Tennessee Medicaid pharmacy reimbursement

Background

Tennessee's version of the carve-out is the oldest in this series and the least conventional: TennCare has been a fully managed-care program since 1994, but since January 2020 every pharmacy claim has run through a single state-contracted PBM at the state's published terms — Tennessee's own acquisition-cost survey (AAAC, with NADAC as a check) plus a professional dispensing fee of $9.02 for high-volume pharmacies and $13.16 for low-volume and long-term-care pharmacies. Those claims land in the federal file as fee-for-service; the managed-care rows that remain are a residue of near-zero-dollar claims — the artifact that once made Tennessee's survey verdict look alarming until this project traced what it actually was.

Every state reports its Medicaid drug utilization to CMS, which publishes it as the State Drug Utilization Data (SDUD) — per drug, per quarter, fee-for-service and managed care separated. This report compares those reported payments against NADAC (CMS's national survey of pharmacy invoice prices) for every generic drug that can be matched.

What a carve-out means

In most states in this series, Medicaid pays each managed-care plan a fixed premium per member, and the plan hires a pharmacy benefit manager that decides — drug by drug, pharmacy by pharmacy, under contracts nobody outside can read — what the pharmacy is actually paid. The federal file shows only what the plans submit, which is how a state can publish a dispensing fee and file numbers that don't contain it. A carve-out removes the drug benefit from those contracts entirely: the state pays pharmacies claim by claim at its published formula — acquisition cost plus the professional dispensing fee — with no intermediary setting its own price in between.

The implications follow directly. Spread pricing becomes impossible, because there is no middle party paying the pharmacy one price and charging the program another. The published fee stops being aspirational: it is the amount on every remittance. One drug list and one formula apply statewide, the state keeps the full manufacturer rebate, and — the property this report depends on — the federal filings become transparent by construction, because the entity reporting the payments is the entity making them. The model has costs too: managed-care plans argue it separates drug coverage from the rest of care management, and New York's transition was delayed twice over lost 340B contract-pharmacy revenue at safety-net providers. A carve-out is a policy choice, not a free lunch — but it is an auditable one.

Three models now cover every state in this series. States like Wisconsin or Alabama never put pharmacy into managed care — ordinary fee-for-service, where the fee has always been visible. States like Ohio and Kentucky kept managed care but fired the plans' PBMs, routing every claim through one state-contracted, pass-through PBM — their filings still land in the managed-care rows, now carrying the fee. Carve-out states went one step further and took the benefit back entirely. The carve-out states differ from the ordinary fee-for-service states in one important way: they ran the PBM experiment first, measured what it cost them, and reversed it. What all three models share is the property the rest of the 50-state survey often lacks: a public payment formula you can check the federal file against. For the full story — what a carve-out changes, its trade-offs, and why pharmacies fight for it — read our carve-out guide.

Reported payment above ingredient cost, per generic prescription

One limit stated plainly: no public dataset itemizes the fee on either side. The chart shows the reported residual above national-average ingredient cost — all that is measurable. A residual near the published fee is consistent with fee-included reporting; a residual near zero is consistent with ingredient-only reporting.

Reimbursed below the national-average cost

NADAC is an average — roughly half of pharmacies pay more than it for any given drug, and the fee absorbs the difference before becoming income. Among the state-run program's generic fills with $500+ of ingredient cost since 2025, 38% were reimbursed below even the national-average cost — a $168K shortfall before counting any labor.

Methodology