Ohio leads way as states take on 'pharmacy benefit manager' middlemen
Officials in states across the U.S. showed little interest for years about looking into the black box of pharmacy benefit managers, the pharmacy supply-chain middlemen who have been shrouded in secrecy as they pour billions of dollars worth of prescription drug rebates into state coffers.
That setup provided states with more than $20 billion in rebates last year alone, an average of $450 million for each state that uses the so-called PBMs to help manage their Medicaid programs, a three-month national survey by The Columbus Dispatch revealed. Rebates are meant to be a price concession intended to lower drug costs.
But now officials in many states are realizing that the rebates helped PBMs maintain an opaque system. Within that system, pricing data typically has been shielded by contract or law, allowing for drug prices to be easily manipulated without scrutiny. Drug prices continue to rise while the middlemen — whose main purpose was to help control costs — reap billions in profit from taxpayer dollars meant to care for the poor.
In 2018 alone, legislators in 28 states enacted 45 laws attempting to curb rising drug costs, according to the National Academy for State Health Policy.
Ohio is among 11 states that began investigating PBMs in 2018.
“You will be hard-pressed to find a state that now isn’t looking into this,” said Ben Calcaterra, a pharmacist in Illinois working with his local legislators to investigate PBMs. “We’ve all been reading articles from Ohio and what has happened there.”
Ohio has become a nationwide sensation in the Medicaid world after it was the first to collect and analyze drug pricing data by its two PBMs, CVS Caremark and Optum Rx.
Those companies and Express Scripts are the country’s three largest PBMs, operating in nearly every Medicaid department that delivers managed care.
The data collected by The Dispatch provide the first nationwide snapshot of how much rebates are used in the Medicaid space. The numbers show many states are just like Ohio — large sums of rebate money coming from PBMs while PBM contracts that set costs with drug manufacturers and pharmacists are not transparent.
It’s a large amount of money, but relatively small compared to the total dollars flowing into the drug supply chain.
Pharmacy benefit managers last year posted revenue in the range of $350 to $400 billion. The top 10 drug manufacturers showed more than $300 billion in revenue in 2017.
Federal regulators have pointed at the business practices of pharmacy benefit managers and drug manufacturers as a reason for soaring health-care costs across the country.
Prescription-drug spending has been the fastest growing sector of health-care costs during the last five years, according to the Centers for Medicare and Medicaid Services.
FDA Commissioner Scott Gottlieb said rising drug prices are due in part to “the system of rebates.” Gottlieb said a review is needed of a federal law that doesn’t classify PBM rebates as kickbacks.
As prices have increased, so have the rebates PBMs offer clients who manage Medicaid and other public and private health-insurance programs.
The concern from many states is that despite the large rebates for prescription drugs that states receive, the business practices and lack of transparency by PBMs might be costing them more.
Pennsylvania, Illinois and New York are each in the process of auditing how PBMs use spread pricing, which involves paying pharmacies less than the PBM middlemen are receiving from the state Medicaid progams and using the difference to bolster profits.
Arkansas not only has enacted tough PBM regulations, but the state also is defending them in the U.S. Supreme Court — citing Columbus Dispatch stories about what's happening in Ohio to support its case.
Pennsylvania Auditor General Eugene DePasquale is set to release an audit — similar to one conducted in Ohio — of PBMs this month.
“At the least, we want more transparency and accountability,” he said.
Pharmacy benefit managers point the finger at drug manufacturers for the rising costs of drugs.
“PBMs are hired to negotiate discounts from drugstores and drug-makers and increase the use of generics and other lower-cost options,” said Greg Lopes, a spokesman for the Pharmaceutical Care Management Association, a national organization that represents PBMs. “The main focus for state policymakers should be scrutinizing brand drug-makers for escalating drug prices. Drug-makers alone set and raise drug prices.”
The system works like this:
States hire managed-care companies to provide health care for Medicaid patients, much like a private employer does for its workers.
Those managed-care companies then hire pharmacy benefit managers, which in some cases are owned by the same managed-care company, with the stated purpose of making sure that patients get the drugs they need at the lowest possible cost to the insurer.
Pharmacy benefit managers are supposed to keep drug costs low. CVS Caremark, which is owned by the company that owns the CVS pharmacy chain, says it should receive credit for helping Ohio limit the growth of managed-care costs to about 2.5 percent per year.
But lawmakers and the public have had a difficult time determining whether that's true, because PBMs and drug manufacturers keep secret their negotiations for drug prices.
States typically have not demanded oversight — and it's unclear whether they legally could — of the contract between the managed-care companies and their PBMs.
The federal government and states demand rebates from the pharmacy benefit managers on Medicaid prescriptions. In many states, including Ohio, the rebate money goes into the general fund.
At the same time, PBMs factor in the rebates when negotiating drug prices with manufacturers. Drug manufacturers have told lawmakers those rebates must be factored in to their list price.
The PBMs also demand rebates from manufacturers to get their brand-name drugs on the list of PBM-approved medications to be covered by health-care companies.
In simple terms, PBMs charge manufacturers a premium for access to their customer base.
Ohio Medicaid director Barbara Sears sat behind a microphone at a Hilton in Washington, D.C., in November to talk about how Ohio is holding PBMs accountable.
The conference was organized by the National Association of Medicaid Directors. Sponsors of the event were asked to fund a breakfast, cocktail parties and private rooms where they could meet with Medicaid officials.
Almost all of the sponsors were health care companies and the PBMs they own.
Sears joked about the lawsuits in which her name has appeared this year related to the state's audit, but she didn’t shy away from the health care reps in the room.
She said they could expect more “disagreements” in the future.
“I want to know where every single penny goes,” Sears said.
Ohio’s path to corralling PBMs has been painstaking. Sears and her department were skewered by state lawmakers that oversee Medicaid in July after they echoed some of CVS Caremark's talking points to justify the millions they are receiving, such as blaming drug manufacturers for increased costs.
The state has done multiple audits. The state is being sued by CVS Caremark and Optum Rx to block the public release of significant portions of the audit it commissioned to find the level of spread pricing.
That audit found that Ohio paid $224 million in spread pricing to CVS Caremark and Optum Rx, which reflects the difference between what the state paid the PBMs and the amount it paid pharmacies to provide prescriptions to consumers. It also found that Ohio was being charged three to six times the going rate to process prescriptions.
Medicaid officials also stepped in last month after The Dispatch found that CVS Caremark had slashed the prices it was paying pharmacists to fill Medicaid prescriptions, allowing the PBM to collect more tax dollars for itself. It was not the first time CVS had reduced payments to pharmacies.
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Calling out CVS
Across the U.S., Ohio and 36 other states handle Medicaid-funded managed care by hiring PBMs, according to survey responses from Medicaid departments collected by The Dispatch.
Overall, CVS Caremark, Express Scripts and Optum Rx control about 85 percent of the marketplace.
The Dispatch survey found that at least two of the three have PBM contracts in 27 of the 37 states that use managed care.
Ohio has CVS Caremark and Optum Rx.
And, like Ohio, 10 other states this year began publicly questioning or investigating the value of PBMs.
Pharmacy benefit managers have said that media coverage has been one-sided and that not enough scrutiny has been placed on drug manufacturers. All three of the big PBMs say they reach their goals to keep costs down.
“We work with employers, governments and other plan sponsors every day to ensure we meet their pharmacy care needs and help them manage their overall care costs,” said Drew Krejci, spokesman for OptumRx.
“Our clients choose their contracts, including models where we take increased risk on our services and tie our compensation directly to how well we perform.”
Krejci said states have the ability to customize their contracts.
A CVS Caremark official made similar remarks this year in front of Iowa legislators investigating PBMs.
A company official was being questioned by lawmakers about cuts in reimbursements to pharmacists in an apparent effort to reap more money from the state’s Medicaid system.
Iowa State Rep. John Forbes, a pharmacist, called the CVS Caremark official’s comments “bullshit” and said PBMs rig the system.
"It's like an infection"
Trish Riley, executive director of the National Academy for State Health Policy, noted that states must have balanced budgets, and as drug costs rise, spending has become a growing concern.
Officials in states across the country said they realized they had no idea how much money flowing to PBMs was being passed along to pharmacies and how much was being kept by the PBM, or how rebates could be driving up costs.
“It’s a black box and complicated supply chain. We don’t know,” Riley said.
“Nobody thinks the PBMs shouldn’t make money, but it’s out of control. The question is: What is a fair and appropriate return?”
Riley's group says of the 45 new laws enacted by states this year, most require greater transparency to shed more light on prescription drug pricing and where the money goes, and many outlaw gag rules preventing pharmacists from telling consumers about cheaper options, such as paying out of pocket rather than using insurance for certain medications.
However, none of the measures enacted so far have set a drug-pricing model to follow, meaning PBMs and manufacturers can still set costs in secret.
A few states have taken more significant action than Ohio.
For example, West Virginia kicked PBMs out of its state health care plans last year. Decisions about what drugs are covered and how much they cost are handled by the West Virginia University’s pharmacy school.
Nancy Nesser, pharmacy director for the Oklahoma Health Care Authority, said her state doesn’t use pharmacy benefit managers. Instead, it is moving to value-based purchasing agreements, which tie payments for drugs to their effectiveness.
She said Oklahoma Medicaid used managed-care plans and PBMs in the early 2000s, but officials there determined that PBMs were more expensive and they didn’t serve the state’s rural areas adequately.
“We decided it was not the plan for Oklahoma,” she said.
Despite the differences between her state’s system and that in Ohio, Nesser said developments in the Buckeye State have everybody’s attention.
“I think the states on managed care are especially looking at Ohio,” she said. “Even states like ours are keeping tabs on them.”
As with Oklahoma, not every state uses a PBM to control and monitor prescription drugs for its Medicaid patients.
A dozen states use a fee-for-service model. Fee-for-service un-bundles everything a PBM wraps up together and instead bills a fee per use of that particular service.
Think of it as choosing a cable provider versus cutting the cord and buying your programming a la carte. Charges for services under this model can fluctuate every year, making budgeting a little more risky for states.
Ohio used the fee-for-service setup a few years ago, but Medicaid officials returned to managed care and PBMs, saying that arrangement offers lower costs and better care.
In Kentucky, Medicaid Commissioner Carol H. Steckel said a review of Medicaid drug pricing should be complete in two weeks. As in Ohio, it was prompted by complaints from independent pharmacists about low reimbursement rates paid by pharmacy benefit managers in the state’s managed care program.
“We want to make sure we are getting the biggest bang for our buck,” Steckel said.
Next, she plans to look into drug rebates to learn how much the PBMs receive and how many of those dollars are being passed back to the state.
“Ohio has informed the work we are doing,” Steckel said. “It’s like an infection. When one state looks into something, we all look into it.”