In most Medicaid managed care states, prescription drugs are covered under the MCO's pharmacy benefit — meaning claims are adjudicated by the MCO's pharmacy benefit manager and reimbursed according to the MCO's formulary. This is the default assumption most pharmacy staff operate with. It is also the assumption that generates one of the most common sources of rejected Medicaid pharmacy claims.
Carve-out drugs are exceptions to that default. Certain drug classes are excluded from MCO capitation payments and reimbursed instead through the state's fee-for-service Medicaid program. When a carve-out drug is billed to the MCO, the claim rejects — not because the drug is not covered, but because it was billed to the wrong payer.
Why Carve-Outs Exist
States carve out specific drug classes for several policy reasons. For high-utilization drug classes — particularly those involving behavioral health, chronic conditions, or specialty medications — states often retain direct oversight through the fee-for-service system to maintain uniform access standards, control costs through state-level rebate negotiations, and monitor utilization patterns across the entire Medicaid population rather than through fragmented MCO reporting.
When pharmacy is carved out at the drug class level, the state negotiates rebates and sets coverage criteria directly, rather than delegating that authority to each MCO's PBM. This gives the state more leverage with drug manufacturers and more consistent clinical criteria across all enrollees, regardless of which MCO they are enrolled in.
Michigan as a Case Study: 14 Carve-Out Classes
Michigan's Medicaid program is one of the most extensive carve-out structures in the country. As of the 2025–2026 State Prescribed Drug List, Michigan carves out 14 drug classes from MCO coverage. These drugs are covered through Michigan's fee-for-service pharmacy program regardless of which MCO the patient is enrolled in.
| Carve-Out Class | Billing Pathway |
|---|---|
| ADHD Stimulants | FFS — Michigan Medicaid |
| Anticonvulsants | FFS — Michigan Medicaid |
| Antidepressants | FFS — Michigan Medicaid |
| Antipsychotics | FFS — Michigan Medicaid |
| Antiretrovirals (HIV) | FFS — Michigan Medicaid |
| Anxiolytics / Sedative-Hypnotics | FFS — Michigan Medicaid |
| Drugs for Alcohol Use Disorder | FFS — Michigan Medicaid |
| Drugs for Opioid Use Disorder (MOUD) | FFS — Michigan Medicaid |
| Hypnotics | FFS — Michigan Medicaid |
| Mood Stabilizers | FFS — Michigan Medicaid |
| Non-Stimulant ADHD Agents | FFS — Michigan Medicaid |
| Opioid Antagonists (non-MOUD) | FFS — Michigan Medicaid |
| Smoking Cessation Agents | FFS — Michigan Medicaid |
| Spasticity Agents | FFS — Michigan Medicaid |
Practical implication: A Michigan Medicaid patient enrolled in Molina, Priority Health, Blue Cross Complete, or any other MCO who fills a prescription for an antidepressant, antipsychotic, or anticonvulsant — the claim must be billed to FFS Michigan Medicaid, not to the MCO. Billing the MCO will produce a rejection on every claim, every time.
How States Differ
Carve-out structure varies significantly across states. Michigan is among the most extensive. Florida, by contrast, has no drug class carve-outs for its MCO population — all covered outpatient drugs are administered through the MCO's pharmacy benefit, with the MCO responsible for formulary management and PA administration. Ohio implemented a pharmacy carve-out at the program level in 2022, moving all pharmacy out of MCO capitation into a state-run FFS program, which is a different structure entirely from drug-class carve-outs within an otherwise MCO-managed benefit.
New York carved pharmacy out of managed care beginning April 2023. Wisconsin, California, Tennessee, West Virginia, Missouri, and North Dakota maintain varying degrees of FFS carve-out. The details of what is carved out and what the billing pathway is differ for every state, and in some cases differ for specific drug classes within the same state.
Specific Drugs That Frequently Cause Confusion
Several drug classes create disproportionate billing errors because they span multiple therapeutic categories or have MCO-covered analogs. In Michigan, buprenorphine/naloxone (Suboxone) is a MOUD agent — carved out to FFS. Naltrexone for alcohol use disorder is also carved out. But naltrexone for pain management may have a different pathway. Distinguishing the indication from the drug name is a step that point-of-sale systems do not always perform automatically.
Antipsychotics present a similar issue in states that carve them out. A drug prescribed for schizophrenia and the same drug prescribed off-label for insomnia may have different billing implications depending on the state's carve-out definition. These are cases where the prescriber's diagnosis on the claim matters, not just the drug name.
What Automatic Carve-Out Detection Looks Like
The practical solution is to verify carve-out status before the claim is submitted rather than learning from a rejection. This requires knowing the patient's state and MCO enrollment, having access to the current carve-out list for that state, and applying that information at the point where the formulary lookup happens — not at the pharmacy counter after the prescription has been filled.
FormCheckRx Detects Carve-Outs Automatically
Every FormCheckRx result shows whether a drug is covered through the MCO or must be billed through fee-for-service, with the correct billing pathway for the patient's state. Michigan's 14 carve-out classes are fully mapped against the 2025–2026 SPDL.
Search Michigan formulary →