Medicaid provides prescription drug coverage as an optional service. Each state may or may not provide this coverage, although all states currently choose to provide it. In 2020, Medicaid's net spending on drugs was $33 billion (gross of $72 billion with $39 billion offset by rebates). Drug pricing and efforts to control drug costs, including Medicaid's spending on drugs, has received heightened national attention over the years. This issue directly impacts pharmacies, with a long history of controversy surrounding Medicaid reimbursement.
In general, unless the Medicaid recipient is on a managed care plan that uses a PBM, state Medicaid programs reimburse pharmacies for drugs based on ingredient costs and a professional dispensing fee. How Medicaid determines the final price it pays for prescription drugs involves a complex set of policies at both the federal and state levels. States vary in how pharmacy payment amounts are set, generally relying on a combination of pricing considerations. There are a number of key pricing terms important for understanding Medicaid drug pricing. (See Kaiser site: https://www.kff.org/medicaid/issue-brief/pricing-and-payment-for-medicaid-prescription-drugs/) These terms include:
Actual Acquisition Cost (AAC): A determination by a state Medicaid agency regarding the actual price paid by pharmacies to purchase the drug. (AAC determines payment for drug ingredients).
Average Manufacturer Price (AMP): The average price paid to the manufacturer by pharmacies that purchase directly from the manufacturer. AMP is also used to calculate rebates under Medicaid.
Average Wholesale Price (AWP): A published price list for a drug sold by wholesalers to pharmacies. It often reflects the starting point for pricing negotiations.
Best Price: Lowest price available to any wholesaler or retailer. Certain programs, such as the 340B drug program, are excluded from this.
Estimated Acquisition Cost (EAC): Was used by many state Medicaid programs to determine drug ingredient cost.
Federal Upper Limit (FUL): Determines a reimbursement limit for certain generic drugs, and is calculated as 175% AMP.
Maximum allowable Cost (MAC): An additional reimbursement limit on top of FUL set by states.
The National Average Drug Acquisition Cost (NADAC): National average of the prices pharmacies pay for drugs from manufacturers or wholesalers. This cost may include rebates and can be used to calculate AAC.
Wholesale Acquisition Cost (WAC): Manufacturer's published list price to wholesalers.
Many states may also require Medicaid beneficiaries to pay a small portion of the reimbursement through cost-sharing. Cost-sharing amounts are usually capped, and some beneficiaries are exempt from cost-sharing requirements. Furthermore, if a Medicaid beneficiary is not able to pay for their cost-sharing portion, a pharmacy is still required to dispense the drug. Adult Medicaid beneficiaries are also exempt from cost-sharing requirements for vaccines and vaccine administration under The Inflation Reduction Act of 2022.
Additional information on Medicaid reimbursement by state can be found at: https://www.medicaid.gov/medicaid/prescription-drugs/state-prescription-drug-resources/medicaid-covered-outpatient-prescription-drug-reimbursement-information-state/index.html.