By Caroline Humer and Michael Erman

NEW YORK (Reuters) – The Trump administration on Thursday said it will test allowing state Medicaid programs to limit health benefits and prescription drug coverage for some patients in return for changing how federal government contributions to the states are made.

Medicaid plans currently pay for most prescription drugs. The new approach would align their coverage with that of many private health plans and Medicare prescription drug plans that typically use the threat of excluding a drug from coverage to seek lower prices from manufacturers.

The Centers for Medicare & Medicaid Services (CMS), part of the U.S. Department of Health and Human Services, said states would have to opt into the Healthy Adult Opportunity program. It said patients eligible for the program would be limited to adult beneficiaries under age 65 who are not eligible on the basis of a disability or their need for long-term care.

The program is primarily targeted at the roughly one-fifth of Medicaid patients who received health coverage through the Affordable Care Act’s (ACA) Medicaid expansion program since 2014, CMS Administrator Seema Verma said.

The program would require states to commit in advance to either a total Medicaid spending figure or a per capita spending amount in order to receive federal money, a change from the current method in which the federal government reimburses states for a percentage of actual spending, and one that could run into legal challenges.

Much like private health insurers, participating states would be able to create a formulary of covered drugs, which allows them to give a drugmakers’ medicine priority in exchange for lower prices. There are special protections for drugs that treat HIV and behavioral health conditions.

“This is an opportunity for states to have greater negotiating power with manufacturers,” Verma said on a conference call with reporters.

States participating in the program will be required to report key quality metrics to CMS.

There are more than 71 million people currently covered under Medicaid, an important social safety net program created five decades ago and expanded by Trump’s predecessor Barack Obama through the ACA, popularly known as Obamacare.

Evercore ISI analyst Michael Newshel said the program could be in violation of Federal law, which requires Medicaid funding to be open ended.

“Any capped funding arrangement will most likely be overturned in court,” Newshel wrote in a research note.

Americans’ healthcare coverage has been a central issue in the 2020 presidential election. Democrats have been critical of programs like the one being proposed by the administration.

(Reporting by Michael Erman; Editing by Chizu Nomiyama and Bill Berkrot)