OLR Research Report

December 23, 2008




By: Robin K. Cohen, Principal Analyst

For more than a decade, states have been trying to save money in their Medicaid pharmacy budgets, including by instituting preferred drugs lists (PDL) that enable them to get additional manufacturer rebates on top of those that federal law requires them to receive. More recently, the Medicare Part D drug benefit has reduced state Medicaid rebates considerably, leading states to consider pooling their Medicaid lives to leverage even more rebates. (The rebate reduction results because many Medicaid recipients also qualify for Medicare and with the latter program now providing drug coverage, the former no longer does, hence the rebate amount has been reduced.)

Currently, 25 states participate in one of three multi-state pools, and Nebraska just released a request for proposals (RFP) for a vendor pharmacy benefit manager (PBM) to enable it to join one of the pools, beginning in February 2009. All three pools use PBMs to negotiate supplemental rebates for the states (hence the savings in Medicaid), but one gives more control to its member states.

It is difficult to say whether Connecticut would benefit from joining one of the pools. States choosing not to join pools cite different reasons. In a 2006 survey, they most often gave the reason that it believed it would be better off financially by not joining. Connecticut's Medicaid director says he believes there would be resistance to allowing other states to have a say over which drugs the state would want on a PDL.


Since early 2000, states have been looking at ways to save money in their Medicaid pharmacy budgets by joining one of three pools that negotiate supplemental rebates from drug manufacturers in exchange for putting their drugs on Medicaid PDLs.

National Medicaid Pooling Initiative (NMPI) (also known as Michigan Multi-State Pooling Agreement, MMSPA)

According to the National Conference of State Legislatures (NCSL), the NMPI/MMSPA was the first multi-state pool set up exclusively for Medicaid drug purchases. Michigan, Vermont, and South Carolina created the pool and received federal approval to begin in late 2003. The PBM First Health Services Corporation administers the program.

As of December 2008, 13 states are participating in the NMPI/ MMSPA: Alaska, Georgia, Hawaii, Kentucky, Michigan, Minnesota, Montana, Nevada, New Hampshire, New York, Rhode Island, South Carolina, and Tennessee. (Vermont left this pool and joined the Sovereign States Drug Consortium in 2006, see below). When announcing that it had approved the Medicaid state plan amendments needed to make the states eligible for their federal matching funds, the federal Medicaid agency (CMS) published estimated savings that some of the states expected to achieve. These are shown in Table 1.

Table 1: National Medicaid Pooling Initiative (NMPI) States and Savings




$1 million; with PDL features state estimated $20 million annual savings




$3 million (between April 2004 and March 2005)




$8 million in FY 2004






$1.9 million in 2004, $4.3 million in 2005

New Hampshire

$250,000 in 2004

New York

$194 million in FY 06 and $392 million in FY 07

Rhode Island


South Carolina




Vermont [1]

$1 million in FY 2004

[1] Vermont left the pool in 2006.

Source: NCSL (2008), National Association for State Medicaid Directors (2007)

The negotiated rebates are dependent on the number of lives in each state that selects a drug for inclusion on the PDL. The supplemental rebate agreements with manufacturers are fixed for two years, and the rebate amounts are based on reported Wholesale Acquisition Cost (WAC) for each individual drug. Supplemental rebates are not required for a drug to be on the PDL. Each state maintains its own Pharmaceutical and Therapeutics Committee (P&T) (these committees, which comprise medical professionals and other statutorily enumerated members, decide which drugs should go on the PDL) with an annual implementation schedule for changes to the PDL occurring in March.

Michigan Experience. A 2008 analysis prepared the Michigan Senate's nonpartisan fiscal agency reports significant savings in the state's Medicaid pharmacy program. But it points to both the state's own PDL (which it began in 2002) and the pool as generating these savings. During FY 07, the state collected over $18 million in supplemental rebates. The analysis also notes the PDL's effect on the state's use of generic drugs, citing a 2004 federal report that the state had achieved a generic substitution rate of 90%.

Hawaii's Experience. In a report to the state legislature (in which the agency was advocating for removing pharmacy from its Medicaid managed care program), Hawaii's Department of Human Services stated that it had accurate data on the supplemental rebates and other savings the state had received by joining the pool in 2004. For the period between April 2004 and March 2005, it realized a net savings of $3,000,199 from supplemental rebates for about 40,000 Medicaid fee-for-service recipients, with an additional $2.6 million from its own PDL for 36 classes of drugs.

Top Dollar (Top $)

Louisiana and Maryland joined forces to form the second pool, called Top $, in mid-December 2004; CMS approved it in May 2005. Delaware, Idaho, Pennsylvania, and Wisconsin joined more recently. The pool is run by Provider Synergies, a for-profit PBM. NCSL reports that Louisiana and Maryland estimated $27 million and $19 million in savings in FY 2006, respectively.

According to an analysis done for the Texas legislature, TOP$ member states represent approximately 2.1 million lives. Its PBM negotiates discounts based on the number of states that select a particular drug as a preferred product, rather than the number of recipient lives in each

state program. This means that not every state in the consortium must agree to every preferred drug product in order to get a benefit from participating.

Each participating state maintains a separate and individual P & T committee and each committee holds meetings in February and August. PDL changes are made in April and October. As in the NMPI pool, supplemental rebate amounts are based on the Wholesale Acquisition Cost (WAC) for each individual drug, and supplemental rebates are not required in order for a drug to be placed on the PDL.

Sovereign States Drug Consortium (SSDC)

The third pool is administered by its member states, which contract with a nonprofit PBM to negotiate the supplemental rebates. It is also unique in that it allows any state to participate, regardless of whether it administers its pharmacy benefit internally or though an outside contract. CMS approved the consortium in July 2006. Each participating state has its own, separate PDL. Members collectively review the bids from the pharmaceutical manufacturers, and independently decide “which approach is most appropriate for their individual program.” Estimated savings for this program are shown in Table 2.

Table 2: Estimated SSDC Savings




$1.8 million in FY 06


1 million between November 2005 and July 2006


1.5 million in FY 07


$5.3 million

West Virginia




Source: NCSL (2008)

SSDC--Vermont Perspective

The head of the SSDC, Ann Rugg, who is also the deputy director of the Office of Vermont Health Access, shared her experiences with the pools. Vermont was initially part of the NMPI but decided that it wanted to have more control over the formation of the pool and its activities. It joined the SSDC in 2006.

The consortium relies on a nonprofit PBM (MedMetrics) to negotiate the rebates. MedMetrics embraces a philosophy of open access to accurate information, including full disclosure of manufacturer drug discount contracts and terms, supporting documentation explaining discount revenue sources and calculation methodologies, and 100% pass-through of all discounts. The member states use their own resources to perform related activities, such as Medicaid management information systems, either in-house (as Utah does) or through a third party.

Rugg suggested that the other two pools provide states with less autonomy, asserting that the PBMs (First Health and Provider Synergies) make themselves available only to states willing to contract with them and use all of their services. In contrast, MetMetrics works for the SSDC and the states can change the vendor if they choose.

While the rebates depend on the number of states participating, Rugg indicated that the consortium does not pressure a member state to participate. And although there are fewer Medicaid recipients in the newer pool (which is composed of smaller states with fewer Medicaid recipients), Rugg asserts that it is getting the same level of rebates that were available in the larger pool. She added that the participating costs are considerably less: currently, MedMetrics charges $150,000 annually, which is shared equally among the six member states. Previously, Vermont spent $22,000 per month to participate in the NMPI. (States also pay an initial fee to “populate the data base.”)

In terms of the negotiation process, the PBM provides the drug manufacturer with drug utilization data and information about the states' PDLs. Then it brings rebate offers for existing drug classes, based on the utilization figures. State staff (or its vendors) will review the offers as if they had negotiated them themselves. States can also confer with their P & T committees. Then the PBM does any fine tuning at the direction of the state Medicaid agencies.

Rugg emphasized that it is difficult to say with certainty whether a particular state would be better off by joining a pool, especially if it has a mature PDL that generates substantial supplemental rebates. She pointed to the potential that joining a pool could disrupt the administrative process as well as any existing contractual relationships.


NASMD Survey

According to the 2006 NASMD report, several factors affect a state's decision to join a bulk purchasing pool for its Medicaid programs. States not participating in the pools were asked why and their responses are listed in Table 3. Since that survey was done, six states whose responses are reflected in the table have joined pools.

Table 3: Reasons States Did Not Participate in Medicaid Drug Purchasing Pools



Administrative burden


Political pressures


State policy barrier


State better off financially not participating


State considering joining




Data not available


Source: NASMD (2006)

Texas Analysis

The 2005 Texas legislature directed its Medicaid agency to perform a cost-benefit analysis and determine the feasibility of the state joining an existing pool. Provider Synergies estimated that the state would realize savings between $3.8 and $4.2 million by joining a pool. But this savings would be mitigated if the state (through its P & T committee) chose to have a different PDL from the pool states.

The Medicaid staff also pointed to differences between's Texas' and the other states' PDL processes that would need to be considered. For example, Texas law requires a supplemental rebate to be in effect in order for a product to be on its PDL. Other states do not have this requirement. And they pointed to the differing P & T schedules, suggesting that the lack of uniform schedules could make administering the multistate pool more difficult.

According to the agency, the state ultimately decided not to join the pool as it believed that it would not benefit. The state has achieved significant savings from its own PDL.


Recognizing that the state could realize additional savings in the Medicaid pharmacy budget, the legislature authorized DSS to adopt a PDL in 2002. As required by federal and state law, a P & T committee oversees the PDL. DSS is authorized to contract with a PBM to negotiate the supplemental rebates. DSS' pharmacy contractor, EDS, maintains a contract with Provider Synergies, the same PBM that administers the TOP$ pool.

By law, the state's 14-member P & T committee meets at least once every three months and can adopt PDLs in the Medicaid, State-Administered General Assistance (SAGA) medical assistance, and Connecticut Pharmaceutical Assistance Contract to the Elderly and Disabled (ConnPACE) programs. To the extent possible, DSS must review all drugs on the PDL at least once a year and can recommend additions or deletions to it. Mental health-related and antiretroviral classes of drugs may not be included on the PDL (CGS 17b-274d).

The state PDL has helped the state realize significant savings in its pharmacy programs, including Medicaid. A FY 2007 DSS report estimated annual savings of nearly $30 million from the 36 classes of drugs on the PDL. (This amount was cut in half to reflect the transfer of clients into Medicare Part D, since the state no longer pays the drug costs for people dually eligible for Medicare and Medicaid.)

It is difficult to say whether Connecticut would benefit from joining a pool. DSS' Medicaid director, David Parrella, suggested that some might not find it “palatable” to have another state decide which drugs would be covered. He suggests that a better way to save money would be to place mental health drugs on the existing PDL.

Yet Vermont's experience with the SSDC suggests that states would retain their autonomy by maintaining their own PDLs. (For a fee, the SSDC will do a comparative analysis for any state considering joining the pool.) Moreover, Connecticut recently (February 2008) carved pharmacy benefits out of the HUSKY program, thereby adding 300,000 or more lives for whom DSS is now directly responsible for providing pharmacy benefits.