Will state Medicaid reforms prove we were getting a bad deal?

By: - March 15, 2021 12:55 am

Photo by Marty Schladen, Ohio Capital Journal.

The Ohio Department of Medicaid in January implemented a massive overhaul to the way it administers prescription drug benefits to more than a quarter of all Ohioans. Now, the department is hiring its own middleman to handle the transactions.

The department expects to save $128 million during the fiscal year starting July 1 and $184 million the year after that.

That raises an important question: Were the Ohio and federal taxpayers who fund Medicaid getting ripped off under the earlier arrangement, under which the state’s five managed-care plans hired their own middlemen? It’s a debate that’s raged since early 2018 and not too many months may have to pass before we have an answer. 

Since 2016, Ohio’s community pharmacists have complained that they were getting killed by under-reimbursements for drugs they bought and dispensed under the Medicaid program.

Even at first glance, the arrangement seemed strange. Their largest retail competitor, CVS, also owned a drug middleman, CVS Caremark, that determined most of their Medicaid reimbursements because it had been contracted by four of the state’s five managed-care plans.

Such middlemen are known as “pharmacy benefit managers,” or PBMs. The state’s managed care plans hired them to create pharmacy networks, negotiate manufacturer rebates, create lists of preferred drugs, determine pharmacy reimbursements, reconcile claims and provide other services.

Just three companies — CVS Caremark, OptumRx and Express Scripts — control more than 70% of a national marketplace that’s estimated to be worth almost $400 billion a year.

Proponents of the industry say the companies use that clout to force drugmakers, pharmacies and wholesalers to provide discounts.

“PBMs are working with the entire prescription drug supply chain, including pharmacists, to help patients access needed medications,” said Greg Lopes, spokesman for the Pharmaceutical Care Management Association, an industry group. “In fact, PBMs are the only member of the prescription drug supply and payment chain working to lower drug costs.”

Critics say, however, that the giant middlemen use their dominance to engage in anti-competitive practices to pad their profits.

An incident in Ohio might be illustrative.

In late 2017, Ohio pharmacists reported that CVS Caremark slashed reimbursements for generic drugs under the state Medicaid program. In many cases, the pharmacists said, reimbursements fell to amounts less than they paid for the drugs, so they were losing money even before they paid employee salaries and other overhead. 

Then they received letters from CVS’s director of regional acquisitions.

“I know what independents are experiencing right now: declining reimbursements, increasing costs, a more complex regulatory environment,” it said. “Mounting challenges like these make selling your store to CVS Pharmacy an attractive and practical option.” 

In 2018, CVS denied that it was engaging in a tactic that community pharmacists bitterly referred to as “squeeze and buy.” The company said it maintained a strict firewall between its PBM operations and other parts of the company, but many pharmacists were skeptical.

Later in 2018, The Columbus Dispatch did a data analysis showing that CVS Caremark and OptumRx were charging managed-care plans — and, ultimately, taxpayers — much more for generic drugs than it was reimbursing pharmacists. 

That prompted the Medicaid department to commission its own analysis using all reimbursement data. It found that in 2017 alone, the two PBMs charged taxpayers almost a quarter-billion dollars more for drugs than they paid pharmacists.

And that was just for generics, the cheapest class of prescription medications. That didn’t count more-expensive brand-name drugs from which PBMs negotiate huge discounts that often aren’t transparent. It also doesn’t count even more expensive specialty drugs, which PBMs often force patients to buy from their own mail-order pharmacies.

That and subsequent revelations sent the Medicaid department and the legislature scrambling for reforms. The biggest change is the move to a single PBM working directly for the department.

“The Ohio General Assembly required Medicaid to implement a single PBM to address a variety of issues with the current managed care-PBM relationships,” Medicaid spokeswoman Lisa Lawless said Friday in an email. “As discovered by (analyses conducted by Medicaid and then State Auditor Dave Yost), and as reported by the Dispatch, the conflicts of interest, lack of transparency, and pricing abuses made the case for the change.”

Lopes, spokesman for the PBM industry group, said he feared that costs will increase under the new setup, possibly to increase pharmacists’ profits.

While the state, as the purchaser of PBM services, has the final say on the type of pharmacy benefit model used, it is vitally important that the tools used by PBMs to lower prescription drug costs, such as home delivery of medications and pharmacy networks, are not restricted,” he said. “When PBM tools are restricted, drug costs increase.”

With the new system up and running, new data are rolling in that soon should tell whether that’s the case. What they may not answer: whether even more savings can be achieved administering Ohio’s mammoth Medicaid prescription drug benefit.



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Marty Schladen
Marty Schladen

Marty Schladen has been a reporter for decades, working in Indiana, Texas and other places before returning to his native Ohio to work at The Columbus Dispatch in 2017. He's won state and national journalism awards for investigations into utility regulation, public corruption, the environment, prescription drug spending and other matters.