California outsourced its Medicaid drug program to a single company. Then came a business takeover. | Health and fitness


SACRAMENTO, Calif. — Prescription drug costs for California’s massive Medicaid program were draining the state budget, so in 2019 Governor Gavin Newsom asked the private sector for help.

The new Medicaid drug program debuted in January, with a private company in charge. But it was woefully ill-prepared and thousands of low-income Californians were left without essential medicine for weeks, some waiting on hold for hours when they called for help.

What happened in the two years between contract award and the start of the program is a case study in what can go wrong when government outsources critical functions to the private sector.

California awarded the Medi-Cal Rx program to a unit of Magellan Health, a company specializing in pharmaceutical benefits and mental health. But Magellan was then gobbled up by industry giant Centene, worth around $50 billion, which was looking to expand its mental health portfolio.

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Centene was already a big player in state Medicaid drug programs — but with a questionable track record. The company was accused by six states of overcharging their Medicaid programs for prescription drugs and pharmacy services and settled to the tune of $264.4 million. Three other states made similar allegations and settled with the company, but the amounts were not disclosed. Centene, in resolving the civil actions, denied any wrongdoing.

KHN has learned that California health authorities are also investigating Centene.

In his 2019 inauguration speech, Newsom vowed to use “market power and our moral power in California to demand fairer prices” from “pharmaceutical companies that are gouging Californians out of exorbitant prices.”

The state’s drug spending for its Medicaid, prison, state hospital and other programs had grown 20% a year since 2012, so the first-term Democrat issued an executive order requiring California to manufacture its own generic drugs and partner with counties and other states to buy drugs in bulk. He also ordered the state to buy prescription drugs for Californians enrolled in Medi-Cal, the state’s Medicaid program, which covers about 14 million people.

Newsom no longer wanted to allow the state’s two dozen Medi-Cal-run health care plans to provide prescription drug coverage to their enrollees, arguing that the state would get a better deal from drug companies by exploiting its purchasing power.

In December, California awarded a competitive $302 million contract to Magellan Medicaid Administration, a subsidiary of Magellan Health, to ensure Medi-Cal enrollees get the drugs California would buy in bulk. Magellan provides pharmacy services to public health plans in 28 states and the District of Columbia.

Even though Magellan’s largest source of revenue is mental health insurance, it met a key requirement of the state tender: it did not provide health insurance to any enrollees in Medicaid in California.

Magellan was supposed to take over the drug program in April 2021. But on January 4 of that year, Centene – which was looking to play a bigger role in the lucrative behavioral health market – announced its intention to buy Magellan.

St. Louis-based Centene, however, is one of the largest Medi-Cal insurers in the state, a factor that would have disqualified it from bidding on the original contract. Centene provides health coverage to approximately 1.7 million low-income Californians in 26 counties through its Health Net and California Health & Wellness subsidiaries. It derived 11% of its revenue from California businesses in 2019, according to its 2021 annual report to the U.S. Securities and Exchange Commission.

But the state bent over backwards to make it work, delaying implementation of the program while Magellan installed firewalls, separated its business operations from Centene and paid for a third-party monitor.

State regulators reviewed the merger in a 30-minute public hearing in October 2021. They did not mention Centene’s legal agreements with other states.

The state Department of Managed Health Care approved the merger Dec. 30. Two days later, the state launched its new prescription drug program with Magellan at the helm.

Centene’s legal issues

Over the past 10 months, Centene has settled charges with nine states that it and its pharmacy company, Envolve, overcharged their Medicaid programs for prescription drugs and services: it has settled with Arkansas, Illinois , Kansas, Mississippi, New Hampshire and Ohio, according to press releases from those states’ attorneys general. The other three states were not identified by Centene or the states themselves.

The company has set aside $1.25 billion for those settlements and future lawsuits, according to its 2021 report to the SEC.

Centene, who has denied wrongdoing in public statements, did not respond to KHN’s multiple interview requests or emailed questions. Magellan also did not respond to interview requests.

From the start, other California health insurers opposed state ownership of the Medi-Cal drug program, in part because it took away a line of business from them. They were even more furious when the state allowed one of their biggest competitors to take the reins, especially given its legal entanglements.

The state Department of Health Services, which administers Medi-Cal, acknowledged to KHN in March that it was investigating the company, but declined to provide details. The state is investigating Centene’s role in providing drug benefits before the state took over the job from managed care insurers.

“DHCS takes all allegations of fraud, waste and abuse seriously and investigates allegations when warranted,” department spokesman Anthony Cava said in a statement.

When Medi-Cal Rx debuted on January 1, thousands of Californians were unable to refill essential — sometimes life-saving — medications for days or weeks. Doctors, pharmacists and patients calling for help often remained on hold for up to eight hours.

Magellan blamed the problems on staffing shortages during the covid-19 omicron surge and missing patient data from insurance plans. State health officials went to great lengths to resolve the issues and appeared before legislative committees to provide assurances to lawmakers that the contractor would not be paid in full.

But Medi-Cal patients still face uncertainty.

Shortly after Magellan took over California’s Medi-Cal drug program, reports surfaced in Axios and other publications that Centene might sell Magellan’s pharmaceutical business.

Centene officials have not confirmed a sale. But that would align with recent moves the company has taken to restructure its pharmaceutical operations in the face of state investigations, such as seeking an outside company to start managing its drug spending.

“Once you tell a PBM it has to behave, that’s when there’s no more money in it. It’s time to go,” said Antonio Ciaccia, president of drug price watchdog 3 Axis Advisors, referring to companies known as pharmacy benefit managers.

Another ownership change in California’s drug program could further disrupt the state’s most vulnerable residents, some of whom are still struggling to get their drugs and specialty medical supplies after Magellan’s rocky takeover.

“I don’t know what kind of instability it creates internally when there’s a change of this magnitude,” said Linnea Koopmans, CEO of Local Health Plans of California, which represents the state’s public Medicaid insurers that compete with Centene. “It’s just an open question.”

Koopmans and other Centene critics acknowledge that California has long relied on private insurance plans to provide medical coverage and prescription drugs to Medi-Cal enrollees and the state should not be surprised. by changes in ownership that accompany the consolidation of the health care sector. For example, Centene has a history of taking over California contracts after an acquisition — it did so when it bought Health Net in 2016.

But consumer advocates say the Centene fiasco makes it clear the state needs to improve oversight of corporate mergers if it chooses to cede responsibility for public programs.

“In an ideal world, these are all behind-the-scenes machinations that people don’t notice – until they do, until there’s a problem,” said Anthony Wright, executive director of Health Access California, a consumer advocacy group. “It just increases the need to make sure that oversight is there, that accountability is there.”

This story was produced by KHN, which publishes California Healthline, an independent editorial service of the California Health Care Foundation.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism on health issues. Along with policy analysis and polls, KHN is one of the three main operating programs of the KFF (Kaiser Family Foundation). KFF is an endowed non-profit organization providing information on health issues to the nation.


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