State report: Pharmacy middlemen reap millions from tax-funded Medicaid

Pharmacy middlemen managing Ohio Medicaid’s prescription drug program billed taxpayers 8.8 percent more for medications than they paid pharmacies, according to an audit commissioned by the health insurance program for the poor and disabled.

That difference — $223.7 million — was kept by CVS Caremark and Optum RX, pharmacy benefit managers for Medicaid’s five managed care plans.

The analysis of more than 39 million drug transactions for the year ending March 30 appears to be the first comprehensive review of “price spread” on behalf of a government agency, state officials said. They hope other states follow suit.

The release of the report, prepared by HealthPlan Data Solutions of Columbus, follows an investigation by The Dispatch which found that CVS Caremark, which has most of Ohio’s Medicaid business, was billing the state more than it paid pharmacies and often reimbursed them less than the cost of the medication.

Greg Moody, director of the Governor’s Office of Health Transformation, said he couldn’t say whether the state was being overcharged for prescription drugs, primarily because it is not clear how much of the price difference, known as the price spread, is profit and how much goes to administrative costs.

“Is it too high? Is it too low? Our position is these are the facts as we understand them currently, and we are now asking those questions ourselves,” Moody said. “At this point, we are reserving judgment.”

The report found that CVS Caremark reimbursed independent pharmacies — which have complained about what they believe are low reimbursement rates — at a higher rate than CVS Caremark's affiliated CVS pharmacies. Specifically, the report said the reimbursement was 3.6 percent more for brand drugs and 3.4 percent more for generic drugs.

The report also concluded that under managed care, Medicaid saved $145 milliion in prescription drug costs as compared its former fee-for-service pricing.

“This is the first day we believe any state has had access to this information,” Moody said.

The analysis does not look into instances of CVS Caremark cutting rates to some independent pharmacies and then CVS offering to purchase their businesses, or pharmacy benefit managers, also known as PBMs, steering patients to their own pharmacies.

Medicaid director Barbara Sears acknowledged that state officials intervened last fall when CVS Caremark slashed pharmacy reimbursements for some 100 medications. Similar cuts occurred at about the same time in other states.

"This is not just a Medicaid issue, and it is not just an Ohio issue — because this drop in these drugs was not just Medicaid. It was commercial carriers and not just in Ohio," Sears said.

State officials released the report Thursday after briefing some state lawmakers earlier in the day.

Mike DeAngelis, senior director of corporate communication for CVS, who said he received an advance copy of the report's executive summary, said the report "confirms that CVS Caremark does not provide preferential pricing to CVS Pharmacy that would create an anti-competitive advantage over independent pharmacies.

"The report’s analysis of our claims data clearly shows that CVS Caremark reimburses independent pharmacies at a higher rate than CVS pharmacies are reimbursed, and that CVS Caremark pays a higher dispensing fee to independent pharmacies than it pays to CVS pharmacies," he said.

DeAngelis said CVS Caremark’s price spread of 8.7 percent (slightly lower than the 8.8 percent overall rate with Optum Rx included) "is very reasonable."

He noted that "a significant portion of the 'spread' we receive pays for vitally important clinical services and other benefit management services we provide to clients. It is important to note that in 2017, CVS Caremark’s overall net profit margin was only 3.5 percent, and in the first quarter of 2018 it was just 2.4 percent."

Critics say the current system is costing taxpayers.


"Under this system that lacks fundamental transparency and accountability, it appears that PBMs have their own personal money tree," said Antonio Ciaccia, lobbyist for the Ohio Pharmacists Association. "This crap has to end, because it is a clear violation of the public trust and it is costing us all hundreds of millions of dollars."

Others questioned the validity of the analysis because reimbursement data provided by the PBMs wasn't checked with pharmacies to verify. Medicaid officials said they could not share the PBM data because it is considered proprietary.

"This is a fox-in-the-hen house type of audit," said state Sen. Dave Burke, R-Marysville and an independent pharmacist. "Did someone go back and verify what the pharmacy was paid?"

Rick Marlin, director of pharmacy for Allen’s Pharmacy, an independent pharmacy in Youngstown, said Medicaid’s report is not credible. He said the state decision not to get reimbursement numbers from pharmacies and relying only on CVS Caremark is troubling.

“You can’t verify the data, and they should have had their contractor make a comparative sample,” said Marlin, a pharmacist for 46 years. “There’s no validation at all, but my contract with CVS Caremark says that I cannot release those numbers anyway.”

Medicaid’s report follows an analysis by The Dispatch published Sunday that found CVS Caremark billed the state about 12 percent more for drugs than what it paid pharmacies to dispense medications to Medicaid enrollees.

The Dispatch analyzed data from a subset of Ohio pharmacies to get past the lack of transparency in the drug-pricing process and show the cost to taxpayers. The newspaper reviewed more than 125,000 drug transactions to come up with a per-pill cost for the 13 million pills dispensed by 40 pharmacies across Ohio in 2017. The data showed that CVS Caremark received more than $1.6 million from the transactions.

In all, about 2,000 Ohio pharmacies dispensed $3 billion in prescriptions under Medicaid last year.

The $26 billion program in Ohio provides health coverage to about 3 million people.

Pharmacy benefit managers, or PBMs such as CVS Caremark, negotiate prices with drug companies, help decide which medications are covered by health insurance plans and set reimbursement rates to pharmacies.

Dispatch reporter Lucas Sullivan contributed to this story.