Ohio Medicaid drug audit calls for transparency, highlights pharmacy closures

August 16, 2018

Two days after the Ohio Department of Medicaid took a dramatic step in an attempt shed light on Medicaid drug expenditures, Auditor Dave Yost called for a pause.

After tense exchanges with the administration of fellow Republican Gov. John Kasich, Yost said Thursday he agrees that more transparency is needed in the system. But Yost said he's worried that the administration's approach will cost taxpayers more money.

"I'm not sure that the remaining cost controls in the long term will be effective and that's why I'm calling for today a freeze for a few months and a robust analysis," Yost told the Joint Committee on Medicaid Oversight. "We would be foolish indeed to discard the current system, which is providing some measure of cost control, for greater transparency — but significantly higher costs."

But the Medicaid department said the move it undertook Tuesday — ordering its five managed-care plans to end spread pricing and simply pay pharmacy benefit managers a set fee — is the best way to puncture the veil of secrecy that shrouds so much of the prescription-drug industry.

“The pass-through model is an important step for public transparency and we believe the best course of action is to proceed as planned without delay,” spokesman Tom Betti said in an email.

On Tuesday, the Medicaid department announced that it had ordered its managed-care plans to terminate contracts with CVS Caremark and OptumRx that had allowed those pharmacy benefits managers (PBMs) to bill taxpayers over $224 million a year more for Medicaid drugs than they were reimbursing pharmacies. That difference is known as "spread pricing," and many independent and small pharmacies say it's putting them out of business.

The Kasich administration and Yost espouse the same goals for Medicaid prescription-drug benefits. But Yost has criticized the Medicaid department since it announced shortly after receiving a verbal briefing from Yost on his yet-to-be-released report that it would change how it handles the business.

"We cannot be content to accept a 'black box' in the delivery of public services, particularly a public service (the Medicaid department) says it did not understand, and had insufficient data to assess, either in its effectiveness or its unintended consequences in the marketplace," Yost told the oversight committee. "But for the General Assembly's work, it is not hard to imagine that the administration might still today be content."

The Medicaid department made its decision after commissioning a report that used the companies' confidential pricing data to determine the seemingly massive markups — three to six times the standard industry cost, the consultant found.

At the request of lawmakers, Yost's office used similar data to produce a report of its own for lawmakers. The auditor’s office would not provide the data behind the analysis. Yost’s office said it had to agree to confidentiality in order to get the data to do that analysis. The data were gathered from Medicaid, insurers and pharmacy benefit managers, Yost’s office said.

There were some important differences between the two analyses, however.

The Medicaid Department report looked at the average markup among all types of drugs — 8.8 percent — while the auditor's report broke them out by type. It determined that generic drugs, were marked up on average by 31.4 percent. That markup represents 93 percent of revenue the PBMs got from spread pricing.

In other words, CVS and OptumRx paid pharmacists $208 million for generic drugs and then effectively billed taxpayers $663 million for the same thing.

Ohio's independent pharmacists have complained that Medicaid reimbursements for generic drugs are often insufficient to cover pharmacists' costs.

Antonio Ciaccia, lobbyist for the Ohio Pharmacists Association, said, "What we see in this report are the truly unfathomable lengths that these massive corporate middlemen will go to manipulate the prescription drug marketplace and hide their litany of revenue streams. It is now overwhelmingly apparent that PBMs are operating the biggest shell game in modern history, and we are all paying for it."

In the summary of its analysis, the Medicaid department did not report separate markups for generic drugs, which are not under patent; brand-name drugs, which are patent protected; and specialty drugs, expensive, complex medicines for ailments such as cancer. Yost said he didn't know why the department only released an average markup, but added, "You do an average because there's a spike you don't want people to see."

Auditor Dave Yost releases a report on the business CVS Caremark and OptumRx are doing with Ohio's Medicaid managed care companies in front of the Joint Committee on Medicaid at The Ohio Statehouse on August 16, 2018. [Kyle Robertson/Dispatch]

Asked why the department didn't release more detailed information about markups, Betti said, “We agree with the auditor’s findings in his report that spread on generic drugs is much higher than the spread on brand-name drugs. The (Department of Medicaid) report was focused on 'how much were the PBMs making' and 'what was the 'spread.'"

"Spread" refers to the markup between what PBMs such as CVS Caremark and OptumRx pay pharmacists for drugs and how much they bill health plans, which in the case of Medicaid managed-care plans, get their money from taxpayers. CVS spokesman Michael DeAngelis noted "spread" is not the same as "profit."

"Under the pricing model chosen by our Ohio Managed Medicaid clients, the 'spread' paid to CVS Caremark is in lieu of our clients paying a separate administrative fee, and it funds vitally important benefit management services we provide to clients, such as clinical and customer support, programs to improve medication adherence, management of the drug formulary, and other services," DeAngelis said in an email. "However, we are actively working with our Ohio Managed Medicaid clients to restructure our contracts to implement the new 'pass-through' pricing model requirement, effective January 1, 2019."

A spokesman for OptumRX said, “The findings in Auditor Yost’s special report are consistent with the Department of Medicaid’s report from earlier this year showing OptumRx and PBMs have saved Ohio Medicaid and taxpayers $145 million annually on prescription drug costs. We look forward to continuing to work as a partner with the state to deliver value and improve health outcomes for Ohioans.”

The thrust of the auditor's report is that there's not nearly enough transparency for state officials to know whether Ohio taxpayers are getting their money's worth from the $2.5 billion that's spent annually through PBMs on Medicaid prescription drugs. The PBMs' contracts with managed care plans allow the PBMs to keep secret the spreads they realize on drugs, the rebates they extract from manufacturers, and a whole range of fees they might be charging others with whom they do business.

The chairman of the oversight committee, Sen. David Burke, R-Marysville, was non-committal when asked whether the Medicaid department's recommended approach is best.

"I don't know, that's the problem," the pharmacist said.

Rep. Emilia Sykes, D-Akron, said she agrees with the Medicaid Department's plan.

“Medicaid’s decision to end contracts with price-gouging pharmacy benefit managers is a great step in the right direction,” she said in a written statement. “The auditor’s report confirmed our fears that taxpayers were being misled.

"We cannot afford to stop moving forward on this issue. We must require transparency and be in constant communication with managed care plans, pharmacies and Medicaid to ensure that we do not get back into a situation where local pharmacies are closing and families cannot afford life-saving prescription medications.”

Eric Pachman, a former pharmacy manager in the Dayton area and founder of the drug pricing website 46brooklyn.com, said the state can quickly come to a decision on what it wants to do.

"You have to fix one component first and that is the transparency component," he said. "After we have a strong foundation in place, then we can figure out what type of house we want to build, but without transparency we are building on shaky ground."   

Dispatch reporter Maya Kaufman contributed to this story.