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Could Michigan's high drug prices flow south to Ohio?

A new study shows that pharmacy middlemen were profiting from Michigan’s Medicaid program much as they have in Ohio and other states, and also warns of a potentially new drug-pricing scheme.

The analysis of spending on more than 2 million prescriptions for generic drugs found that pharmacy benefit managers, or PBMs, charged Michigan taxpayers far more than they paid pharmacies to dispense the medications to Medicaid beneficiaries.

The practice, known as spread pricing, allowed PBMs to increase their profits, pushing Medicaid's drug spending higher despite declining drug costs, researchers found.

According to the study:

• The spread margin on generic drugs represented 29% of Michigan's managed-care costs in 2017, up from 6% the previous year.

• Medicaid’s generic-drug costs increased 7% between the first quarter of 2016 and the first quarter of 2018, despite a 22% decline in the average cost of drug acquisition and a 28% drop in pharmacy reimbursements.

“Just like Ohio found, just like Kentucky found, spread pricing is not just a newer phenomenon, it is a growing phenomenon,” said Antonio Ciaccia, co-founder of 3 Axis Advisors, which conducted the analysis.

“The audit in Ohio showed it was growing; the audit in Kentucky showed it was growing. In Michigan, it also showed it was growing. To me, the question I have for the PBM industry is, what enhanced services are being offered as the spread is growing?” said Ciaccia, who also is a lobbyist for the Ohio Pharmacy Association.

“If they are not offering an enhanced level of services as that spread increases, then are you ripping off these programs purposely?”

Officials with the Michigan Department of Health and Human Services say they have already changed PBM contracts, and are monitoring to determine if additional action is warranted.

“The department acknowledges the concerns around spread pricing that this study calls attention to and, in fact, made substantial changes to the Medicaid health plan contracts in fiscal year 2019 in order to address these concerns as soon as we became aware of this issue," agency spokeswoman Lynn Sutfin said in a statement.

The time period reviewed for the study, first quarter 2016 through first quarter 2018, predates contract changes made in October 2018, she said.

New contracts between Medicaid managed care plans and their pharmacy benefit managers ban spread pricing and require PBMs be paid based on how much they pay pharmacists, Sutfin said.

The Pharmaceutical Care Management Association defended their practices.

“Pharmacy benefit managers (PBMs) are hired to reduce prescription drug costs and improve the quality of benefits for consumers, employers, and public programs, including Medicaid. The plan hiring a PBM always has the final say on contract terms," said association spokesman Greg Lopes.

"In addition, the report is irrelevant, given that beginning October 2018 Michigan decided to no longer use spread pricing contracts in the Medicaid program."

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Larry Wagenknecht, chief executive officer of the Michigan Pharmacists Association, said the analysis confirmed pharmacists' concerns about low reimbursement, and the rates remain low despite the elimination of spread pricing.

"The new contract may have helped (managed care plans and the state), but it hasn't helped pharmacists" who continue to be paid just pennies above their cost of the drug, he said, adding that some pharmacies have been forced to close.

The association is urging state lawmakers to pass legislation requiring transparency of drug pricing to show exactly where money is going.

Last year, an audit in Ohio found that the two Medicaid PBMs, CVS Caremark and OptumRx, charged taxpayers $224 million more for drugs than they paid pharmacists — a margin of 8.8%. That was three to six times the industry standard, the state's consultant said.

In Kentucky, a state report released this year found that PBMs charged taxpayers $124 million more for drugs than they reimbursed pharmacies in 2018, a spread of nearly 13% and up from 9% the previous year.

The studies undermine claims by PBMs and the managed-care companies that hire them that they save money for taxpayers.

“The drug costs are going down, pharmacy reimbursements are going down, yet the costs to the state are going up,” said Ciaccia.

The report recommended that Michigan implement a transparent, pass-through payment model, as Ohio did this year. The model pays PBMs a set administrative fee and requires them to reimburse pharmacies the same amount they bill the state.

However, Ohio officials don't yet know whether the change has reduced drug costs. Although the Department of Medicaid now receives pharmacy pricing data from managed-care plans, it has yet to analyze the information and has no timeline for doing so, said department spokesman Kevin Walter.

PBMs are hired by insurers to oversee pharmacy benefits. They typically negotiate prices and rebates with drug companies, decide which drugs are covered, and determine how much pharmacists are paid.

According to the Michigan report, a flawed payment system was to blame for rising drug costs. PBMs typically guarantee drug prices to managed-care companies based on the average wholesale price, an estimate of how much a retail pharmacy will pay to buy a drug from a wholesaler. But average wholesale prices are estimates based on information from manufacturers and distributors that are often inflated and do not reflect actual drug costs.

In Michigan’s Medicaid program, average wholesale prices for generic drugs ranged from actual drug costs to 350 times those costs, the report found. That means that the tax-funded health-care program was often paying far more than market rates for generic drugs.

The report notes that “the supply chain is being compensated on a percentage of average wholesale price” and has “no incentive to lower average wholesale prices … lowering the average wholesale price would result in lower generic drug costs for the payer, but also lower revenue for the PBM.”

Researchers also warned of a new PBM pricing setup to increase profits. Under Michigan's new contract provisions, the PBM reimburses pharmacies at the time of sale based on average wholesale prices, and it has the ability to adjust rates later. According to the report, this allows a PBM to pay the pharmacy a higher rate upfront, then demand reimbursement later to “completely hide PBM spread margin from Medicaid’s view.”

Some Ohio pharmacists have told The Dispatch that similar provisions are now in their PBM contracts, although they have not yet been asked to return a portion of the payments they received.