Ohio firing pharmacy middlemen that cost taxpayers millions

August 14, 2018

The Ohio Department of Medicaid is changing the way it pays for prescription drugs, giving the boot to all pharmacy middlemen because they are using "spread pricing," a practice that has cost taxpayers hundreds of millions.

Medicaid officials directed the state's five managed care plans Tuesday to terminate contracts with pharmacy benefit managers using the secretive pricing method and move to a more transparent pass-through pricing model effective Jan. 1.

"It will provide volumes of transparency," said Patrick Stephan, director of managed care for the Department of Medicaid. “The black box will effectively be eliminated.”

The announcement comes after more than 40 stories by The Dispatch this year investigating the mysterious practices of little-known pharmacy benefit managers, or PBMs, that make nearly $400 billion a year as part of the country’s health-care system. Ironically, PBMs historically served as claims processors but more recently, as they became more involved in managing benefits, they have touted their role as helping to control the rapid rise in health-care costs.

The state's leading PBM, CVS Caremark, "is working with our clients (the managed care plans) to update our contracts moving forward," said company spokeswoman Christine Cramer. CVS uses pass-through pricing in several other state Medicaid programs.

Miranda Motter, president and chief executive officer of the Ohio Association of Health Plans, said managed care organizations, serving the bulk of the 3 million poor and disabled covered by Medicaid, have reduced costs by at least $145 million per year with coordinated care and improved health outcomes for patients.

"We welcome the opportunity to continue to provide transparency with regard to drug costs, and welcome a robust review of all factors that go into the rise in drug costs, including manufacturers and distributors,” Motter said.

Attorney General Mike DeWine threatened legal action last month to recoup taxpayer dollars that went to PBMs. Auditor Dave Yost is set to release the results of a separate investigation this week.

"The Ohio Department of Medicaid has taken a very positive step to increase the transparency of these contracts today," DeWine said in a statement released by his gubernatorial campaign. “We need to hold people’s feet to the fire when they try to rip off taxpayers, and under the current contracts, Ohioans have no way of knowing if we are getting a good deal or not.”

Yost questioned the timing of Medicaid's announcement, coming two days before his report is presented to lawmakers.

“We shared a draft of our report with ODM yesterday," the auditor's office said in a prepared statement Tuesday. "We had hoped our report would have a significant impact on state policy. We just didn’t expect it to happen this quickly.”

Medicaid spokesman Tom Betti disputed the claim, saying "it took more than 24 hours to implement this change."

The action by Medicaid is an about-face from officials from less than two months ago, when Stephan told lawmakers, during a meeting of the Joint Medicaid Oversight Commission, that “we concluded there is not necessarily justification for a crisis and immediate regulatory intervention. However, we understand that there is always room for improvement.”

Senator Bill Coley, R-West Chester, said Tuesday he is pleased by the news but added he will continue to work to provide more transparency about how PBMs secure rebates from drug manufacturers and administrative fees from pharmacists.

“This shows that the legislative process worked,” Coley said. “You also have to applaud the Kasich administration and it take guts to stand there and say we are heading in the wrong direction.”

Kasich spokesman Jon Keeling said “not only is transparency good for markets, but taxpayers deserve it from all levels of government and this approach helps advance that cause.”

But State Rep. Thomas West, D-Canton, asked what took Medicaid so long and blasted the decision as "damage control," ahead of Yost’s report on deceptive pharmaceutical pricing.

“(Tuesday's) decision to fire cheating big-PhRMA middlemen is proof positive of what many of us have been saying all along: big health-care corporations have been ripping off Ohio consumers by hundreds of millions of dollars to line their own pockets and boost their own bottom line,” West said.

“This decision is a win for consumers and small independent pharmacies alike, but we shouldn’t wait until January 1 to stop this rip off.”

In June, the Ohio House passed House Bill 479, a bipartisan bill co-sponsored by West to crack down on PBMs by prohibiting gag rules that prevent pharmacists from informing consumers when their out-of-pocket cost for prescription drugs.

PBMs hired by Ohio Medicaid's five managed care plans have been making millions by billing taxpayers far more than they reimburse pharmacists for filling prescriptions for Medicaid patients, with the difference known as price spread. Under a "pass-through" model, pharmacy middlemen would be paid a straight administrative fee and forced to bill the state the same amount they pay pharmacists.

"The goal is to make sure we are not costing taxpayers more," Stephan said. Last year, Medicaid spent more than $3 billion on prescription drugs.

According to a report commissioned by the state, PBMs billed taxpayers $223.7 million more for prescription drugs in a year than they reimbursed pharmacies to fill those prescriptions. That 8.8 percent spread represents millions kept by CVS Caremark, the PBM for four of Medicaid's five managed-care plans, and Optum Rx, the PBM for the other. Largely pass-through operations, PBMs are employed to negotiate drug prices with manufacturers and process drug claims.

The study said PBM fees should fall in the range of 90 cents to $1.90 per prescription. CVS Caremark billed the state about $5.60 per script; Optum charged $6.50 — three to six times higher.

HealthPlan Data Solutions, which performed the analysis, recommended Ohio switch to a pass-through model, finding costs to the state would decrease $16 million while pharmacy reimbursements would increase $191 million. The Ohio Bureau of Workers' Compensation recently switched to the same model.

“After years of banging our heads against the wall trying to expose the flaws in this opaque system, it is refreshing to see some substantive movement toward a more transparent model,” said Antonio Ciaccia, lobbyist for the Ohio Pharmacist Association.

Ciaccia said he hopes the changes will create a better program for patients and taxpayers.

Dispatch reporter Marty Schladen contributed to this story.