On Monday, January 7, 2019, California’s newly inaugurated Governor, Gavin Newsom, issued an Executive Order (EO) directing state agencies, including Medi-Cal, to jointly negotiate prescription drug pricing and as a single-purchaser system. For covered entities participating in the federal 340B drug discount program, the single-purchaser system includes one unwelcome feature – the EO directs the Department of Health Care Services (DHCS) to “take all necessary steps to transition all pharmacy services for Medi-Cal managed care to a fee-for-service benefit by January 2021.”  As explained below, the shift will dramatically reduce prescription drug revenues for many covered California safety net providers (“covered entities”) participating in the 340B program, though a statutory change may bring that pain first.

Under existing law, California requires 340B covered entities to “carve-in” fee-for-service Medicaid claims (i.e. utilize drugs purchased under the 340B Program when billing traditional Medicaid), and bill for reimbursement at their actual acquisition cost (AAC) plus a $7.25 dispensing fee.  With respect to managed Medicaid, covered entities are generally free to bill managed care organizations (MCO) for their contracted reimbursement.  In most cases, the covered entities enjoy some reimbursement margin on drugs covered by Medicaid MCOs that can be used to subsidize care provided to uninsured and underserved patients.  DHCS circulated a draft All Plan Letter on November 15th that would prohibit the use of 340B drugs by contract pharmacies to fill managed care claims, already jeopardizing a substantial source of 340B program reimbursement.  If Medi-Cal shifts the prescription drug benefit under managed Medicaid to the fee-for-service benefit, covered entities will be required to use 340B drugs to fill MCO enrollee prescriptions and to accept reimbursement at cost.

Alternatively, DHCS might pursue a previously proposed statutory change that would require all covered entities to “carve-out” – refrain from using 340B drugs when billing Medicaid.  In order to maximize the impact of a single-purchaser system, the state might prefer to keep 340B drugs out of the Medicaid equation, so it can pursue better-than-Medicaid-rebate pricing on outpatient drugs.  The mandatory carve-out proposal could resurface in this year’s budget legislative package.

Either stance would be financially and operationally challenging for covered entities.  A mandatory carve-in provision commandeers covered entities and requires them to pass 340B discounts through to the state.  A carve-out approach requires covered entities to maintain 340B and non-340B drug inventories, and carefully track inventory to ensure that no Medicaid patients receive 340B drugs.  Hospitals would be especially harmed by a carve-out requirement because those that are subject to the 340B program group purchasing organization (GPO) prohibition would be forced to use drugs purchased on non-GPO, non-340B accounts for Medicaid beneficiaries.  The cost of those drugs, typically purchased at or near the wholesale acquisition cost (WAC) benchmark, would almost certainly exceed the cost-based reimbursement.  FQHCs have more flexibility, in that they could roll drug costs into their PPS rates, but that angle would leave them vulnerable to drug price increases that outpace PPS rate increases.

Feldesman Tucker Leifer Fidell LLP’s Pharmacy and 340B Team will watch developments, including the release of trailer bills to implement the Governor’s budget, closely in the coming days and weeks, and will continue to notify impacted clients. If you have any questions about this or other 340B program or pharmacy reimbursement issues, please contact Michael Glomb at mglomb@feldesman.com.