Ohio cracks down on PBM contracts after audit shows egregious spread pricing in Medicaid

Drugs and money
The Buckeye State is forcing PBMs to restructure their contracts following the release of a long-awaited audit. (Getty/LIgorko)

Ohio is bearing down on pharmacy benefit managers (PBMs) for wasting taxpayer dollars through “spread” pricing.

Spread pricing models allow PBMs to generate revenue for themselves by charging Medicaid (and thus, taxpayers) more than the amount they reimburse pharmacies.

On Thursday, Auditor of State Dave Yost released findings that PBMs charged Medicaid not only a nearly 9% spread across all drugs but also a 31% spread among generic drug prescriptions filled between April 1, 2017 and March 31, 2018.

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PBMs collected more than $2.5 billion from plans during that period, including $662.7 million from generic drugs and almost $1.25 billion from brand-name drugs. Of the $2.5 billion, nearly $225 million was generated through spread pricing, including $208 million from prescriptions for generics. 

In a lengthy rebuttal, CVS Health, which serves as one of the state's PBMs, said it has saved Ohio taxpayers $145 million annually by negotiating drug prices for Medicaid managed care plans. The company also said CVS Caremark passes 100% of government-mandated rebates to Medicaid managed care clients. 

"In other words, we do not keep any amount of a drug manufacturer’s rebate for Medicaid prescriptions in Ohio," the company wrote. 

CVS added that the spread pricing was chosen by managed care insurers instead of paying an administrative fee. The company said the money "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."

RELATED: CVS, Express Scripts provide a rare moment of transparency on rebate profits

The audit came on the heels of Ohio Medicaid Director Barbara Sears’ letter informing the state’s five managed care plans that they may no longer contract with PBMs that engage in spread pricing. The state will require PBMs in its Medicaid program to move to a “pass-through” pricing model instead, in which PBMs receive a flat administrative fee and may only bill the state for what they pay pharmacies. In contrast to spread pricing, pass-through pricing will be cost-neutral for the state and improve transparency for taxpayers, Sears explained.

The plans must terminate contracts with PBMs that use a spread pricing model by January 1, 2019. CVS said it is "actively working" with the state to restructure its contract to implement pass-through pricing. 

Until then, the state will design the pass-through pricing program, conduct actuarial analyses to ensure budget neutrality, conduct its annual survey of pharmacy dispensing costs, and update and negotiate PBM contracts as needed.

“The more we learn, the more troubling this becomes,” Yost said in his announcement. “We cannot be content to accept a ‘black box’ in the delivery of public services." 

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