Spread pricing represents the difference between what the PBM charges the insurer for each prescription filled and what it pays the pharmacy for dispensing the medication.

Recently, Kentucky became the latest state to announce an investigation into allegations that pharmacy benefit managers (PBMs) overcharged the state Medicaid programs and discriminated against independent pharmacies. The Kentucky attorney general announced its investigation following the issuance of a report by the Kentucky Cabinet for Health and Family Services, which found that PBMs appeared to reap an extra $123.5 million from the state’s Medicaid programs in 2018 through a little-known profit center called “spread pricing.”

PBMs act as middlemen between health insurers and pharmacies by negotiating prices with drug manufacturers to create formularies and organizing networks of pharmacies for insureds to use  to obtain prescribed medication. PBMs also reimburse pharmacies that dispense medication to insureds enrolled as members of the PBM.

Spread pricing represents the difference between what the PBM charges the insurer, or in this case Kentucky’s Medicaid programs, for each prescription filled and what it pays the pharmacy for dispensing the medication. Here, as found by Kentucky, the PBMs were charging the state significantly more than what they were paying the pharmacies to service state Medicaid beneficiaries—$123.5 million more.

This conduct has been the subject of other state government scrutiny. For example, Ohio Attorney General David Yost recently filed a lawsuit against PBM OptumRx alleging it overcharged the state of Ohio for PBM services provided to the state’s Medicaid program. This followed the state’s 2018 decision to cancel contracts with PBMs for spread pricing, costing the state more than $223 million during a 12-month period.

Additionally, Pennsylvania’s auditor general is calling for legislative reforms to PBMs, including increased transparency into PBM pricing practices, after a commonwealth report found that in 2017 state-contracted PBMs made approximately $40 million on spread pricing. The commonwealth found that PBMs earned almost $13 per Medicaid prescription, and that the PBMs pocketed the spread as profits, as opposed to returning the extra money to the commonwealth to help lower cost consumers’ costs.

Arkansas Attorney General Leslie Rutledge is also investigating PBM conduct in which a PBM is alleged to be providing unprofitable reimbursement arrangements to independent pharmacies, rendering the pharmacies unable to remain in operation, and then offering to buy out these pharmacies for pennies on the dollar. Rutledge’s office has announced that it is investigating whether such practices are in violation of the state’s Deceptive Trade Practices Act and other applicable laws.

Kentucky’s report was conducted and issued in response to state Senate Bill 5, which passed the legislature and was enacted July 1, 2018. According to the Kentucky report, the law mandates that PBMs contracting with the state Medicaid programs to report financial and business relationship information regarding their interactions with the state-selected managed care organizations and Kentucky-enrolled pharmacies. The report provides summaries of those financials and key recommendations regarding PBM reform and pharmacy pricing.

Among the numerous reforms suggested are:

• Mandatory pass-through contracting for all state PBM contracts. This will eradicate the spread-pricing scheme and switches to a flat administrative fee from the PBM per member per claim.
• The removal of all ancillary fees to pharmacies charged by PBMs. The state finds that ancillary transaction fees add unnecessarily to the complexity of pharmacy pricing and fail to provide fair future projections for pharmacies.
• Require annual PBM transparency reporting to be delivered to the state Department of Medicaid Services for each PBM contract. The report would ensure continued monitoring of the PBMs and their fiscal responsibilities to the state.
• Prohibit PBMs from providing financial incentives to use specific retail, mail order or other network pharmacies in which the PBM has common ownership. This would ensure PBMs do not gain an unfair advantage over the pharmacy business in the state.

Kentucky’s action is the latest is a series of state actors taking aim at the growing problems of PBMs taking advantage of the high drug prices pervading the country. We expect to see more states acting in similar fashion to enact drug-pricing reforms, provide fairer reimbursement to independent pharmacies and provide cost savings to the states and consumers.

Duane Morris attorneys will continue to monitor developments in this area and other related issues and report on the key details for our clients and others in the industry.

For More Information

If you have any questions about this Alert, please contact Jonathan L. Swichar, Bradley A. Wasser, any of the attorneys in our Pharmacy Litigation Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.