Are companies still inflating the cost of Medicaid drugs? 

Nobody seems to know

By: - November 4, 2021 12:50 am

Ohio Medicaid Director Maureen Corcoran (left) before the start of the Joint Medicaid Oversight Committee Meeting at the Ohio Statehouse, October 27, 2021, in Columbus, Ohio. (Photo by Graham Stokes)

Last week, Ohio Medicaid Director Maureen Corcoran revealed something with potentially far-reaching implications: When her department calculates how much to pay managed-care companies she’s not sure if it it knows the true cost of the prescription drugs for which it is shelling out billions.

If the drug middlemen hired by Ohio’s Medicaid managed-care contractors are reporting inflated drug costs, that would appear to violate both state and federal law. It also could violate a federal rule that is a fundamental brake on for-profit corporations that have access to many billions of taxpayer dollars meant to help the poor.

The issue might be getting attention from members of the U.S. Senate.

The drug middlemen, known as pharmacy benefit managers or PBMs, facilitate pharmacy transactions. They create pharmacy networks, determine reimbursements and pay their claims. They also create preferred drug lists and negotiate rebates and discounts from drugmakers in exchange for putting their products on the drug lists.

fntonio Ciaccia, president of 3 Axis Advisors gives testimony to the Joint Medicaid Oversight Committee Meeting at the Ohio Statehouse, October 27, 2021, in Columbus, Ohio. (Photo by Graham Stokes for the Ohio Capital Journal.)

The PBMs work through a dizzyingly complex set of transactions to do their business. But as far back as 2016, Ohio’s independent pharmacists were noticing that their Medicaid reimbursements were rapidly dropping while the state’s overall spending on Medicaid prescriptions was going up, Antonio Ciaccia, president of the drug-price consulting firm 3 Axis Advisors, told the legislature’s Joint Medicaid Oversight Committee last week. At the same time, the great majority of Medicaid prescriptions were for generic drugs and those prices were rapidly dropping, said Ciaccia, who formerly worked for the Ohio Pharmacists Association.

Seeming to confirm pharmacists’ suspicions, a subsequent investigation found that the PBMs working for Ohio Medicaid were charging the program one price for drugs and reimbursing pharmacists another — a practice the PBMs said was totally legitimate. 

Regardless, the difference was big, totaling $244 million in a single year. When it learned that, the Medicaid department issued a rule banning the practice, known as “spread pricing.”

In 2019, the General Assembly passed a law banning clawbacks, another reimbursement practice huge PBMs use in their dealings with pharmacies that often are owned by much smaller businesses. 

The law was meant to stop PBMs from initially reimbursing pharmacies at one rate and then coming back months later and clawing a portion back by claiming overpayment or fees of some kind.

Questions have been raised about whether the clawback law is enforceable. But in any case, The Columbus Dispatch in October reported that Ohio pharmacists complain that the practice is continuing, in some cases amounting to a whopping  7% of their annual revenue.

The practice has implications well beyond its impact on small pharmacies.

The Medicaid department periodically sets a “capitated rate” — how much to pay a managed-care company for each member it has. Those rates are set by considering expenses from the prior year, making informed predictions about what they’ll be in the coming year and by building in administrative fees and profits for the managed-care company that are not to exceed 15%.

But PBM clawbacks raise a huge question about those calculations: Are they using the initial reimbursement paid to pharmacies, or are they using the amount pharmacies still have after a portion gets clawed back?

In other words, nobody seems to know whether PBMs are simply pocketing the Medicaid money they claw back. And since the state spends billions each year on Medicaid managed-care drugs, the difference could be big.

The Pharmaceutical Care Management Association represents the PBM industry. Asked if its members were reporting clawbacks to state Medicaid departments, spokesman Greg Lopes on Wednesday said he’d have to research the matter further.

State Rep. Scott Lipps (R-Franklin) of the Joint Medicaid Oversight Committee during a meeting at the Ohio Statehouse, October 27, 2021, in Columbus, Ohio. (Photo by Graham Stokes for the Ohio Capital Journal.)

At last week’s legislative hearing, Rep. Scott Lipps, R-Franklin, asked Medicaid Director Corcoran whether PBMs were passing the clawbacks they collect along to Medicaid.

Corcoran seemed to say they weren’t.

“All the machinery within this supply chain looks at the (initial) claim as the point when the reporting stops,” she said. “In other words, when mom goes to the pharmacy to get her inhaler and the pharmacy is paid X amount of money, that is the cost. That is the claim, and all these other things happen outside of that claim. Therein lies all of what you’ve been hearing about.”

If those clawbacks aren’t being reported, it might be a violation of federal law, as well as of a fundamental rule meant to protect taxpayers.

When it comes to Medicaid managed care, there is much jargon that spawns even more acronyms. But “medical-loss ratio,” or MLR, is particularly important.

It says that at least 85% percent of all funds a managed-care company receives has to be spent on allowable healthcare expenses. That means the remaining 15% can go to administration, profits and other items.

The rule is meant to keep big, profitable corporations from unduly feasting on taxpayer funds meant to help the poor.

A 2019 bulletin by the U.S. Centers for Medicare and Medicaid Services seems to make it very clear that federal law requires that any kind of rebate or refund must be reported for the purposes of calculating medical-loss ratio.

“CMS interprets this regulation to require that any time a managed-care plan receives something of value for the provision of a Medicaid covered outpatient drug (e.g., manufacturer rebates, incentive payments, direct or indirect remuneration, goods in kind, etc.), regardless from whom the item of value is received (e.g., pharmaceutical manufacturer, wholesaler, retail pharmacy, etc.), the value of that rebate must be deducted from the amount of incurred claims used for calculating and reporting the MLR,” the bulletin says.

But when Lipps last week asked Corcoran whether PBM clawbacks were being reported as Ohio Medicaid calculates medical loss ratio, she said she didn’t know.

“That is a really, really complicated question… Let me focus on a couple of… key pillars here,” Corcoran said. “The key pillars are whatever is spent in the drugs, pharmaceuticals, is considered part of the service claims, so these are all being counted within the medical-loss ratio. The rates are set representative of the industry. Beyond that, I at this point can’t go deeper than that in terms of what effect, if any, this has on the medical-loss ratio. I just don’t know.”

A national group representing independent pharmacists said Medicaid officials such as Corcoran should know.

In 2019, CMS issued guidance prohibiting spread pricing from being calculated towards medical spending in the medical-loss ratio,” Anne Cassity, vice president of the National Community Pharmacists Association, said in an email. “Managed care organizations in Ohio and elsewhere should be following federal regulations, and states should be monitoring compliance and exploring whether the organizations are ignoring this CMS guidance and possibly also ignoring the clawback law. NCPA would argue that clawbacks should be included as spread – it just occurs on the back end of the claim.”

For his part, U.S. Sen. Sherrod Brown, D-Ohio, repeated his calls for more transparency.

“I’ve fought for years to lower prescription drug costs, and to require pharmacy benefit managers – the pharmacy middlemen – to be more transparent about their costs and discounts, and to pass on more of their rebates directly to consumers in order to hold the industry accountable to Ohio taxpayers and patients,” he said in an email.



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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.