Analysis of PBM spread pricing in New York Medicaid managed care

Spread pricing is a core component of the traditional pharmacy benefit manager (PBM) business model. In a spread transaction, PBMs generate revenue by charging the payer one price for a drug, paying a lesser amount to the pharmacy that dispenses the drug, and then retaining the difference. The PBM has separate contracts with the payer and the pharmacy that allow it to price the same claim differently, generating revenue from the spread. According to one of the largest PBMs in the market, CVS/Caremark, this model provides the payer “stability and certainty around drug costs” and funds “vitally important benefit management services… in lieu of the client paying a separate administrative fee.”

However, spread transactions are not transparent by nature. The PBM charges a payer a price for a drug that is neither stable or certain nor based on a prevailing market rate. The PBM’s payment to a pharmacy is based on proprietary pricing lists maintained by the PBM that do not have to cover the pharmacy’s operating costs and can change without notice. These types of transactions happen to be highly prevalent in Medicaid managed care, where the state’s contracting responsibilities with pharmacy providers are outsourced to managed care organizations (MCO).

Over the past year, the nature of spread transactions has drawn increasing attention from both pharmacies and lawmakers across the country. Spurred by the Ohio Auditor’s findings that Ohio Medicaid managed care paid $208 million in spread pricing on generic drug claims over a recent 12-month period ($6.14 per claim – 3-6 times higher than market-based PBM fees of $0.95 to $1.95 per claim), payers and providers in New York are now looking for insight into how much PBMs are claiming in spread revenue for the management of their program.

In 2017, we estimate that New York Medicaid managed care spent the most on generic drugs compared to all other state managed care programs, with nearly $1.3 billion spent ($6.7 billion combined for generic and brand name drugs). The large size of the program elicits the need to bring better understanding to the nature of spread pricing in New York.

This study was commissioned and funded by the Pharmacists Society of the State of New York (PSSNY) to estimate the nature and extent of spread pricing within the New York Medicaid managed care program. Further, the objectives are to explain the nature of a pharmacy transaction, illustrate how spread is impacting both payer and pharmacy, and estimate spread on generic drug claims using a limited, but robust, sample of pharmacy data.

To estimate the nature and extent of spread pricing in New York Medicaid managed care, we collected nearly two million prescription claims from pharmacies across New York. Of these claims, there were nearly 170,000 generic oral solid (e.g. tablets and capsules) prescriptions dispensed between January 1, 2016 and March 31, 2018. Based on this sample, pharmacy unit revenue was compared to publicly-available datasets from the Centers for Medicare & Medicaid Services (CMS) that measure state drug costs (State Utilization Data) and pharmacy acquisition cost (National Average Drug Acquisition Costs, or NADAC). For generic oral solid drugs in New York Medicaid managed care, the key findings related to PBM spread were:

In 2016, aggregate PBM spread was 10%
- In Q1 2016, there was no PBM spread
In Q4 2017, PBM spread was 39% of overall generic spend, or $5.62 per claim
Between April 1, 2017 and March 30, 2018, PBM spread was 24% of overall generic spend
- In comparison, Ohio’s Auditor found a 31% spread over this period on generic claims
Between Q1 2016 and Q4 2017, NY managed care PBMs cut pharmacy gross margin by 83%. This resulted in an average margin (relative to NADAC) of $0.53 per prescription for pharmacies – 5% of the state’s $10.08 per prescription cost to dispense in Medicaid Fee-for-Service
The data suggest that New York managed care PBMs are pricing most generic drugs below a pharmacy’s cost to dispense and potentially using these savings to subsidize spread pricing on the remaining generic drugs
- More than 50% of the PBM’s Q4 2017 spread came from just 6% of the dispensed generic drug claims

Additional findings of this study were:

In Q4 2017, 99% of all generic oral solid pharmacy claims generated a margin of less than $10 (cost to dispense) for the pharmacy
We found no evidence of a correlation between the change in pharmacy reimbursement and the change in pharmacy acquisition cost for Fidelis (PBM = CVS/Caremark) – the largest MCO in our study – raising questions on what is driving updates to the PBM’s proprietary pricing lists

We recommend further work to determine:

Whether managed care PBMs are consistently preferring drugs that will result in the lowest net cost for the state. In Q1 2018, we found that two highly dispensed HIV-1 treatment drugs were abruptly switched from brand to generic, potentially sacrificing sizable state/federal rebates
How managed care is accounting for PBM spread in the Medical Loss Ratio (MLR) calculation

A limitation of the study was the lack of publicly-available claim-level data for all NY Medicaid managed care claims. This constricted our ability to analyze the full population of claims to precisely calculate PBM spread in NY Medicaid managed care. This level of precision is only possible with a comprehensive audit commissioned by either the State Comptroller, Department of Health or other auditing authority. This study strives to evaluate pricing distortions in NY Medicaid managed care and estimate and visualize spread pricing using the data analytics techniques and assumptions described in detail throughout this report.

We highly recommend that the state of New York conduct a full audit of its managed care pharmacy program to confirm the findings of this study using a more comprehensive dataset.

We hope that this study will help advance New York’s insight into this opaque transaction and lead to productive discussions on ways to improve drug pricing transparency and spending prioritization within Medicaid managed care.

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