AMID growing attention being paid in Massachusetts to the high cost of prescription drugs, independent pharmacists are pointing a finger at a little known culprit: the middlemen who mediate between drug manufacturers, insurers, and pharmacies.
The independent pharmacists released a study Thursday arguing that a particular pricing practice used by pharmacy benefit managers, or PBMs, is unnecessarily driving up the cost of drugs by giving more money to the PBMs and less to the pharmacists, who have to cover the costs of dispensing the drug and counseling patients.
“It’s a very complicated system and a very perverse business model,” said Todd Brown, executive director of the Massachusetts Independent Pharmacists Association. “The business model for independent pharmacies is they don’t control the cost of the drug and they don’t control what they get paid by the insurance company.”
The question revolves around a practice called spread pricing, where the PBM charges insurers a set price for a drug, then pays the pharmacy a lower price and pockets the difference.
The other pricing model that can be used, which the pharmacists favor, is to charge the insurer and pharmacy the actual cost of the drug, then charge an administrative fee to the insurer (which is how the PBM profits) and pay a dispensing fee to the pharmacy.
The pricing model is negotiated between the PBM and the insurer, while pharmacists, particularly smaller ones, generally have little leverage in negotiating rates with the large PBMs. There are three major PBMs – CVS Caremark, Express Scripts, and Optum – that control most of the market.
Brown argued that spread pricing does not make sense for generic drugs, since prices generally decline over time and spread pricing ensures that savings get swallowed by the PBM, not passed on to the consumer or the pharmacy.
But the PBMs argue that spread pricing, what they call “risk mitigation pricing,” is a way to provide predictability in pricing for insurers (and employers who pay for the plans) in an environment where the cost of drugs constantly fluctuates. The price of generics can fluctuate weekly because there are multiple manufacturers and suppliers.
Greg Lopes, a spokesperson for the Pharmaceutical Care Management Association, a trade association representing pharmacy benefit managers, said other entities in the drug supply chain also use spread pricing, like hospitals and drug manufacturers. And it is the insurers, not the PBMs, who choose spread pricing contracts. The reason an insurer might choose a spread pricing plan is that different pharmacies pay different rates for the same drug, so a consistent price reimbursement insulates the insurer from losses if more customers go to pharmacies with lower reimbursement rates. The model also lets the insurer classify more of its spending as “drug costs” instead of “administrative costs,” since under state and federal law insurers are capped in how much they can spend on administration.
“PBMs constantly look at the marketplace and pricing for generics and establish benchmark acquisition prices in order to incentivize pharmacies to best manage their generic drug inventory and make sure our clients don’t overpay,” Lopes said.
The new report conducted by 3 Axis Advisors and commissioned by the Massachusetts Independent Pharmacists Association estimates that between mid-2017 and mid-2018, the average drug sold in Massachusetts had an ingredient cost of $11.19. The pharmacy received $4.16 and the PBM got $2.68, due to spread pricing. A year later, the drug ingredient cost was $9.24, with the pharmacist getting $2.88 and the PBM getting $4.06. Using a nationally established methodology, the cost Massachusetts pharmacies should get for dispensing medication is $10.02 above the price of the drug.
The pharmacy trade group extrapolates from the report that PBMs charged MassHealth an extra $25 million over the course of a year due to spread pricing.
While the report examines Medicaid data and reimbursement rates provided voluntarily from 43 independent pharmacists (data from private insurers, chain pharmacies, and PBMs is not publicly available), Antonio Ciaccia, co-founder of 3 Axis Advisors, said trends are likely similar across the system.
The report also identified a growing problem that the amount reimbursed to pharmacists in some cases is lower than the cost of the drug, so pharmacists lose money dispensing these drugs. This happens because PBMs pay a fixed amount for a large group of drugs, with some reimbursed above cost and others below cost. According to the analysis of the Medicaid data, 8 percent of drugs were reimbursed below cost in 2016, compared to 26 percent in 2019.
Mike Wilson, who runs Crawford Drug in Dorchester with his uncle, said drugstores like his have to accept the PBM contracts because so few companies dominate the market, and they have little leverage to negotiate higher prices. But rather than getting the $10 per drug that would cover all their costs, the pharmacy earns on average $2 to $4. “When you squeeze pharmacies so tightly, it inhibits our ability to do proper patient care,” Wilson said.
The data also have taxpayer implications if MassHealth is losing money to PBM pricing. Potentially, MassHealth could eliminate the use of PBMs – which are only used for some of its plans – and do the work of processing claims and negotiating prices itself.
The state’s Health Policy Commission in 2019 flagged the use of PBM spread pricing as a potential problem for MassHealth, and administration officials have made proposals seeking to increase PBM transparency. A spokesperson for MassHealth did not respond to a request for comment.
Ciaccia said some states have banned the use of spread pricing altogether. “It’s unnecessarily complex and unnecessarily opaque,” he said.