients to choose pharmacy providers because there likely will be more pharmacies able to participate in California Medicaid.

According to DHCS, “the vast majority of the state’s pharmacies” will be included in California Medicaid’s pharmacy network—citing 94% at last report.1

“Patients were restricted to a relatively smaller number of pharmacies that contracted with the 2 dozen or so Medi-Cal managed care organizations,” Nelson said. “After the carve-out, patients will be able to obtain their medications through most pharmacies that will participate in ‘straight’ Medi-Cal [without the managed care organizations]. This is likely to benefit pharmacies focused on Medi-Cal populations, including pharmacies contracted to support federally qualified health centers through the 340B program.”

Once enacted, this will be good for all parties going forward, he said.

“The big attraction for Medi-Cal patients is the ability to go to almost any pharmacy in the state and have instantaneous processing thanks to the technology that allows PBMs to provide convenience for patients with private insurance,” he said. “For the state, centralizing drug rebates and having a single PBM utilizing a cost-based model holds out the potential for savings that did not materialize” in the current managed care organization-negotiated model.


  1. Medi-Cal Rx: transition. Department of Health Care Services. Updated December 21, 2020. Accessed January 12, 2020.
  2. Executive order N-01-19. Executive Department, State of California. January 7, 2019. Accessed January 12, 2020.
  3. Medi-Cal and fee-for-service expenditures. Department of Health Care Services. Updated October 7, 2020. Accessed January 12, 2020.


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