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.

But according to the report by California Health Line, 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.

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.

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.

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.