'Cost-cutting' middlemen reap millions via drug pricing, data show
A middleman company hired to keep the state's prescription-drug prices in check for Ohioans on Medicaid is receiving millions in taxpayer money meant to provide medications for the poor and disabled.
Records of transactions provided to The Dispatch from 40 pharmacies across Ohio show that CVS Caremark routinely billed the state for drugs at a far higher amount than it paid pharmacies to fill the prescriptions. The state-sanctioned practice, known as "spread pricing," allows the middlemen, called pharmacy benefit managers, to keep the difference on medications used to treat health concerns ranging from mental illness to osteoporosis.
CVS Caremark received more than $1.6 million for managing the payment for prescriptions filled by 40 pharmacies in 2017, according to a Dispatch analysis of drug transactions covered by taxpayer-funded Medicaid. The analysis shows that CVS Caremark received roughly 12 percent more from the state than it paid the pharmacies for the drugs.
The pharmacy pricing information provided to The Dispatch contained no patient information.
Although an exact projection of a statewide total flowing to CVS Caremark cannot be made based on this analysis, the figures indicate that it must be tens of millions of dollars. The pharmacies surveyed represent less than 1 percent of the total Medicaid prescriptions filled statewide in 2017 and about 2 percent of pharmacies in the state.
The state spent $3 billion last year for prescription drugs for Medicaid recipients.
The Dispatch analysis provides what might be the first detailed look nationwide behind the curtain of how pharmacy benefit managers such as CVS Caremark make billions of dollars annually. CVS Health Corp., which owns CVS Caremark and CVS Pharmacy, reported a net profit of $9.5 billion in 2017, according to its website.
The company reported $130.6 billion in net revenue from its pharmacy services division.
“The General Assembly has to put on their big-boy and big-girl pants and stop this nonsense,” said state Sen. William P. Coley, R-West Chester. “It’s easily tens of millions of dollars statewide.”
Coley said the Department of Medicaid is not providing sufficient administrative oversight of its managed-care plans and the pharmacy benefit managers they hire to oversee drug benefits.
“We have to get ahold of this. It’s hurting people,” Coley said. “Every dollar we spend in a wasteful manner is a dollar we don’t have to help people.”
State Medicaid officials declined to comment on The Dispatch’s findings, saying they are preparing their own analysis.
“The state’s priority is to ensure that Medicaid enrollees have access to pharmaceutical benefits and taxpayers get a fair price. To ensure this, the state is conducting an analysis that includes every pharmacy transaction, not samples, with actual prices and actual spreads. Ohio consumers have every right to fair pricing of their pharmaceuticals. We are diligently working to make sure that happens,” Medicaid spokesman Tom Betti said in a written statement.
The report commissioned by Medicaid is expected to be released this month.
Miranda C. Motter, president and CEO of the Ohio Association of Health Plans, would not comment on The Dispatch's findings, but said the analysis is incomplete because it isn’t statewide and includes only a fraction of Medicaid spending.
“Spread,” she said, “doesn’t equal profit.” The spread also covers administrative costs such as claims processing, pharmacy help desk, drug-utilization review, clinical programs and audit management, she said.
Others have a different view.
"PBMs have been fighting transparency, accountability and fiduciary obligations for years, and now I think we know why," said Antonio Ciaccia, a lobbyist for the Ohio Pharmacists Association. "PBMs criticize drug companies for inflating their prices. Here it seems they are the ones inflating prices."
Sen. David Burke, R-Marysville, and a pharmacist, said “whether the drug cost to Medicaid grows slowly or quickly is irrelevant if you don't review the pharmacy drug-claim payment, which might have actually decreased. It is the primal role of managed-care plans to maximize value in all care networks. ... I remain deeply concerned the incentives to all parties are not aligned with the vision of the taxpaying citizen."
CVS Caremark is the pharmacy benefit manager, also known as a PBM, for four of the state’s five managed-care contracts; Optum Rx is the other. The Dispatch analyzed data from CVS Caremark because the company, under the same umbrella as the national CVS pharmacy chain, represents the overwhelming majority of Medicaid patients in Ohio.
Mike DeAngelis, senior director of corporate communication for CVS Health, said the company would not comment on either The Dispatch analysis or the company's pricing information until a state analysis is finished. Both the Ohio Department of Medicaid and state Auditor Dave Yost are studying the pricing setup; the auditor recently asked for additional information.
The CVS spokesman said the Medicaid managed-care companies that hired them in Ohio actually requested that their compensation come via spread pricing, as many clients do, "because it provides them with stability and certainty around their drug costs."
"Spread pricing is regularly misrepresented, but it is simply the difference in pricing from what we are paid to what we reimburse — no different than what any business pays its suppliers vs. what it is paid by its end users. ... Under this model, we make money on some drugs, but lose money on others."
DeAngelis also said, "Reimbursement terms and other financial components of any PBM relationship with a client, including CVS Caremark’s relationships with the Ohio managed Medicaid plans, are frequently monitored, audited and subjected to both market checks and competitive bidding. These processes are managed by independent third-party industry consultants retained by the clients. This helps ensure that we remain competitive in the marketplace while also creating continuous downward pressure on our client pricing."
The Dispatch analysis included every Medicaid/Caremark transaction (125,000-plus) at 40 pharmacies in 2017 on a quarterly basis, because that's how often the state reports Medicaid pricing data. And of those 160 quarters examined (40 pharmacies times 4 quarters), 159 showed a price spread. The only exception was one pharmacy that came out $380 ahead in the second quarter. At the other end of the spectrum was an individual pharmacy that wound up short $78,000 in the last quarter of 2017.
Little state scrutiny
The pharmacy data analyzed by The Dispatch confirm suspicions among some Ohio legislators and pharmacists that the PBM middlemen are retaining what some would say is a significant portion of the cost of drugs, affecting prices and how much public money goes to the corporation.
For example, the PBM was given $8.64 per pill by the state for Vyvanse, a drug to treat attention-deficit/hyperactivity disorder and binge-eating disorder, while paying a pharmacy 67 cents per pill to provide it to patients, according to the records.
The state paid CVS Caremark $5.80 per pill for the antipsychotic drug aripiprazole, and $5.50 of that, or almost 95 percent of the taxpayer subsidy, went to CVS Caremark.
Although the data analysis shows that on occasion pharmacies are paid more than the PBM receives from the state, instances of the PBM keeping at least half of the taxpayer money intended to buy drugs are far more prevalent.
The system has a built-in incentive for CVS Caremark and other PBMs to maximize the price spreads: They get to keep the money. Although the PBMs must cover their costs with those dollars, the rest is profit. The debate in Ohio and increasingly across the nation now centers on what "spread" is fair for PBMs to retain.
Until late last year, Ohio Medicaid officials gave PBMs little scrutiny. Because overall cost increases in the Medicaid program were running 2 percent a year or less, there was not great concern that within that sprawling empire, drug prices were sometimes going up by double-digit percentages annually.
The PBMs point to examples in which they keep the cost of drugs down for Ohio Medicaid recipients. But that appears to be only half of the story.
The cost increases that CVS Caremark mitigates are for brand-name drugs, DeAngelis said in an email to The Dispatch in May. The data obtained by The Dispatch from the pharmacies show that the largest spreads occurred among generic drugs, which are far more common.
Once a brand-name drug goes generic, more manufacturers flood the market with their version of the drug, and the price drops. What is unclear is how much of that decrease in generic-drug costs CVS Caremark is being passed along to the state.
“Growth in generic utilization played a major role in helping keep overall and member-specific costs low,” DeAngelis said.
He said that 86 percent of the drugs dispensed for clients are generic drugs.
How pharmacy benefit managers such as CVS Caremark do their work is complicated and somewhat shielded by confidentiality language in contracts.
The players in getting drugs to the marketplace include manufacturers, PBMs, pharmacists and insurers in the public and private sectors.
All of them receive a portion of the total cost of drugs, and all of that factors into how much consumers' prescriptions cost.
But in the middle of the negotiations with all of those layers are the PBMs.
They charge manufacturers to put their drugs on a PBM's formulary — a list of drugs to be covered — so they can be prescribed to patients.
Insurers rely on the PBM to decide which drugs should be covered.
The PBM also sets both the price that pharmacies charge and the amount the PBM will provide to pharmacies to cover the costs of those same drugs based on volume.
PBMs have not made public their pricing lists. They regard the information as “proprietary.”
Sen. Coley said PBMs are profiting by keeping drug prices and pharmacy reimbursements secret. Legislators, he said, are working on bills to “take the wind out of the PBMs’ sails.”
The first bill would prohibit health insurers and PBMs from charging consumers co-payments that exceed what they would pay if they bought the drugs without using insurance, or what the pharmacy is being reimbursed to fill the prescriptions.
It also would ban “gag rules” that prevent pharmacists from telling their customers about cheaper options for acquiring medications, such as paying out of pocket. PBMs often include such provisions in contracts with pharmacies, although CVS Caremark has said that under its agreements, pharmacists are free to share pricing information.
Another bill would ban PBMs from requiring consumers to fill certain prescriptions — often of the more expensive medications — at designated specialty pharmacies. It’s not unusual for PBMs to use such requirements to direct business to an affiliated mail-order pharmacy.
Rep Scott Lipps, R-Franklin, is sponsoring two of the bills targeting PBMs. He said more competition and more transparency will lower drug prices.
“No one knows what PBMs pay pharmacies. No one knows where (drug manufacturers') rebates go,” he said. “Medicaid spending in Ohio accounts for 50 percent of the state budget. We need to get our arms around this problem and stop lining PBMs’ pockets.”
Max Peoples, who owns two pharmacies in central Ohio, said the money being pocketed by CVS Caremark is hurting not only taxpayers but also pharmacies: More than 100 independent pharmacies have closed in Ohio in recent years.
“This hurts patients," Peoples said of the closings, "and we are talking about the handicapped and children who now have a harder time getting their medications from someone locally who is counseling them on their health-care decisions, just so a middleman can make millions.”
Dispatch Public Affairs Editor Darrel Rowland performed data analysis for this story.
How The Dispatch analyzed Medicaid drug prices
Here is how The Dispatch analysis of Medicaid drug prices was performed:
The Dispatch downloaded a Medicaid drug-utilization database for 2017 (the most recent available) provided by Ohio but maintained by the federal government at Medicaid.gov. It shows how much taxpayer-funded Medicaid money was spent for more than 88,000 types of drugs, including the dosage and manufacturer. The total was more than 41 million prescriptions with nearly 2.4 billion units (typically some form of pill).
The Dispatch also obtained lists from 40 pharmacies of every drug transaction in 2017 involving Medicaid and the pharmacy benefit manager for four of the five managed-care organizations handling the program for the state: CVS Caremark. Those lists did not include patient information.
Despite CVS assertions that there is no “gag clause” prohibiting pharmacies from sharing information, no pharmacy would provide the data without a promise of confidentiality because of fear of reprisal from CVS. In fact, the pharmacies would not email the data; Dispatch reporters traveled throughout the state to pick up the information.
The pharmacies are located across Ohio, from a large group based in an urban area to a medium-sized group in another part of the state to individual stores in large suburbs, smaller exurbs and rural counties.
The Dispatch then took what Ohio Medicaid paid CVS Caremark (via the managed-care organizations that hired the company) for each type of drug transaction on a per-pill basis, and compared it with what CVS Caremark paid each pharmacy for each pill. The difference between those two totals is the “price spread” — which critics say indicates that the pharmacy-benefit manager overcharged the state/taxpayers, and/or underpaid the pharmacies, some of which have gone out of business in recent years.
The analysis did not include prescribed liquids, powders, gels or other drugs not in pill form, so that the units were defined the same by both the state and the pharmacies. But it did include nearly 11 million pills, more than 125,000 transactions and more than $7.5 million in pharmacy reimbursements.
Examples of what PBMs profit from one drug dosage from one pharmacy
DRUG: Vyvanse, treats ADHD - 30mg capsule
Photos by Joshua A. Bickel
DRUG: Quetiapine Fumarate, treats schizophrenia - 50mg tablet
|State paid PBM||$3.24 a unit|
|PBM paid pharmacy||$.66 a unit|
|PBM profits||$2.58 a unit|
|Units pharmacy sold||150|
|Net revenue for PBM||$387|
DRUG: Budesonide, treats Crohn's disease - 3mg capsule
|State paid PBM||$10.69 a unit|
|PBM paid pharmacy||$4.85 a unit|
|PBM profits||$5.84 a unit|
|Units pharmacy sold||90|
|Net revenue for PBM||$526|
DRUG: Raloxifene Hydrochloride, treats osteoporosis - 60mg tablet
Photos by Joshua A. Bickel
DRUG: Aripiprazole, anti-psychotic - 10mg pill
|State paid PBM||$5.80 a unit|
|PBM paid pharmacy||$.30 a unit|
|PBM profits||$5.50 a unit|
|Units pharmacy sold||1900|
|Net revenue for PBM||$10,450|
Sources: Dispatch analysis of national drug utilization database and data from Ohio pharmacies