Managed care organizations (MCOs) play a major role in administering Medicaid pharmacy benefits, with a majority of states using comprehensive care arrangements that include prescription drugs as a covered benefit. States with MCOs can “carve in” the pharmacy benefit by including it as a covered benefit and placing the MCO at risk for costs. States also have the option to “carve out” the pharmacy benefit by excluding it from the MCO contract and covering drugs in fee-for-service (FFS), or carve in or out on a case-by-case basis.¹

Changes made to the Medicaid Drug Rebate Program by the Affordable Care Act (ACA) encouraged more states to carve in the pharmacy benefit, allowing states to increase budget predictability and leave the MCO accountable for drug costs.

The ACA encouraged carving-in as a way to decrease government spending but carving-out may allow states to obtain more favorable rebates through negotiations with manufacturers.

In general, carving the pharmacy benefit into the MCO benefit remains the prevalent approach for managing the prescription drug program for MCO enrollees. States are more likely to carve out certain subsets of drugs than to carve out the full benefit. States will generally carve-ous high-cost drug groups/classes (e.g. HIV/AIDS, oncology, etc.).¹ However the landscape of carving in or out is malleable and dynamic as states respond to budgetary concerns and the landscape of available treatments. Beginning in April 2021, California and New York opted to carve out prescription drug benefits from their Medicaid contracts with insurers. They join the ranks of states like Missouri, North Dakota, Tennessee, West Virginia, Wisconsin, and Nevada who plan to carve out the prescription drug benefit in fiscal year 2023 when its MCO contracts are renewed.²

Of the 39 MCO states that responded to a Kaiser Family Foundation 2019 survey question on whether they carve pharmacy benefits in or out, only four states (Missouri, Tennessee, West Virginia, and Wisconsin) reported carving out.¹

The most commonly mentioned drugs carved out or considered for carve-out strategies are Zolgensma and Spinraza, gene therapy treatments for spinal muscular atrophy. CAR-T therapies, cystic fibrosis, and muscular dystrophy drugs are also mentioned.¹

1. Gifford K, Winter A, Wiant L, Dolan R, Tian M, Garfield R. How State Medicaid Programs Are Managing Prescription Drug Costs: Results From A State Medicaid Pharmacy Survey For State Fiscal Years 2019 And 2020. Kaiser Family Foundation; 2020. https://www.kff.org/report-section/how-state-medicaid-programs-are-managing-prescription-drug-costs-pharmacy-benefit-administration/.

2. Small L. More States Choose to Carve Out Medicaid Drug Benefits - AIS Health. AIS Health. https://aishealth.com/drug-benefits/more-states-choose-to-carve-out-medicaid-drug-benefits/. Published 2021.