(Washington, D.C.)— Amid the debate on escalating drug prices, a new report estimates that by implementing the full range of pharmacy benefit management (PBM) tools, Medicaid could save $51.1 billion over the next ten years while maintaining or improving quality of care for the program’s vulnerable population. The Menges Group report finds that most state Medicaid programs currently don’t use all of the PBM tools that commercial plans employ to manage pharmacy spending.

The study, which is based on analysis of Centers for Medicare & Medicaid Services (CMS) data and includes a 50-state breakout, projects how much Medicaid could save by negotiating market-based pharmacy payments, encouraging the use of generics and more affordable brands, using lower-cost pharmacy options, and reducing fraud, waste and abuse.

“There is a real budgetary opportunity for federal and state policymakers to reduce costs while making Medicaid benefits more robust and sustainable,” said Pharmaceutical Care Management Association (PCMA) President and CEO Mark Merritt.

According to the new research, using the full range of PBM tools and strategies in state Medicaid programs nationwide could save a total of $51.1 billion over the next ten years, including $33.4 billion in federal savings and $17.7 billion in state savings.

Read the study.

Components of these potential savings include:

  • $26.5 billion saved by optimizing the use of generic drugs: Generics are typically (but not always) the lowest net cost products for state Medicaid programs. In aggregate, each percentage point increase in the generic dispensing rate yields roughly a 3% reduction in net prescription drug costs.
  • $2.4 billion saved by encouraging the use of more affordable, preferred brands: State Medicaid programs that continue the antiquated practice of exempting entire classes of drugs from Preferred Drug List reviews make it more difficult to use Prior Authorization (PA) protocols that encourage both safe and cost-effective drug utilization.
  • $1.9 billion could be saved over the next ten years in reduced drug diversion, polypharmacy, fraud, and waste: Medicaid plans that are more actively managed detect patterns of fraud through use of tools like step therapy, audits, and pharmacy lock-in programs to help detect and avoid inappropriate utilization.
  • By using a competitive process and negotiating better discounts from drugstores that wish to participate in more selective pharmacy networks, Medicaid could save $11.4 billion over the next ten years. State Medicaid programs could achieve greater savings by implementing competitive pharmacy contracting processes that characterize Medicare Part D and commercial-sector programs. In Medicare Part D, preferred pharmacy options have demonstrated savings of 6.1%.
  • $9 billion saved by aligning pharmacy reimbursements with competitive levels in the commercial sector: CMS has recently required that states adopt an Actual Acquisition Cost (AAC) methodology for paying pharmacies. The AAC approach may result in higher pharmacy reimbursements than the already higher-than-average reimbursements characteristic of traditional Medicaid programs.