With high drug prices the topic of the hour, pharmacy benefit managers have increasingly been put under the microscope from their methods of determining drug prices. They have been criticized nationwide for their opaque financial arrangements, unnecessarily complicating the system, and making it hard to trail the money. PBMs sign multiple deals on rebates and reimbursements with manufacturers, pharmacies, and MCOs, all of which are bound by nondisclosure agreements to avoid sharing the numbers.
A study by Bloomberg, published in September 2018, found that these spread prices were most commonly applied to generic drugs. This makes the promotion of generic drug prescriptions moot, as PBMs increase the cost of those drugs and pocket the difference themselves. The study also showed that some of the well-known and most common generic drugs carried huge markups on their rates. Among the 90 drugs that the report analyzed, PBMs and pharmacies made $1.3 billion of the $4.2 billion Medicaid insurers spent on the drugs in 2017.
So what is spread pricing?
Spread pricing is the difference between the prices of a drug that is paid by the PBM to the pharmacy and that it bills to the insurer, employers, or Medicaid. This difference marks up the administrative fee and also determines PBM profits.
Medicaid programs could be the most impacted by this, as their formularies overwhelmingly consist of generics, which are provided to Medicaid plans for free or for a negligible copay. With Medicaid a major piece of state budgets, it’s imperative to know the true cost of prescription drugs and ensure the benefits reach the most vulnerable population.
On the other hand, PBMs say their pricing model is not hidden from clients. At a hearing on prescription drug costs in Iowa, a state CVS representative commented that spread pricing makes the pharmacy rates more predictable, and the 2 percent of the rebate the company collects is not all profit but is used to fund administrative services the PBM provides.
State Medicaid programs are beginning to catch up and take steps to increase transparency
In 2017, West Virginia decided to carve out the entire pharmacy benefits from the MCO managed services. Now the state uses West Virginia University School of Pharmacy to manage its formulary and saved an estimated $30 million in one year.
Ohio’s Medicaid program issued a mandate in August 2018 to all its managed care plans to renegotiate PBM contracts. This mandate asked the insurers to move their contracts from a spread-pricing drug purchasing model to a pass-through model. A study conducted by Kentucky’s Cabinet for Health and Family Service showed that the percentage spread between the total price billed to the MCO and the price paid to the pharmacy increased from 9.4 percent in 2017 to 12.9 percent in 2018. This meant the four PBMs managing the Medicaid lives in the state charged the total spread of more than $123.5 million to the government.
Louisiana went in a different direction, founding a state-owned and -administered PBM system for its Medicaid program. Some other states have worked to reign in PBMs and their avoidable charges. In March 2018, Arkansas became the first state to pass a bill to regulate PBM business practices. Through this bill, the state aims to ensure PBMs provide adequate reimbursement to pharmacies for drugs purchased. Three states—Georgia, Kentucky, and Virginia—have passed bills that would require PBMs to be more transparent.
The future of spread pricing in Medicaid
PBMs, which were established with the notion to help manage high drug prices, have been accused of doing just the opposite. While states are taking stronger actions, PBMs have taken preventive steps by implementing innovative pharmacy contracting models and moving away from spread pricing.
Express Scripts released its new pricing model, the Total Performance Management solution, for the employers of the National Drug Purchasing Coalition. CVS/caremark announced a 100 percent pass- through pricing model for its clients called the Guaranteed Net Cost pricing model. Both of these models are available only to commercial plans. With several states opening up the discussion on PBM pricing, PBMs may extend these models to Medicaid as well.
Throughout 2019, the focus will be on PBMs to come up with more transparent methods for drug pricing. President Donald Trump has also advocated higher transparency on drug pricing to reduce costs in his blueprint for executive action on drug pricing. However, this transparent model might also mean the end of large discounts on drug prices that some PBMs were offering through private contracts with the manufacturers.
Nishitha Prabhu is an analyst with Decision Resources Group’s market access team.