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Study: Pharmacists were underpaid for drugs

Pharmacy benefit managers potentially pocketed $64M over two years, leaving Medicaid system to foot bill.

May 10, 2019
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A new study shows middleman Medicaid management companies potentially overcharged Michigan taxpayers by at least $64 million over two years.

Pharmacy benefit managers — which act as middlemen between pharmacies and insurance companies, determining drug coverage and reimbursing pharmacies for filling prescriptions — may have underpaid pharmacists for generic drugs and kept the excess $64 million, leaving the Medicaid system to foot the bill.

The analysis is based on nearly 2 million generic drugs prescriptions from 451 community pharmacies across Michigan from 2016-18. There are nearly 2,356 retail and community pharmacies in the state.

The Michigan Pharmacists Association contracted Ohio-based 3 Axis Advisors to assess the degree of generic drug spread pricing, the difference between what a PBM pays a pharmacy for a medication and what it charges Michigan Medicaid.

Despite a 22% decline in wholesale costs and a 28% decline in pharmacy reimbursements from the first quarter of 2016 to the first quarter of 2018, the amount Medicaid pays for generic drugs increased by 7%, according to the study.

While it was costing pharmacies an average of $10.64 to dispense a generic Medicaid prescription by early 2018, they were being reimbursed an average of 49 cents above the wholesale cost, meaning pharmacies were losing an average of over $10 for each one sold.

Spread pricing for generic prescriptions rose from 2% of managed care’s costs in 2016 to 34% in 2018.

While pharmacy margins over wholesale costs decreased by 36% from 2016-18, spread price margins increased by 1,600%, the study said.

“That's the most startling juxtaposition in this data,” said Antonio Ciaccia, 3 Axis Advisors co-founder and Ohio Pharmacists Association director of government and public affairs.

“It certainly begs the question of: Are they offering a higher level of service as time progresses or are they just using this as a secret profit scheme?” Ciaccia said.

Ciaccia said the MPA study shows the discrepancy is directly linked to manipulation of drug prices by PBMs.

“The fact that nobody knew that this money existed is a big problem,” Ciaccia said.

A report from the White House Council of Economic Advisers in February 2018 showed three PBMs make up 85% of the marketplace: Express Scripts, CVS Caremark and OptumRx. All these PBMs are owned by Fortune 100 companies, which also own pharmacy companies and health insurance companies.

For community pharmacies, this monetary loss highlighted in the MPA study means owners throughout the state have to consider pulling back services or even closing, according to Larry Wagenknecht, president of the Michigan Pharmacists Association.

Brian Swartz, owner of Pharmacy Care in Middleville and Dorr Pharmacy in Dorr, said the reimbursements have gotten so low in the last five years that he has to make such considerations as laying off workers or not offering certain medications. He said he and other community pharmacy owners are having to rely on supplemental revenue from the sale of gifts and other goods.

After 36 years as a pharmacist, he said the last five “have certainly been the toughest.”

Ciaccia said the issues lie within complicated, non-negotiable contracts between the PBMs and pharmacies. Even though the services contracted are publicly funded in this case, a legal lack of transparency keeps those contracts from being disclosed publicly.

Swartz said a primary wholesaler deals with PBM contracts on behalf of his pharmacies and a group of others. He said the loss of funds from some prescriptions are supposed to be made up by profits from others, according to the contract.

He said he recently lost $90 on a single prescription for a patient.

Swartz said when he complains to a PBM about low reimbursement rates, he is referred to the contract. Not signing a contract would mean losing a portion of customers and potentially forcing them to drive miles away for prescriptions, Swartz said.

Ciaccia said there should be more enforced transparency from PBMs, as well as pharmacists and any other entity receiving public funding. In this case, he thinks the state should take the first step by conducting its own audit of where public health spending is going.

“I think that the state and the taxpayers deserve to have some sort of an idea of the cost-benefit analysis of what they're buying,” he said. “Because of all the smoke and mirrors and the lack of transparency in this industry, the value proposition of all these members of the supply chain are really unknown and unaccounted for.”

Having a clearer understanding is what “equips lawmakers with the tools that they need to make good decisions about how they spend taxpayer money,” he said.

“Any state that does not audit their spend, especially after crumb trails like this, they are absolutely insane,” Ciaccia said. “It would be political malpractice to not try and find some accountability in the drug spend.”

Ciaccia said, based on his experience, the payer usually does not know the breadth or value of the services offered.

“Everybody cares about drug prices and high drug costs, but nobody actually knows what the hell they're buying,” Wagenknecht said.

With greater transparency would come increased pressure on PBMs, and insurance companies could start contracting more directly for specific services.

Ciaccia said he began investigating this issue in Ohio a couple of years ago after hearing complaints from pharmacists about low reimbursement rates.

Ciaccia said the state of Ohio largely was unaware of spread pricing before he analyzed data and found a discrepancy of more than $224 million between mid-2017 and early 2018, leading to government investigation and lawsuits.

After that initial study, government agencies and companies reached out about exploring the issue in other states.

Kentucky discovered hidden fees accounting for nearly $124 million. PBMs charged the Illinois Medicaid program 23% more for generic drugs than they paid pharmacists for dispensing the same medications. In New York, PBMs overcharged taxpayers more than $300 million between April 2017 and March 2018.

Wagenknecht said Michigan pharmacists have been complaining about low reimbursement rates for a while, and the Michigan study validates some of those complaints.

The Pharmaceutical Care Management Association, the Washington, D.C.-based organization that represents PBMs, sent a statement regarding spread pricing: “Pharmacy benefit managers are hired to reduce prescription drug costs and improve the quality of benefits for consumers, employers and public programs, including Medicaid. The plan hiring a PBM always has the final say on contract terms.”

The PCMA did not respond to questions about what led to increased spread pricing, margins in areas besides those publicly funded or whether there will be adjustments to the management of public funds.

The association also said the study is “irrelevant” because of a state law passed in October 2018 — after the scope of the study — that eliminated spread pricing for Medicaid and Medicare only.

In the Michigan study, Ciaccia said state Medicaid data was one of the only publicly available data sets, leaving him to believe there may be hidden costs throughout the system. He said the Ohio study found pharmacy chains were being paid even lower rates than community pharmacies.

Wagenknecht said he agrees that if spread pricing was happening in the Medicaid system, it could be happening elsewhere.

“There's a bigger pie out there when one looks at all of the pharmacy benefit manager arrangements they have for other state-funded programs,” he said.

U.S. Sens. Chuck Grassley and Ron Wyden in April called for a federal investigation of spread pricing and PBM practices.

Wagenknecht recently testified in Lansing about the role and impact of PBMs regarding Michigan pharmacists and patients.

Michigan Rep. Abdullah Hammoud, D-Dearborn, confirmed he plans to introduce legislation regarding transparency of public health care funding.

“The more that you can arm the market with more information, the better opportunity there is for perhaps an unconventional alternative to emerge within the marketplace,” Ciaccia said. “And I've talked to employers that are desperately looking for something different.”

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