Kentucky’s Democratic attorney general just launched an investigation to determine if middlemen in the prescription drug supply chain are ripping off the state’s Medicaid program. He’s almost certainly onto something.
These middlemen, known as pharmacy benefit managers, or PBMs, administer drug benefit plans for Medicaid, Medicare Part D, and private insurers. In theory, PBMs keep drug spending under control by negotiating with pharmaceutical companies for rebates and bulk discounts.
In practice, PBMs cause many patients and insurers — including Medicaid plans — to overpay for drugs. Since the rebates and discounts are secret, PBMs have considerable leeway to overcharge the insurance plans and patients they ostensibly represent.
Medicaid was created in 1965 to provide health insurance for low-income elderly, pregnant, and disabled Americans. Today, Medicaid is a nearly $600 billion operation that covers more than 70 million Americans.
Medicaid is jointly funded and regulated by state and federal governments. The federal government covers a percentage of program expenditures that varies by state. State governments pick up the remainder.
Under this model, Medicaid’s costs are spinning out of control. Spending grew over 4% in 2017 and 2018 and will climb even more this year. The Centers for Medicare and Medicaid Services predicts that Medicaid expenditures will rise almost 6% every year through 2026.
A number of factors, including prescription drug costs, drive Medicaid spending. To rein in these costs, states often contract with managed care organizations, which provide coverage to Medicaid enrollees in return for a lump sum payment from the state.
These managed care organizations — which are large provider groups or insurers — then hire pharmacy benefit managers to administer their drug benefits. PBMs leverage their power as bulk purchasers of drugs to extract significant discounts from pharmaceutical companies. In 2017, rebates from drug manufacturers totaled more than $150 billion.
These savings are rarely shared with patients at the pharmacy. Most of the rebates are passed back to insurers, who use the savings to lower premiums. PBMs keep the rest for themselves.
PBMs actually like it when drug companies set high list prices. Doing so creates wiggle room for PBMs to negotiate bigger rebates and discounts.
Indeed, earlier this year, the giant PBM OptumRx, a division of insurer United Health, sent a letter to major drug companies demanding 21 months’ notice of a proposed reduction in a drug’s list price.
PBMs also engage in a practice called “spread pricing.” Spread pricing agreements allow PBMs to acquire cheap generic drugs and sell them at a much higher price. Some state Medicaid directors point to spread pricing as the reason they spend so much on drugs.
Consider what happened in Ohio last year. PBMs secured a popular depression medication from manufacturers for roughly $0.18 per pill, then charged Ohio’s Medicaid program $1.54 per dose.
Since PBM contracts are kept secret, it’s hard to tell exactly what’s going on. But this example isn’t isolated. State Medicaid programs pay PBMs between $109 and $300 for every pill of imatinib mesylate, the generic form of the cancer medication Gleevec. But the drug only costs pharmacies $84 per pill.
An analysis conducted by Bloomberg found that Medicaid programs in 31 states paid drastically different prices for 90 of the most popular generic drugs. Some states got good deals; others faced markups that were triple what the pharmacy paid.
President Trump is trying to rein in PBMs. The administration recently released a proposal that would force PBMs to share rebates with patients at the pharmacy. This move would make it difficult for PBMs to continue shrouding their moves in secrecy and overcharging state Medicaid programs.
The president’s proposal is a good idea. It would help keep a lid on drug costs — and trim Medicaid’s bloated budget.