Drug middlemen in Kentucky earned $123.5 million in hidden fees, report says

Drug middlemen took $123.5 million in hidden fees from Kentucky health-insurance plans that cover the state’s poor, according to a report that follows efforts by other states to find out if pharmacy-benefit managers are gaming state programs for profits.

The Kentucky report is the latest to examine a controversial practice known as spread pricing, in which pharmacy-benefit managers pay drugstores one price for a treatment while charging a higher one to their health plan clients. The difference, or spread, is used to stabilize drug costs, PBMs say — or add to PBM profits, according to critics.

Related: Pharma middlemen’s cut is getting bigger, at least in NY

In 2018, four Kentucky insurers in Medicaid paid $957.7 million to four PBMs that use the arrangements. Of that, the PBMs kept 13 percent — $123.5 million — through spread pricing, according to the Kentucky report. The size of those spreads rose by more than a third from 2017, the state found.

“These are taxpayer dollars that we can’t identify what is the service they are being used for,” said Jessin Joseph, director of pharmacy for Kentucky’s Department for Medicaid Services, in a phone interview. Joseph said the state planned to do a more detailed claim-by-claim analysis of pharmacy spending to determine why spreads were going up.

Companies that run PBMs, including CVS Health Corp. and Cigna Corp., say that clients enter into spread-pricing agreements knowingly. Along with stabilizing drugs costs, the spread money is used to fund benefits for patients, PBMs say.

Popular practice

The arrangements have become a popular form of administering drugs. In Kentucky last year, 58 percent of the 24.7 million prescriptions in private Medicaid plans were filled through spread-pricing agreements, according to the state report.

The practice has come under increasing scrutiny in Medicaid, where many states have outsourced the program to private companies in order to lower costs and provide better care for low-income patients.

A Bloomberg analysis last year of 90 frequently prescribed generic drugs in Medicaid managed-care plans in 31 states found wide variations in reimbursement and drug costs. In some states, Medicaid plans appeared to be getting a good deal. In other states, plans paid markups of threefold or more on some treatments, Bloomberg found.

The analysis couldn’t tell how much of the markup was going to PBMs and other middlemen, versus how much was going to pharmacies. Nor could it distinguish between health plans whose contracts allowed spread pricing, and plans that used fee-based arrangements where drug prices are passed along directly. The Kentucky report and similar efforts by other states have shed light on those details.

Kentucky’s Joseph said that four of five private Medicaid plans in the state used spread pricing in 2017 and 2018, including three whose drug benefits were administered by CVS’s Caremark, and one by Cigna’s Express Scripts unit.

CVS said it is in the process of reviewing Kentucky’s report. The spread “is not a PBM’s profit. It is used to fund benefit services provided to plan sponsors as well as clinical programs to support patients,” Michael DeAngelis, a spokesman for CVS, said in an email.

“Spread-pricing arrangements provide predictability, competitive rates, and deliver value for our clients,” said Brian Henry, a spokesman for Cigna, in an email. PBMs help drive down drug costs, he said.

Pharmacy-benefit managers “are hired to reduce prescription drug costs and improve the quality of benefits,” said Charles Cote, a spokesman for the Pharmaceutical Care Management Association. “The plan hiring a PBM always has the final say on contract terms and some prefer spread pricing arrangements.”

Ohio pushback

In Ohio, a summary report last year found that CVS and other PBMs took an 8.8 percent spread on name-brand and generic drugs from March 2017 to March 2018. That amounted to an average of $5.70 per prescription. Ohio officials told Medicaid plans to terminate spread-pricing agreements this year.

In Kentucky, the spreads averaged $6.07 per prescription in 2017, and $8.70 per prescription in 2018.

“It is shocking,” said Eric Pachman, a consultant at 3 Axis Advisors and former pharmacy executive who examined PBM markups in Ohio, New York and other states. “I didn’t suspect it could be this high.”

The Kentucky report examined retail pharmacies and did not include mail-order drugs. It recommended that the state eliminate spread pricing for all private Medicaid plans. It also recommended that the state require an annual PBM transparency report for each private Medicaid plan.

Read more:

• New HHS director blames PBMs, insurance plans for high drug prices
• Price hikes on name-brand drugs cancel out savings from generics
• Pharmacy benefits: The year to come

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