New federal regulation targets excessive profits by pharmacy benefit managers
May 15, 2019
Citing Ohio’s struggles with rising drug costs, federal regulators on Wednesday announced new reporting guidelines for tax-funded Medicaid managed-care plans aimed at eliminating excessive profits.
The Centers for Medicare and Medicaid Services' directive targets pharmacy middlemen’s use of “spread pricing” and rebates from drug manufacturers to boost earnings.
Spread pricing occurs when pharmacy benefit managers, known as PBMs, charge Medicaid far more than the amount paid to pharmacies to dispense medications.
“The market for prescription drugs is convoluted and opaque,” CMS Administrator Seema Verma said in a statement.
“States are increasingly reporting instances of spread pricing in Medicaid, including cases in Ohio and Texas, and I am concerned that spread pricing is inflating prescription drug costs that are borne by beneficiaries and by taxpayers. Today’s guidance will ensure that health plans monitor spread pricing in Medicaid appropriately. PBMs cannot use spread pricing to upcharge health plans and increase costs for states — spread pricing must be monitored and accounted for, and not used to inflate profits.”
The new federal guidelines deal with the way managed-care plans, hired to oversee state Medicaid programs, report how much they spend on health care and how much goes to administrative costs and profits, a calculation known as “medical loss ratio.”
Under current rules, the plans are required to direct at least 85% of revenue toward care and retain no more than 15% for administrative costs and profits.
Federal regulators say they are concerned that managed-care plans are not accounting for benefits derived from spread pricing in their medical-loss ratio.
The directive also seeks to ensure that manufacturers' rebates paid to PBMs and managed-care plans are accounted for and not allowed to artificially inflate the cost of claims.
The directive seeks to ensure administrative costs and profits are accurately disclosed and remove the incentive for managed-care plans and PBMs to spend more to allow higher profits.
The National Community Pharmacists Association praised the action by CMS.
"For years, community pharmacists have said that PBMs have been playing spread-pricing games, contributing to higher drug costs to the detriment of states they are supposed to serve," said B. Douglas Hoey, the association's chief executive officer.
"We applaud the Trump Administration and CMS Administrator Seema Verma for recognizing that PBM methods have led to increased costs for states and taxpayers, and for issuing guidance aimed at stopping this abuse. NCPA agrees that it cannot be tolerated. Spread pricing must be monitored and accounted for to provide more clarity about what states and other plan sponsors are paying for."
The Pharmaceutical Care Management Association noted that insurers have always had options beyond spread pricing.
"The plan hiring a PBM always has the final say on contract terms, PBMs don’t choose spread pricing contracts. CMS’ guidance is a clarification to the health plans on how to report expenditures," said Greg Lopes, association spokesman.
Ohio Medicaid spokesman Kevin Walters said the agency had no immediate comment on the federal directive. He did, however, note that Ohio implemented a transparent, pass-through payment model on Jan. 1 to address the issue. The model pays PBMs a set administrative fee and requires them to reimburse pharmacies the same amount they bill the state.
Neither the Ohio Association of Health Plans nor the state's largest Medicaid managed care plan, CareSource, responded to a request for comment. Last month, CareSource announced its new PBM contract with ExpressScripts would bring greater transparency to mostly secret drug pricing and it's unclear whether the new reporting requirements would impact the agreement.
The Dispatch has spent more than a year reporting on the cost of prescription drugs and the role PBMs play in affecting prices in its Side Effects series, prompting sweeping changes in Ohio's Medicaid program. A consultant hired by the state found that in one year, PBMs received about $225 million from spread pricing, a rate three to six times the industry standard.