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More states, including Pa., are taking on pharmacy benefits managers, demanding to see the savings in Medicaid

"Every Medicaid program in the country should be investigating what the hell is going on" with PBMs, said attorney Linda Cahn, a fierce critic of the industry.

A CVS store in downtown Los Angeles.
A CVS store in downtown Los Angeles.Read moreChristopher Lee.

Pharmacy benefit managers are supposed to save money for their clients – health plans that cover people with just about any type of insurance. But more and more states are demanding to see how these multibillion-dollar companies are spending taxpayer dollars in Medicaid – and are reining in the industry's role in taxpayer-funded programs.

A new Arkansas law makes pharmacy benefit managers (PBMs) answer to the state's insurance commissioner, after independent pharmacists showed how they were being paid less than pharmacies owned by CVS Health, which also runs a major PBM. Louisiana and Ohio are tearing up their old PBM contracts, and putting transparent models in place next year. Virginia, Kentucky, and Georgia have all passed bills requiring more disclosure of PBM payments. Last year, West Virginia's Medicaid program took over most of PBMs' duties.

Pennsylvania's Department of Human Services has gotten in the act, rewriting contracts to collect more data about reimbursements to pharmacists, following complaints that independent pharmacies were losing money on filling Medicaid prescriptions. The state's auditor general — who is conducting his own review of the industry, due out next month — recently told state senators that Pennsylvania may need to go further, and pass legislation with stricter oversight of PBMs.

"Every Medicaid program in the country should be investigating what the hell is going on," said attorney Linda Cahn, a fierce critic of PBMs who runs a consulting firm that helps health plans negotiate contracts with PBMs. "It's out of control."

PBMs customize contracts according to what clients want and their patients need, responded a spokesperson for the Pharmaceutical Care Management Association, the industry's main trade group. As states look into their drug supply chains, PBMs "have used this opportunity to highlight how the industry reduces costs and improves quality for consumers, employers, and state health plans," said spokesperson Greg Lopes. His group urged policymakers to scrutinize brand drugmakers and reject "costly mandates pushed by the independent drugstore lobby agenda."

PBMs typically negotiate rebates with drug manufacturers, and they set reimbursement rates for pharmacies who sell the drug to patients. As drug prices have risen — and become a heated political issue — PBMs and drugmakers have blamed each other for driving up the costs of prescriptions.

President Trump, in his zeal to lower drug prices, called out both industries (and a few others) when he unveiled his administration's "American Patients First" blueprint in May: "Everyone involved in the broken system — drugmakers, insurance companies, distributors, pharmacy benefit managers, and many others — contributes to the problem."

Independent pharmacists, meanwhile, have said they're getting squeezed by PBMs on payments. "You get tired of filling prescriptions and losing money on them," said Mel Brodsky, executive director of PARD, a community pharmacy association in Philadelphia. "A lot of guys have closed because they just couldn't stand it anymore."

Complaints from pharmacists have prompted officials in a number of states to sound alarms over one way that PBMs make money: "spread pricing." It's a practice in which PBMs bill a health plan a higher amount for a drug than what they pay to reimburse the pharmacy, and keep the difference (or the "spread").

Ohio's auditor found $224.8 million in "spread" going to PBMs in one year, and said that amount might be excessive. Both Louisiana and Ohio decided in recent months to eliminate "spread pricing" in their Medicaid programs, and require new types of contracts.

CVS Health — whose PBM, CVS Caremark serves part of Pennsylvania's Medicaid patients — tells investors that regulatory changes have limited its ability to use spread pricing, and that such changes pose a risk to its profits. The company's pharmacy services segment, which includes Caremark, saw its net revenue climb from $100.4 billion to $130.6 billion between 2015 and 2017 — though it says its operating profit margins are slim: 3.6 percent in 2017, and 3 percent so far this year.

The spread the company collects is not pure profit, according to CVS spokesperson Mike DeAngelis. "That money is used to fund the services we are providing." CVS Caremark, he said, reimburses independent pharmacies at higher rates, on average, than it does CVS pharmacies – and "PBMs are held accountable by our clients to deliver cost-effective benefits."

Those clients, in Medicaid, typically are other companies. In Ohio, as in Pennsylvania, most Medicaid patients are served by managed care companies that contract with the state, and subcontract with PBMs. The subcontracting arrangement has made it difficult for some states to see how dollars are flowing through the system. In Pennsylvania, the amount managed care companies paid to PBMs to provide benefits doubled in five years, according to figures they reported to the state: going from $1.41 billion in 2013 to $2.86 billion in 2017.

Auditor General Eugene DePasquale is aiming to calculate the "spread" in Pennsylvania as well. "We have received data points from some of the PBMs and we are working with others toward the goal of calculating the spread" in Pennsylvania Medicaid, said agency spokesperson Gary Miller.

According to the state, five out of eight managed care organizations use spread pricing. The PBMs those companies use in Pennsylvania include three of the largest in the country: CVS Caremark, Express Scripts, and OptumRx, a division of UnitedHealthcare. DHS isn't getting rid of spread pricing in contracts for 2019, but it wants to know what the difference is between what pharmacists are getting paid and what the state is being billed.

"The sheer fact that they [PBMs] are earning a spread does not necessarily mean that they are earning too much," said Adam Fein, president of the Philadelphia-based advisory firm Pembroke Consulting, who writes a go-to industry blog called Drug Channels. It's no secret that spread pricing is one way for PBMs to be paid, he said.

"It's up to the state Medicaid program to manage the program appropriately," Fein said. "If they allow the PBMs to be overcompensated, it's hard to blame the PBMs for accepting the extra compensation."

PBMs say they produce savings. At a state Senate hearing in Harrisburg last month, the industry's trade group pointed to a consultant's report, commissioned by Ohio's Medicaid program, that found PBMs save Ohio $145 million a year, compared with fee-for-service.

Ohio's auditor, however, has said that the millions in savings still came at a cost.

"When administrative fees are hidden in the spread," he told the legislature, "it's impossible to tell what the state is really paying for, or whether the same service could be provided at a drastically lower rate."