Is the state of Pennsylvania paying far more than it should for prescription drugs?
The auditor general is looking into that possibility, and a hearing Tuesday before the state senate health and human services committee will examine the companies at the center of the inquiry: the pharmacy benefit managers that handle many aspects of prescription benefits for health plans, including Pennsylvania's Medicaid program.
The Department of Human Services reported that it paid pharmacy benefit managers $2.84 billion in 2017, compared with $1.8 billion in 2013, according to the auditor general's office.
"It concerns me that basically billions of dollars are flowing to these pharmacy benefit managers. Some may be doing a great job, some may not be," said Auditor General Eugene DePasquale. But because the companies are subcontractors — hired by the managed-care organizations that contract with the state to run the bulk of the Medicaid program — DePasquale says he doesn't have the ability to audit them. "I have significant concerns about that arrangement, and the lack of accountability there."
The state has already moved to change its contracts with the managed-care organizations to make them more transparent — after receiving complaints from independent pharmacists, who said they were being reimbursed too little by the pharmacy benefit managers, or PBMs, and sometimes even losing money in filling a prescription for a Medicaid patient.
"We don't know if we have a problem, but we know we don't have the full picture, because we don't know in every case what the pharmacy was paid," said Terri Cathers, pharmacy director for the Department of Human Services.
PBMs play the role of classic middlemen, and the industry says they save money for consumers and health plans through skilled and confidential negotiations for rebates and discounts. PBMs have leverage with drug makers because they decide which prescription medications will go on a health plan's formulary — the list of drugs the plan will cover — representing a huge concern for patients. The PBMs also issue contracts to pharmacists who want to participate in the plan's network.
"The main focus for state policymakers around the country should be scrutinizing brand drug makers, who set and continue to raise drug prices," said Greg Lopes, a spokesman for the Pharmaceutical Care Management Association, an industry trade group for PBMs. Health plans aren't required to hire a PBM, Lopes said, but "they choose to because PBMs typically reduce drug costs by 30 percent."
Research published by the trade group estimates that PBMs will save Pennsylvania's Medicaid program $1.6 billion between 2016 and 2025.
Under the revised contracts, the Department of Human Services will require managed-care organizations to report what the PBM paid to the pharmacy and what the managed-care organization paid to the PBM for the same claim.
The difference between those two amounts is called the spread, and it has become a thorny issue for an industry under scrutiny at both state and federal levels. A report by Ohio's state auditor, in August, found that the spread over the course of a year in the state's Medicaid managed-care plan came to $224.8 million, illustrating the "profit-making potential for PBMs."
Ohio's auditor also noted an outside analysis in his report that prescriptions could be administered for about a third of that amount — an estimate that "suggests Ohio's current spread may be excessive and warrants the state taking further action," he wrote.
State Rep. Seth Grove (R., York) highlighted the Ohio findings in a request last month to the Legislative Budget and Finance Committee, asking for a review of spread pricing by PBMs across state government agencies. He said that because Pennsylvania and Ohio have similar demographics, the spread here could be similar. (Ohio has 2.4 million people enrolled in Medicaid managed care, according to federal data, and Pennsylvania has 2.3 million, according to the state.)
"That's $200 million that we've got to figure out," said Grove, who led a bipartisan call last spring for the auditor general to look into PBMs. "Was it supposed to go to pharmacies? Was it supposed to come back to taxpayers? Something in between the two?"
DHS said its own investigation found that five managed- care organizations use spread pricing and that three use what's known as a transparent "pass-through" pricing model, meaning that they tell DHS what a pharmacy is paid. But Cathers said the department doesn't know whether transparent pricing would save DHS money.
"We're definitely going to be looking closely to see if there are cost savings opportunities there," Cathers said.
The department's main concern, she said, is that patients have access to the medications they need. "We don't have any evidence that patients don't have access to covered outpatient drugs," she said, adding: "That is what the department holds MCOs [managed-care organizations] accountable for. The department does not get involved in dictating rates to any partners," such as pharmacies.
Independent pharmacists have for years said pharmacy benefit managers have exerted too much control over their business. But last fall, reimbursement cuts by CVS Caremark — one of the nation's largest PBMs — elevated pharmacists' complaints to a new level. Grove and two colleagues, in an April letter to the auditor general, described the cuts as a "drastic step" that reduced reimbursements "substantially below" pharmacists' purchase price.
A CVS spokesman said the company raised rates for some generic drugs after lowering them last fall, but "it cannot be our responsibility to subsidize pharmacies at the expense of patients, payers, and in the case of government programs such as Medicaid, taxpayers."
For his part, DePasquale said he was worried about pharmacies going out of business, and what that would mean for patients. He has conducted five hearings in communities around the state as he assembles a report, due out in late November or early December, that he intends as a guide for lawmakers weighing legislation about PBMs in the next session.
"It's very clear that the independent pharmacies don't have the same negotiating tools as some of the larger chain organizations," DePasquale said.