On April 1, 2021, the California Department of Health Care Services (“DHCS”) will be transitioning all Medi-Cal pharmacy benefits from managed care to fee-for-service (“FFS”).  This new system to administer FFS pharmacy benefits is being called “Medi-Cal Rx” and was developed by DHCS in response California Governor Gavin Newsom’s January 7, 2019 executive order (the “Order”), which instructed DHCS to transition all Medi-Cal pharmacy benefits to FFS by January 1, 2021.  The rationale behind the Order is to combat rising prices for prescription drugs by increasing the State’s bargaining power in negotiating prescription drug prices with pharmaceutical companies.  The date of transition was subsequently pushed back to April 1, 2021 so currently no pharmacy managed care benefits have been impacted.

According to DHCS, transitioning Medi-Cal drug benefits from managed care to FFS has many benefits.  The transition to FFS will standardize the Medi-Cal pharmacy benefit statewide under a single delivery system and apply statewide utilization management protocols to all outpatient drugs.  Access to pharmacy services will improve since the pharmacy network will now include approximately 94​% of the State’s pharmacies and will generally be more expansive than individual Medi-Cal Managed Care Plan pharmacy networks.  Medi-Cal Rx also has the potential to strengthen California’s ability to negotiate state supplemental drug rebates with drug manufacturers.  In addition, based on DHCS’s fiscal analysis for Medi-Cal Rx, DHCS anticipates approximately $405 General Fund million in annual savings by 2022-2023.[1]

Critics, however, are skeptical that the transition of Medi-Cal pharmacy benefits to FFS will actually result in a reduction in costs.  In a 2019 report, the Menges Group conducted an analysis of 13 states who used a pharmacy “carve-out” model in their Medicaid managed care programs and found that California’s adoption of the pharmacy carve-out “would result in a 19.4% increase in net Medi-Cal pharmacy expenditures across the five year timeframe SFY2020 – 2024, increasing state fund costs by $51 million in SFY2020 and $757 million over five years.”  Critics have also expressed concern about transitional challenges that will result in Medi-Cal beneficiaries unable to obtain necessary prescription drugs and that carving out the pharmacy benefit from managed care will adversely affect care coordination by fragmenting the provision of services.[2]

Who Will Be Impacted?

All Medi-Cal Managed Care Plans will be affected by Medi-Cal Rx since they will be forced to transition pharmacy benefits from managed care to FFS.  Medi-Cal Rx will also apply to California Children’s Services (“CCS”) and the Genetically Handicapped Persons Program (“GHPP”).  Medi-Cal Rx will not affect any pharmacy services that are billed as a medical and/or institutional claim instead of a pharmacy claim.  In addition, Medi-Cal Rx will not apply to Programs of All-Inclusive Care for the Elderly (“PACE”) plans, SCAN (aka the Senior Care Action Network) and Cal MediConnect health plans, or the Major Risk Medical Insurance Program (“MRMIP”).

Medi-Cal Rx will also not change the following:

  1. The scope of the existing Medi-Cal pharmacy benefit.
  2. Provision of pharmacy services as part of a bundled or all-inclusive billing structure in an inpatient or long-term care setting (including Skilled Nursing Facilities and other Intermediate Care Facilities).
  3. Existing Medi-Cal managed care pharmacy carve-outs will continue (g., blood factor, HIV/AIDS drugs, antipsychotics, or drugs used to treat substance use disorder).
  4. The State Fair Hearing process. [3]

Administration of Medi-Cal Rx

DHCS released a Request for Proposal on August 22, 2019 in order to procure an administrative services contractor to administer Medi-Cal Rx.  On December 13, 2019, DHCS awarded a contract to Magellan Medicaid Administration, Inc. (“Magellan”) to provide certain administrative services, including claims management, prior authorization and utilization management, pharmacy drug rebate administration, provider and beneficiary support services, and other ancillary and reporting services to support the administration of Medi-Cal Rx.[4]

Transition Process

Assuming nothing changes, starting on April 1, 2021, the Medi-Cal pharmacy benefit will transition from the Medi-Cal managed care delivery system to a FFS delivery system and Magellan will assume responsibility for all of the administrative services that are needed to support Medi-Cal Rx.  In order to ensure that Medi-Cal beneficiaries do not experience a disruption in their care or access to necessary prescription medications, DHCS developed a Pharmacy Transition Policy (the “Policy”).

The Purpose behind the Policy is to ensure that Medi-Cal beneficiaries who previously received prescriptions through their Medi-Cal Managed Care Plans will have continued coverage for covered Medi-Cal pharmacy benefits through a “grandfathering” and “look-back” system.  In order to implement the Policy, Magellan will be collecting at least 12 months of paid claims and prior authorization (“PA”) history received from Medi-Cal Managed Care Plans.

  • Existing Prescriptions Without a Previously Approved PA: For all Medi-Cal beneficiaries with an existing prescription that previously did not require PA but will require PA on or after April 1, 2021, Magellan will “look back” and validate that a prior prescription existed for the applicable medication. Based upon this “look back”, DHCS will not require any PA during the 180-day period for covered Medi-Cal pharmacy benefits billed on pharmacy claims (with the exception of off-label use pursuant to federal Medicaid requirements).
  • Existing Prescriptions With Previously Approved PA: For existing prescriptions for covered Medi-Cal pharmacy benefits with a previously approved PA on or before March 31, 2021, Magellan will “grandfather” those prescriptions to allow continuation of the PA through its stated duration, which cannot exceed one full year from the approval date of the PA. Certain types of drugs, such as maintenance medications used to treat chronic conditions, may be “grandfathered” for up to five years from the date the prescription was written.
  • New Prescriptions: For any new prescriptions requiring PA under Medi-Cal Rx, the “grandfather” component will not apply, and the provider will need to submit the prescription for PA consistent with Medi-Cal Rx policy. For new prescriptions not requiring PA under Medi-Cal Rx, these claims will not be impacted, and will be processed and paid by Magellan per Medi-Cal Rx policy.[5]

Medi-Cal FFS Reimbursement Methodology

Medi-Cal FFS pharmacy reimbursement for covered outpatient drugs has two components: (1) drug ingredient cost (average acquisition cost) and (2) a professional dispensing fee.  The professional dispensing fee is two-tiered based on total Medicaid and non-Medicaid annual pharmacy claim volume: (A) If less than 90,000 claims per year, then the amount is $13.20 and (B) If more than or equal to 90,000 claims per year, then the amount is $10.05.[6]

Impact on 340B Drug Program

Medi-Cal Rx will likely impact billing and reimbursement for prescription drugs under the 340B Drug Pricing Program (the “340B Program”).  The 340B Program requires pharmaceutical manufacturers to offer covered outpatient drugs to eligible “safety net” health care facilities, clinics, and hospitals (termed “covered entities”) at a discounted price.  For 340B Program claims under Medi-Cal Rx, the reimbursement is the covered entity’s actual drug acquisition cost plus the appropriate professional dispensing fee.[7]

Currently, drugs purchased by covered entities through the 340B Program are based on the pharmacy’s contract with the Medi-Cal Managed Care Plan, and covered entities have the option to carve out Medi-Cal managed care from their 340B Programs.  Medi-Cal FFS, on the other hand, cannot be carved out and must be reimbursed at the 340B actual acquisition cost.  Medi-Cal Rx essentially requires covered entities to “carve in” all of their retail

pharmacy drugs and accept reimbursement at actual acquisition cost.  In addition, Medi-Cal identification requirements for 340B Program claims differ for FFS and managed care, so the transition to FFS will also require covered entities to meet FFS claims identification requirements for all 340B Program drugs dispensed by pharmacies to Medi-Cal enrollees.[8]

DHCS, however, believes that the new Medi-Cal FFS billing requirements for 340B Program drugs will improve transparency issues with the managed care delivery system.  According to DHCS, Medi-Cal Rx promotes uniformity of policy and improves oversight of claims for medications dispensed and billed through the 340B Program.  In addition, DHCS intends to make a supplemental payment pool for non-hospital 340B clinics as a part of the Governor’s 2020-21 Budget. The California State Budget for 2020-2021 included $52.5 million to provide supplemental payments to specified non-hospital clinics who participated in the 340B Program, which will grow to $105 million in 2021-22 and annually thereafter.  DHCS is in the process of finalizing the distribution methodology.[9]

Long-Term Effect for California

Assuming that Medi-Cal Rx goes into effect as planned on April 1, 2020, it will be a significant change to Medi-Cal’s managed care program.  However, at this point, it is unclear whether the transition of Medi-Cal pharmacy benefits to FFS will work as intended by significantly reducing the State’s spending on prescription drugs.  We will continue to monitor and provide updates on the transition process.


[1]               https://www.dhcs.ca.gov/provgovpart/pharmacy/Documents/Medi-Cal-Rx-FAQ-11-06-2020.pdf; https://medi-calrx.dhcs.ca.gov/home/education/

[2]               https://www.managedhealthcareexecutive.com/view/california-carving-out-pharmacy-benefits-and-going-ffs

[3]               https://www.dhcs.ca.gov/provgovpart/pharmacy/Documents/Medi-Cal-Rx-FAQ-11-06-2020.pdf

[4]              Id.

[5]               https://www.dhcs.ca.gov/provgovpart/pharmacy/Documents/MRX-Pharmacy-Transition-Policy-Ver%208.0-08-14-2020.pdf

[6]              https://www.dhcs.ca.gov/provgovpart/pharmacy/Documents/Medi-Cal-Rx-FAQ-11-06-2020.pdf

[7]               Id.

[8]              https://www.rwc340b.org/california-medicaid-will-transition-all-pharmacy-services-to-fee-for-service/

[9]              https://www.dhcs.ca.gov/provgovpart/pharmacy/Documents/MRX-Pharmacy-Transition-Policy-Ver%208.0-08-14-2020.pdf