Medicaid/Managed Care


Medicaid Carve-In Enriches PBMs at Cost to Pharmacies & Patients

In March 2012, Texas Health & Human Services Commission "carved in" Medicaid pharmacy benefits statewide into managed care. Swayed by MCO and PBM claims that the state would save $100 million on Medicaid drug spending by switching to managed pharmacy care, legislators authorized the transition in the 2011 session. APRx, TPBC and other Texas pharmacy groups assertively opposed the managed care transition at every step, but could not forestall a decision that effectively had been made behind the scenes before the start of the session.

HHSC has contracted with 19 different managed-care organizations (MCOs) to provide Medicaid and CHIP services in 14 Texas regions. Those MCOs have subcontracted with seven PBMs to administer pharmacy provider networks. According to HHSC, 76% of Texas Medicaid beneficiaries receive their prescription benefits through Medicaid managed care while 24% continue to receive them through the fee-for-service model formerly used in all of the Texas Medicaid/CHIP Vendor Drug Program (VDP).

Carving pharmacy benefits into Medicaid managed care added two layers of for-profit middlemen (MCOs/HMOs & PBMs), increased taxes to Texans, disrupted patient access to pharmacy care and probably increased the cost of health insurance.

Cost-Shifting Vs. "Savings"

States pay MCOs a fixed, monthly “capitation” rate for each Medicaid enrollee. Federal law requires states to pay actuarially sound rates. Most states set rates administratively using actuaries, but others negotiate rates, set them by competitive bid, or combine approaches. Most states risk-adjust rates based on beneficiary age, sex, eligibility category, geographic location, and health status. About half also have risk-sharing arrangements, such as reinsurance.

The great majority of projected savings from the carve-in has nothing to do with the purported cost-effective management of pharmacy benefits under managed care. It comes to the state from almost $80 million in premium taxes projected to be paid by the HMOs and MCOs participating in the state's managed care program. Those HMOs and MCOs will simply shift the cost of those taxes to private and third-party commercial plans. In turn, Texas employees pay higher health insurance premiums. 

Texas HHSC ran a model Medicaid drug program before the carve-in. Administrative expenses for the VDP were just 1% of total spending, among the best rates in the nation. Medicaid dispensing fees were higher under the former fee-for-service model and the great majority of that money remained in Texas. With most PBMs reducing dispensing fees by 80% or more under managed care, millions of dollars in monthly pharmacy revenue has been shifted to out-of-state PBMs that have 7% - 10% profit margins built into their operations. The drastically reduced payments to Texas pharmacies equate to no savings for the state whatsoever, only big profits for the out-of-state PBMs.

Problems With the Pharmacy Carve-In

  • Texas HHSC contracts directly with the MCOs and HMOs participating in the Medicaid/CHIP program. That arrangement enables HHSC to set contract terms and conditions for those entities and to have generally uniform reimbursements for the hospitals, doctors and other non-pharmacy providers in the program. There are seven different PBMs in the Medicaid/CHIP Program and each has a third-party contract with one or more of the MCOs/PBMs. HHSC purports that it has little to no latitude to intervene in any aspect of a contract between an MCO/HMO and a PBM, especially in setting standards for pharmacy reimbursement. We strenuously disagree.
  • The rate-setting process for non-pharmacy providers has taken place in open hearings where those providers and other affected parties could testify. The resulting reimbursement rates are public information. Pharmacy reimbursement rates are set in a secretive process by each PBM in which pharmacists have no voice.
  • There is wide variation in prior authorization requirements, dispensing fees and generic MAC prices used by the seven PBMs. A pharmacy can receive one reimbursement from one PBM and a vastly different payment from another PBM for the exact same drug in the same quantity.
  • PBMs operating in Texas are not considered to have fiduciary responsibility to the state or the Medicaid/CHIP Program.This means they are not required to operate in the state's or patients' best interest, and are free to make many decisions based on profit motivations.
  • PBMs are vastly unregulated entities that operate in virtual secrecy with little accountability. Many have been fined or paid settlements for fraudulent or deceptive practices to the amount of more than $370 million to date. Repeated out-of-court settlements mean they often do not have to admit any wrongdoing.

What APRx and TPBC are Doing

APRx filed suit in August 2011 over HHSC's failure to comply with state procedural requirements for meaningful public notice and comment concerning its waiver request to CMS and the carve-in of the Medicaid drug benefits into managed care. HHSC submitted the waiver request before enabling legislation was signed and three months before its effective date, and without providing proper public notice or a meaningful opportunity for interested parties to comment.

Feb. 14, 2012 -- American Pharmacies files a federal suit against HHSC, asking the court to order HHSC to require that pharmacies be reimbursed by managed care companies at the same rate as is established in the Vendor Drug Program and approved by federal regulators. 

APRx filed suit against HHSC on February 17, 2012 in Travis County, asking the district court to find that the Texas Vendor Drug Program payment rates in effect through Feb. 29, 2012, govern payments made through managed care organizations (MCOs). It also asked the court to strike down HHSC’s new regulations for failing to consider less onerous alternatives. APRx believes strongly that HHSC is obligated under current state law to set rules and standards to govern determination of Medicaid payments to pharmacy providers, even if the payments are made by MCOs and PBMs. 

Texas Pharmacy Business Council has sponsored key legislation to reform PBM audit practices and bring much greater consistency and transparency to generic MAC prices. These measures would provide significant incremental relief to Texas pharmacies under Medicaid managed care. TPBC is also working to strengthen the Texas Any Willing Provider Law and to maintain state (HHSC) control of the Medicaid/CHIP formulary.

Where Are We Headed?

Managed care for Medicad pharmacy benefits is here to stay in Texas for the forseeable future. It will not be until the 2015 session or later until the state has the benefit of a full biennium of cost and utilization data to review in assessing whether the carve-in has produced any savings. Although it is unrealistic to expect any modifications to the carve-in before the 2015 session at earliest, APRx and TPBC continue to press the following issues with state leaders and HHSC officials regarding alternatives to the carve-in:

  • Texas Medicaid could save $20 to $25 million alone by increasing its generic dispensing rate (GDR) by just 1%. The Texas GDR is 72%, which ranks (27th in the nation).
  • The state could save money through increased use of MTM and medication adherence programs. 


Texas Medicaid & CHIP in Perspective - Texas HHSC Study
Pharmacy Carve-In Actuarial Study
Map Showing Distribution of Medicaid Pharmacies in Texas
Texas Medicaid/CHIP VDP Pharmacy Assistance Resources
Pharmacy Assistance Chart
Texas Medicaid Formulary Search
HHSC Pharmacy Provider Procedures Manual (eff. April 2016)


Pharmacies (APRx) File Suit Against Texas HHSC - YouTube
Pharmacies Feeling Pressure of Reduced Medicaid Fees - Texas Tribune 
Medicaid Changes Mean Pain for Some Pharmacists - NY Times
Texas Pharmacists Fear Medicaid Cuts Could Be Devastating - Austin American Statesman
Valley Pharmacies Closing Doors Amid Medicaid Changes -
Prescription for Profit - Texas Observer
Pharmacy Closing Over Lower Medicaid Reimbursement - The Monitor
Texas Pharmacies Closing With Ripple Effects - Texas Insider