Report 96038 Summary - December 1997

Department of Health Services: Its Drug Management Techniques Are Similar to Those of Health Maintenance Organizations

Results in Brief

The Department of Heath Services (department) is responsible for administering the California Medical Assistance Program (Medi-Cal). Medi-Cal provides a wide array of heath care services, including payment for prescription drugs to public assistance recipients and low-income families. The department employs a number of drug management techniques designed to optimize care while minimizing costs.

Generally, the department's drug management techniques are on a par with those of Health Maintenance Organizations (HMOs). We compared them to those used by 14 HMOs and found the department employs 11 of the 14 techniques. Of the 3 it does not employ, 1 is not widely used by the HMOs and 2 are not applicable to the state program. While the department uses most of the same techniques, it does not use some in the same manner or to the same extent as the HMOs. There are differences in the list of preferred drugs (formulary), drug use reviews, and rebates.

The Medi-Cal formulary is comparable to those of HMOs in the number and range of drugs it offers. However, it offers fewer of the most commonly prescribed medications because the drugs either cost more than other comparable drugs or are prone to misuse. Nonetheless, if medically necessary, a Medi-Cal recipient can obtain these drugs with the department's approval.

Also, although the department employs drug use reviews, it does not do so as extensively as the HMOs. Both use on-line computer messages or screens to alert pharmacists of a drug's potential adverse effects, but the department screens only a few of the drugs on the Medi-Cal formulary while the HMOs screen all drugs on their formularies. Additionally, unlike some HMOs, the department does not obtain or review nonformulary drug use statistics to identify drugs for possible inclusion on the formulary.

Further, the department and most HMOs negotiate rebate agreements with drug manufacturers. However, while the HMOs base their rebates on a price that is published and readily available, the department bases its on a price known only to the drug's manufacturer. Thus, unlike the department, HMOs can calculate rebates and bill manufacturers for the amount owed.


The department should continue to expand its use of drug management techniques. Additionally, it should stay abreast of new techniques HMOs and other third-party payers use to manage their prescription benefit plans and consider adopting those methods that are effective and suited to the Medi-Cal program. Finally, the department should calculate state rebates using an available price base.

Agency Comments

The department concurs with our recommendations and is interested in generating a report to identify high-demand drugs and developing additional step care guidelines. In addition, it expects to add more drug alert screens in the near future and is committed to seek out and implement new drug management techniques when possible. Finally, the department states that it is now able to negotiate rebate agreements using a basis that will allow it to calculate rebates.