California handed its Medicaid drug program to one company. Then came a corporate takeover.

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

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

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

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

Centene was already a big player in state Medicaid drug programs — but one with a questionable record. The company was accused by six states of overbilling 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 have settled with the company, but the amounts have not been disclosed. Centene, in resolving the civil actions, denied any wrongdoing.

KHN has learned California health officials also are investigating Centene.

Handing Over Control

In his 2019 inauguration speech, Newsom vowed to use California’s “market power and our moral power to demand fairer prices” from the “drug companies that gouge Californians with sky-high prices.”

Drug spending by the state for its Medicaid, prison, state hospital, and other programs had been climbing 20% a year since 2012, so the first-term Democrat issued an executive order requiring California to make its own generic drugs and forge partnerships with counties and other states to buy drugs in bulk. He also directed the state to buy prescription drugs for Californians enrolled in Medi-Cal, the state’s Medicaid program, which covers roughly 14 million people.

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

That December, California awarded a competitive $302 million contract to Magellan Medicaid Administration, a subsidiary of Magellan Health, to make sure Medi-Cal enrollees get the medications that 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 biggest money maker is mental health insurance, it met a key requirement of the state’s call for bids: It didn’t provide health insurance to any Medicaid enrollees in California.

Magellan was supposed to take over the drug program in April 2021. But on Jan. 4 of that year, Centene — which was seeking a greater role in the lucrative behavioral health market — announced plans 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 for the original contract. Centene provides health coverage for about 1.7 million low-income Californians in 26 counties through its subsidiaries Health Net and California Health & Wellness. It earned 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 backward to make it work, delaying implementation of the program while Magellan set up firewalls, sectioned off 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 didn’t mention Centene’s legal settlements 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 controls.

Centene’s Legal Troubles

In the past 10 months, Centene has settled with nine states over accusations that it and its pharmacy business, Envolve, overbilled their Medicaid programs for prescription drugs and services: It settled with Arkansas, Illinois, Kansas, Mississippi, New Hampshire, and Ohio, according to news releases from attorneys general in those states. The three other states have not been 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, which has denied wrongdoing in public statements, did not respond to multiple requests by KHN for interviews, nor did it respond to emailed questions. Magellan also did not respond to interview requests.

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

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

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

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A Sale in the Offing?

When Medi-Cal Rx debuted Jan. 1, thousands of Californians couldn’t refill critical — sometimes lifesaving — medications for days or weeks. Doctors, pharmacists, and patients calling for help often languished on hold for as many as eight hours.

Magellan blamed the problems on staff shortages during the COVID-19 omicron surge and missing patient data from insurance plans. State health officials went to great lengths to fix the problems and appeared before legislative committees to provide lawmakers with assurances that the contractor wouldn’t be paid in full.

But Medi-Cal patients still face uncertainty.

Not long after Magellan took over California’s Medi-Cal drug program, reports surfaced in Axios and other publications that Centene might sell Magellan’s pharmacy business.

Centene officials have not confirmed a sale. But it would align with the company’s recent moves to restructure its pharmacy operations in the face of state investigations — such as seeking an outside company to begin managing its drug spending.

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

Yet another ownership change in California’s drug program could bring more disruption to the state’s most vulnerable residents, some of whom are still having trouble getting their drugs and specialty medical supplies after Magellan’s rocky takeover.

“I don’t know what kind of instability that 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 publicly run Medicaid insurers that compete against Centene. “It’s just an open question.”

Koopmans and other Centene critics acknowledge that California has long relied on private insurance plans to offer medical and prescription drug coverage to Medi-Cal enrollees and that the state shouldn’t be surprised by ownership changes that come with consolidation in the health care industry. For example, Centene has a history of taking over California contracts after an acquisition — it did so when it purchased Health Net in 2016.

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

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

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

Kaiser Health News is a national health policy news service. It is an editorially independent program of the Henry J. Kaiser Family Foundation which is not affiliated with Kaiser Permanente.