Side Effects

Ohio's battle with drug costs provides road map for other states

May 15, 2019

If there is a bright side to Ohio’s misfortune with Medicaid drug costs, it would be helping other states avoid similar pricing schemes.

When federal regulators announced new guidelines this week to crack down on excessive profits by private Medicaid managed-care companies and their pharmacy benefit managers — also known as PBMs — they credited Ohio for its effort to combat the problem.

"We released new guidance (Wednesday) to curb the games that health plans and PBMs play with pharmacy spread pricing that drive up costs for taxpayers. I want to recognize the states that have been proactive on this issue already, including Texas and Ohio," said Seema Verma, administrator of the Centers for Medicare and Medicaid Services.

Ohio last year became the poster child for spread pricing, a practice in which pharmacy benefit managers bill the state far more than they pay pharmacists for medications and keep the difference. The billing arrangement was in place for years and increased costs for taxpayers, who finance the health insurance program for nearly 3 million poor and disabled residents.

CVS Caremark and OptumRx, the two PBMs hired by Ohio’s Medicaid managed-care plans, charged the state nearly 9% more than they paid pharmacists in 2017, allowing them to pocket $224 million. State consultants said the charges were three to six times the industry standard.

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In response, Medicaid officials abolished spread pricing and this year implemented a “transparent, pass-through” payment system that pays PBMs a set administrative fee and requires them to bill the state the same amount they pay pharmacies.

Gov. Mike DeWine also ordered Medicaid Director Maureen Corcoran to rebid the state's managed-care contracts to address unfavorable billing practices.

State legislators are proposing additional reforms aimed at lowering costs and banning PBMs from steering business to affiliated companies such as specialty and retail pharmacies.

"Ohio was a leader at addressing problems that were created by spread pricing, and director Corcoran hopes that the actions Ohio Medicaid has taken can help guide other states to save taxpayer dollars as they enact this new guidance," said Medicaid spokesman Kevin Walter.

“By implementing a pass-through model in January, Ohio has already eliminated spread pricing. Many of the requirements of the CMS guidance have already been implemented. However, when the department issues our review of managed-care contracts for July 1, we will have completed a detailed review and made additional adjustments as needed in consideration of the CMS guidance to make sure Ohio taxpayers are getting the best deal possible."

The federal directive specified how managed-care plans account for spread pricing when reporting their medical-loss ratio, a calculation showing the percentage of spending that goes to patient care compared with administrative costs and profits. Spread pricing revenue cannot be counted as a "claims cost" under the new rule.

Verma said the new rule will ensure that spread pricing is closely monitored and is not used by managed-care plans to boost their profits.