Editor’s Note: This “Manatt on Medicaid” is the fifth in a series of updates focused on CMS’s new Medicaid/CHIP managed care regulations. In the coming weeks Manatt will continue to explore key provisions of the regulations and highlight their implications.


The recently finalized Medicaid managed care (MMC) regulations clarify an important point about prescription drug coverage in Medicaid managed care plans. Just as is the case in fee-for-service (FFS) Medicaid, beneficiaries enrolled in Medicaid managed care plans are entitled to any medically necessary Medicaid-covered outpatient drug. Both plans and FFS Medicaid programs may impose prior authorization restrictions on some drugs, though when medically necessary for a particular patient, access will generally be granted.

This clarification likely means that managed care plans are effectively prohibited from using “closed” formularies, as at least some currently do. With a closed formulary, plans exclude some drugs from the formulary and provide no coverage for those excluded drugs. The rules may permit plans to maintain nominally closed formularies, as long as any drug excluded from the plan formulary is available to beneficiaries directly from the state.


States are not required to cover prescription drugs through managed care, but when a state requires Medicaid managed care entities to cover prescription drugs, under the new rules the managed care entity must provide coverage of outpatient drugs “that meets the standards for such coverage imposed by Section 1927 of the [Social Security] Act as if such standards applied directly” to the managed care entity.1

Section 1927 reflects a “bargain” between outpatient prescription drug manufacturers and state Medicaid programs, as enacted in the Omnibus Budget Reconciliation Act of 1990 and revised in the intervening years:2 Medicaid gets favorable prices and manufacturers get open access to their medicines.

Manufacturers are required to provide state Medicaid programs rebates that result in Medicaid generally receiving the best price of any payer for the drug, and the Medicaid programs are required to cover all of the manufacturers’ drugs when medically necessary, subject to a few limitations:

  • Certain types of drugs can be entirely excluded from Medicaid coverage, such as weight-loss or fertility drugs, even if medically necessary.
  • Drugs can be excluded from coverage if they are not prescribed for a “medically accepted indication,” which is defined as indications listed on the FDA-approved label, as well as indications that are not on the label but are recognized in specific medical compendia.

Any drug that is covered can be subject to prior authorization. Generally, states establish “preferred drug lists” and impose prior authorization requirements on non-preferred drugs. States have used this authority to negotiate supplemental rebates with manufacturers. When therapeutically similar drugs are available without prior authorization, clinicians rarely go through the prior authorization process. Therefore, the lists have proven powerful in gaining additional manufacturer rebate concessions.

Section 1927 also permits the state to establish a drug “formulary.” However, states do not use this authority, as even excluded drugs must be available to a Medicaid beneficiary through a prior authorization process.3

The new regulations are important, as they clarify the extent to which state Medicaid programs and the plans with which they contract must comply with Section 1927.

First, the regulations clarify that managed care plans may not use so-called closed formularies, if that means enrollees would have no access to a drug if it is not on formulary, as might have been the case prior to these rules. Off-formulary drugs must still be available through prior authorization, either from the managed care plan itself or directly from the state. This likely will expand access to prescription drugs for managed care enrollees over current practices. (It is possible under the new rules that states could conceivably write their managed care contracts so that only some drugs are available through the managed care entity, with other drugs (including potentially drugs that would have been otherwise “off formulary”) made available through FFS.)

Second, plans may continue to apply the same Medicaid standards for coverage that apply outside managed care. This means coverage can be limited to medically accepted indications for particular drugs and can be restricted to prescriptions that are medically necessary for a particular patient.4

This does not mean that either states or managed care entities have carte blanche to deny coverage of drugs prescribed for a medically accepted indication because the state or plan believes the drug is not medically necessary. In the context of direct-acting antivirals (DAAs) for treatment of the hepatitis C virus, CMS has recently emphasized that medical necessity determinations should be based on clinical evidence and should not unreasonably restrict access.5 But that recent CMS guidance also made clear that merely being prescribed for a medically accepted indication was not sufficient for coverage in either FFS or managed care. States and plans are still permitted to evaluate drugs for medical necessity for a particular patient.

Finally, the final rule makes clear that managed care plans must cover newly FDA-approved drugs as soon as they are available and subject to a Section 1927 rebate agreement, as long as the drug falls within the scope of the managed care contract and is otherwise considered a Medicaid covered outpatient drug. The plan may still impose prior authorization requirements.6


The Medicaid managed care rule adds some additional clarity to how prescription drug coverage must be made available to beneficiaries in managed care. In sum, their coverage must be at least as generous as the coverage available to FFS beneficiaries, which may be more generous than some managed care enrollees are currently receiving.