Background

The Ohio Department of Medicaid (ODM) announced on Tuesday, August 14 that it is directing Medicaid Managed Care Organizations (MCOs) to cancel contracts with Pharmacy Benefit Managers (PBMs) that use a “spread pricing” model. Spread pricing allows PBMs to keep a portion of the amount paid to them by the state for the Medicaid prescription drug benefit, while reimbursing pharmacies at a lower rate for dispensing drugs for consumers. The amount retained by PBMs, or the “spread,” covers the PBMs’ overhead costs for administering the benefit in addition to providing a source of profit. ODM’s announcement to disallow these contracts was followed by the release of a report from Ohio Auditor of State Dave Yost’s office that examined the magnitude of spread retained by PBMs for brand name, generic and specialty drugs, as well as regional differences in spread based on pharmacy location.

Auditor Yost’s report estimated an 8.9 percent spread between the amount MCOs pay PBMs and the amount they reimburse pharmacies. This mirrors the findings of a recent ODM report on the same issue, which identified an 8.8 percent spread. But, the Auditor’s report found that of the more than $224 million retained by PBMs for prescription drugs dispensed for Medicaid, the vast majority, $208 million, came from generic drugs. In fact, PBMs retained 31.4 percent of what MCOs paid them for generic drugs, compared to only 0.8 percent for brand name drugs and 1.1 percent for specialty drugs.

Spread pricing allows PBMs to keep a portion of the amount paid to them by the state for the Medicaid prescription drug benefit, while reimbursing pharmacies at a lower rate for dispensing drugs for consumers.

On Thursday, August 16, Yost presented the report’s findings and recommendations to the Joint Medicaid Oversight Committee and offered comments on ODM’s decision to move away from the spread pricing model, replacing it with a “pass-through” model. In a pass-through model, the state, through MCOs, pays a flat administrative fee to PBMs in addition to the amount paid to pharmacies for dispensing drugs. This model was specifically recommended to ODM by the firm that conducted the agency’s investigation into spread pricing. The recommendation came with an estimate that a pass-through model would save the state more than $16 million, while increasing reimbursements to pharmacies by more than $191 million.

According to the Legislative Service Commission, the Medicaid expansion cost Ohio $4.075 billion last year.

Yost told JMOC members he was unsure if a pass-through model would actually result in savings in Medicaid pharmacy benefits. This is largely because such a model would negate the profit motive that PBMs have in a spread pricing model to keep costs down. Yost suggested that instead of ODM implementing its decision to enact pass-through contracts by January 1, the department should consider freezing its decision until the financial implications of this model can be more fully studied. Further recommendations included strengthening oversight and monitoring internal controls of PBMs by requiring additional statistics and financial information to be reported to PBMs. Such information might include the size of rebates PBMs retain from drug manufacturers. Rebate negotiations between PBMs and manufacturers have long been kept secret, but rebates are generally believed to be an even greater source of profit for PBMs than spread pricing. Were MCOs to continue using spread pricing contracts, Yost suggested ODM develop benchmarks to monitor the spread. This could involve capping the overall spread at a certain percentage level to reduce the state’s cost while maintaining some profit motive for PBMs.

The recommendation came with an estimate that a pass-through model would save the state more than $16 million, while increasing reimbursements to pharmacies by more than $191 million.

Implications Moving Ahead

Yost made several comments about how privatization requires governmental oversight to be effective. The PBM issue, then, is bringing up ideas of what is or is not appropriate regulation in the context of Medicaid. For the years that PBMs were contracted by MCOs, however, legislators were not concerned about the implications of their subcontracting the pharmacy benefit as the belief was that market forces would drive down expense. It could be argued the PBMs were doing what was asked, providing scale and a predictable range of cost growth on behalf of the program. So, from that lens, the effort was successful, allowing the state to have predictable cost growth in a major cost center. Now, seeing the effect that this type of overhead and profit motive has had on total program cost, legislators and statewide officials are looking at ways in which this sort of arrangement drives expense.

According to the Legislative Service Commission, the Medicaid expansion cost Ohio $4.075 billion last year. The state match associated with the spending, using the federal medical assistance percentage rate of 94 percent, is $244.5 million to finance coverage for the nearly 700,000 Ohioans during the same amount of time, meaning spread pricing cost Ohio nearly as much as the entire expansion. As JMOC reconvenes to establish a growth benchmark in advance of the next budget, members would be wise to examine the ways in which contractual overhead, not enrollment, is driving up state spending. This means looking at all the major cost centers in Medicaid and determining the ways in which policies are encouraging cost growth. What’s more, realizing that the plans and PBMs technically did what was asked of them, General Assembly members and the next administration should look carefully at what they consider reasonable oversight and focus their reform, legislative or otherwise, on the common cause of cost control.