This is the second of a two-part blog covering the June 28, 2018 meeting of the Joint Medicaid Oversight Committee. The first part, addressing the committee’s discussion of Behavioral Health Redesign, can be found here.

The business models of pharmacy benefit managers (PBMs) have come under scrutiny from both the media and state investigators in the months since the Joint Medicaid Oversight Committee (JMOC) last discussed their impact on Ohio’s Medicaid program in its March meeting. A series of investigative reports from The Columbus Dispatch, along with a report commissioned by the Ohio Department of Medicaid (ODM), sought to shed light on how PBMs make their profits, and whether their profit margins inappropriately burden Ohio taxpayers.

Background – The Role of PBMs

PBMs serve as brokers between insurers, drug manufacturers and pharmacies by negotiating drug prices and rebates in exchange for placing a manufacturer’s drug on a “formulary,” or a list of drugs to be covered by an insurer. PBMs then reimburse pharmacies for dispensing those drugs. In the context of Medicaid, PBMs theoretically create cost savings for taxpayers by making prescription drugs cheaper for the publicly funded health insurance program to pay for. But because the price negotiations by PBMs intentionally lack transparency, it becomes difficult to assess the extent to which these savings are actually realized. It is important to note that PBMs are contracted by the state’s Medicaid Managed Care Organizations (MCOs), not by the state directly – adding an extra barrier to transparency.

The lack of transparency in drug pricing negotiations is not just an Ohio Medicaid issue, but one that exists throughout the U.S. healthcare system, including in private insurance. The flowchart below helps to map out the role of PBMs in a complicated process.

ODM Identifies $224 Million in “Spread Pricing” Retained by PBMs

While much remains unknown about the size of the discounts and rebates negotiated by PBMs, the investigations by the Dispatch and ODM have uncovered the difference between what PBMs are paid by Ohio’s MCOs and how much the PBMs pass on to pharmacies as reimbursement for dispensing prescription drugs to the state’s Medicaid population. This difference, known as “spread pricing”, is a major source of profit for PBMs. The Dispatch and ODM have claimed that their investigations mark the first time that any state has publicly uncovered the amount of this spread pricing within its Medicaid program. The ODM report also analyzed whether CVS Caremark, the PBM contracted by four of Ohio’s five MCOs, engaged in anticompetitive behavior favoring CVS pharmacies over independent pharmacies.

The lack of transparency in drug pricing negotiations is not just an Ohio Medicaid issue, but one that exists throughout the U.S. healthcare system, including in private insurance.

The ODM report found that CVS Caremark and OptumRx, the only PBMs contracted with Ohio Medicaid MCPs, paid pharmacies an average of 8.8 percent less than what they billed the MCPs – a spread of nearly $224 million that was retained by the PBMs in one year. The report was unable to identify anticompetitive pricing by CVS Caremark, indicating CVS paid independent pharmacies between 3.4 to 3.6 percent more than CVS pharmacies.

Is Better Value Achievable?

At the June 28 JMOC meeting, the key question facing lawmakers and ODM officials was whether or not 8.8 percent represents an appropriate spread. In other words, how much of that 8.8 percent is needed to cover the PBMs’ administrative costs and how much is pure profit derived from taxpayer dollars? ODM Director of Managed Care Patrick Stephan posited that the report’s findings did not necessarily signal a crisis justifying immediate regulatory intervention. When challenged on this position by Senator Vernon Sykes, ODM Director Barbara Sears responded that ODM is still seeking more answers to the questions surrounding the issue, and that the Medicaid program cannot “move on a dime” without negatively impacting the people and providers it serves. Sears and Stephan explained that now that the spread data has been made public, MCOs may be in a position to negotiate a better deal from PBMs, allowing the market to address the issue without regulatory intervention. The officials told JMOC that ODM is requiring MCOs to review the report and notify the department of any changes each plan intends to make related to pharmacy administration by September 30.

This JMOC meeting has been widely publicized, with much attention being given to individual lawmakers’ criticism of ODM’s handling of the PBM issue. But amid the lively back-and-forth centering on the question of PBM profits, it would have been easy to miss an important conversation among JMOC members about paying for value in Medicaid pharmacy benefits.

…a PBM is more of a third-party transactional entity than a healthcare entity.

JMOC Chair Senator David Burke first raised the question of Medicaid paying for outcomes, saying that a PBM is more of a third-party transactional entity than a healthcare entity. Burke suggested that PBMs do not care what product is provided, as long as they receive payment. Senator Lou Terhar attested that if PBMs are keeping a share of the rebates from manufacturers based on the volume of drugs dispensed, then their primary incentive is to push more drugs out to plan members, regardless of whether those drugs are actually helping people achieve better health.

Representative Emilia Sykes asked if it were possible for Ohio Medicaid to reduce the cost of pharmaceuticals by identifying the most prescribed and most expensive drugs and seeking ways to prevent the conditions associated with them, or treating them in other ways. Representative Sykes pointed out that the state is already doing this with opioids.

Sears and Stephan told the committee that they hope to get to a place where pharmacists can better assist members achieve healthcare outcomes, rather than just dispensing drugs. Sears said ODM is working to more effectively engage pharmacists, providers and MCPs to reduce the volume of prescriptions by providing educational information to members.

Key Takeaway

The question of whether the state is overpaying for pharmacy benefits via Medicaid Managed Care and PBMs is a critical one for lawmakers and ODM to carefully consider. This is an issue, along with prescription drug pricing in general, that is likely to remain at the forefront of both this year’s gubernatorial election and next year’s state budget deliberations. It is also worthwhile to think about the ways in which this type of subcontracting through the MCOs is more significant than just the pharmacy benefit. But the broader question of the value of PBMs in Ohio and other states’ Medicaid programs, particularly related to health outcomes, should not be lost in the continuing debate over what constitutes an appropriate profit margin in the context of cost containment in Medicaid.