Know Your Issue: Spread Pricing

Pharmacy Benefit Managers (PBMs) are good at making something out of nothing. We’ve seen them turn a profit through drug rebates, accumulator adjustment programs, clawbacks, and more. The Centers for Medicare and Medicaid Services (CMS) recently issued a guidance on spread pricing, but states have been dealing with this issue for a while now.

A Brief Explanation of Spread Pricing

Spread pricing is one of the main ways PBMs make money. CMS’s guidance defines spread pricing as follows:

“Spread pricing occurs when health plans contract with [PBMs] to manage their prescription drug benefits, and PBMs keep a portion of the amount paid to them by the health plans for prescription drugs instead of passing the full payments on to pharmacies. Thus, there is a spread between the amount that the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription.”

For the visually inclined among us, here’s an excellent visual representation from Bloomberg of how spread pricing works:


For their part, CVS, a prominent PBM, says choosing to use spread pricing is up to the health plan (for Medicaid, it’s up to the state). CVS says: “Our PBM clients have options to choose from to compensate us for the services we provide.... In one model, clients agree to pay the price negotiated with the pharmacies [...] along with a separate administrative fee for the services we provide. More often, we find that our clients choose a different model whereby they contract for predictable drug costs for the year and allow the PBM to keep the difference between this fixed amount and the amount paid to the pharmacy that dispenses the drugs" (AKA spread pricing). This all sounds fine, however, while most people know that a middleman has to make money somehow, they do not know the sheer volume of profit that spread pricing can create for PBMs.   

The State of Spread Pricing in States

While spread pricing can affect any health insurance plan, including employer-based plans, states have been sounding the alarm on spread pricing in their Medicaid programs. In August of 2018, Ohio found that PBMs “collected more than $2.5 billion from plans [between April 2017 and March 2018]…... Of the $2.5 billion, nearly $225 million was generated through spread pricing, including $208 million from prescriptions for generics.” In Kentucky, a February report showed that PBMs earned more than $123 million in spread pricing in 2018, an increase of nearly 13% over 2017. With Medicaid programs representing a larger and larger portion of state budgets each year, it’s no surprise that states want to decrease the occurrence of spread pricing.

States Fight Back

So far in 2019, five states (AR, LA, MT, NY, and VA) have introduced legislation to regulate spread pricing, with most bills outlawing the practice all together. Additionally, the Pennsylvania state auditor recommended the state legislature pass laws to rework the relationships with PBMs and change fee structures. Some states have used the regulatory process to stop spread pricing instead of waiting on legislation to pass.

A map of the United States.

In Ohio, where (reminder) PBMs charged Medicaid not only a nearly 9% spread across all drugs, but also a whopping 31% spread among generic drug prescriptions, the state’s Medicaid Director barred managed care plans from contracting with PBMs that engage in spread pricing. Instead, the state is allowing contracts that have “pass-through” pricing, where PBMs receive a flat administrative fee and can only bill the state for what they pay pharmacies. This rule went into effect in January of 2019, and we’re eagerly awaiting the data that comes from it. And to add to the drama, the Ohio Attorney General is now in a lawsuit with PBM OptumRx. The Attorney General claims OptumRx owes $16 million that they allegedly overcharged the state for generic drugs.  

In Kentucky, the February report recommended eight steps the state could take to curb spread pricing, including requiring an annual PBM transparency report, prohibiting PBMs from financial incentives in the forms of copayments and deductibles, and mandating pass-through contracting for all managed care organization and PBM contracts for pharmacy benefit services. Considering nearly one fourth of Kentucky’s population is receiving Medicaid or CHIP, it will be interesting to see how the state chooses to implement these recommendations. Kentucky has already initiated a probe into PBM pricing structure as of late May.

CMS Gets Involved

All the state issues with spread pricing caught the ears of two lawmakers, Senator Chuck Grassley from Iowa and Senator Ron Wyden from Oregon. In April, the two Senators asked the HHS Office of Inspector General to conduct a “federal-level analysis of PBM practices across state Medicaid programs.” They specifically asked HHS to consider spread pricing in their investigation. CMS responded in mid-May by issuing a guidance for states on how to reduce the cost of their prescription drugs by eliminating spread pricing. CMS noted that some managed care organizations are not accurately reporting spread pricing from PBMs. We’re happy that the guidance will require more accurate reporting, which will likely uncover some disturbing trends and force states to act.