State warned against pharmacy middlemen's loopholes in contract

As Ohio seeks to reduce costs and bring more transparency to Medicaid’s $3 billion-plus prescription drug program, experts warn: Don’t solve one problem by creating others.

Pharmacy benefits managers, who are the middlemen in the process of pricing and paying for prescription drugs through insurance programs, are the focus of the state's attention.

“They (state officials) have to watch all areas of contracts to make sure there are no loopholes for pharmacy benefit managers to recover revenues,” cautioned Marc A. Sweeney, dean of Cedarville University’s School of Pharmacy.

Efforts to eliminate "spread pricing" — a process in which some pharmacy middlemen have reaped millions by charging the state more than they have paid pharmacists to fill prescriptions for Medicaid patients — could prompt the pharmacy benefits managers (PBMs) to manipulate a complicated drug-pricing system to make up for the losses.

For example, Sweeney said, if spread pricing is eliminated, the PBMs still could increase fees charged to Ohio pharmacies, alter drug formularies to promote more profitable medications or keep larger portions of the rebates they negotiate with drug companies.

As the state puts new contracts in place, Sweeney said, “the challenge will be the definition of transparency” to make sure the agreements require disclosure of all PBM revenue, something PBMs have been loathe to do.

Ohio will be the first state in the nation to implement a transparent, pass-through payment model for Medicaid pharmacy benefits. The $25 billion tax-funded program provides health coverage to 3 million poor and disabled residents.

The move came after The Dispatch reported that PBMs were charging the state millions more than they were paying pharmacies to dispense medications to Medicaid patients.

Subsequently, a state-commissioned report found that CVS Caremark and OptumRx received $224 million in a single year through spread pricing. That’s three to six times the amount the consultant said they should be charging — and that did not include revenue from drug rebates or fees charged to pharmacists.

CVS Caremark and OptumRx currently are in court fighting to block release of certain portions of the state report, arguing that it contains trade secrets.

Those secrets soon may be harder to keep.

Under new contracts starting Jan. 1, Medicaid officials will require PBMs to bill the state for the same amount they reimburse pharmacies plus a set fee for administering claims. In addition, PBMs must disclose all of their revenue to the state.

Medicaid spokesman Tom Betti said state officials are taking steps to ensure that they can see every penny PBMs receive while requiring the five Medicaid managed-care plans that hire them to step up their monitoring, too.

"The move to a transparency pass-through model contract is step one in a larger evolution of the management of the pharmacy benefit. We have a number of transparency requirements built into our updated provider agreement language which will allow us insight not previously available," Betti said.

New contracts will include two key provisions:

• "All monies, including but not limited to dispensing fees and ingredient costs, paid to pharmacies, and all revenue received, including but not limited to pricing discounts paid to the plan or PBM, rebates (including manufacture fees and administration fees for rebating), inflationary payments (any agreement a PBM may have with a manufacturer where the manufacturer agrees to a payment back to the PBM if a drug has inflation above an agreed upon level), and supplemental rebates, are passed through to the MCP (managed care plan); and

• "All payment streams, including any financial benefits such as rebates (including manufacturer and administration fees for rebating), discounts, credits, fees, grants, chargebacks, reimbursements, or other payments that the PBM receives related to services provided for the MCP are fully disclosed to the MCP, and provided to ODM (Medicaid) upon request."

In addition, Betti said Medicaid will require quarterly reporting in a number of areas and for managed care plans to renegotiate PBM contacts annually or put them out for competitive bid at least every three years. Independent audits will be required annually.

Sweeney said that internal controls and auditing to review “100 percent” of PBM revenue is needed to thwart efforts to hide revenue. State officials also should keep a close eye on formularies that list the medication Medicaid will cover.

“You must look beyond the cost of the drug to its effectiveness and then factor rebates,” Sweeney said. “If a patient is being prescribed medication because of rebates, that’s not a good way to manage your formulary.”

CVS Caremark is the pharmacy benefit manager for four of Ohio's five Medicaid managed-care plans. Spokesman Michael DeAngelis didn't comment directly on the new contract language, but said, "CVS Caremark is actively working with our Ohio Medicaid clients to restructure our contracts to implement the new 'pass-through' pricing model requirement, and we look forward to discussing the specific terms of the new requirements with our clients and the Ohio Department of Medicaid."

DeAngelis blames drug manufacturers for rising prescription costs and he added that CVS already passes along 100 percent of rebates to taxpayers. Critics, however, have said that CVS and other PBMs use a flexible definition of "rebate" when making such arguments.

OptumRx, the PBM to Ohio's remaining Medicaid managed-care plan, didn't respond to a request for comment.

To create the greatest transparency, Sweeney says that insurers should consider "unbundling" the services provided by the big PBMs. That is, hire separate companies to aggregate rebates, process claims, manage plans and create formularies.

Gary Rutherford, co-founder of HealthPlan Data Solutions, recommended that Ohio switch to a transparent pass-through model in his report analyzing the impact of spread pricing. He's skeptical of the idea that PBM services should be unbundled.

Rutherford said, however, that much can be done to make the system more transparent.

"This is a systemic problem in health care — cost overruns. It's in every state," Rutherford said. "There's a lot of people with their hands in the pot."

But he has no doubt that the new system can better manage costs and lead to savings. He recommends quarterly compliance reviews by a third party.

"We have experience where a PBM was missing contract guarantees by millions and is now exceeding them because the screws were tightened and they were monitored,” Rutherford said.

State Sen. David Burke, a Marysville pharmacist and head of the legislature's Joint Medicaid Oversight Committee, said he too was concerned about the new pharmacy payment system leading to "unforeseen expenses."

But after reviewing contract provisions with actuaries, he said the risk seems nominal.

"We will get quarterly data to review so pharmacy underpayments, rebate money will be revealed quickly," Burke said. "You may be able to fool me once but you won't fool me twice."

Dispatch reporter Lucas Sullivan contributed to this story.

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