Sunshine in the Black Box of Pharmacy Benefits Management: Florida Medicaid Pharmacy Claims Analysis

“Managed care is designed to benefit those that control it, rather than those that only serve it.”

The Florida Pharmacy Association (FPA) and American Pharmacy Cooperative, Inc. (APCI) commissioned 3 Axis Advisors LLC to study the Florida Medicaid program with the initial intention of understanding the impact of spread pricing on Florida’s small community pharmacy providers. Our prior work has found strong evidence of spread pricing in Medicaid programs in New York, Illinois, and Michigan, while state government work in Ohio, Kentucky, Georgia, Virginia, and Maryland has definitively quantified spread in their state’s Medicaid programs as well. While we did not have all of the data required to perform an audit to completely pinpoint spread pricing in Florida Medicaid, it was the hope of FPA and APCI that we could perform a transparent assessment of spread in Florida, with the goal of providing any evidence to the state for it to research further.

As we started to gather data, we realized that Florida – owing to its laudable commitment to transparency – offered a unique opportunity to go well beyond spread pricing in our data analysis. We were able to obtain more than 350 million deidentified claims through a Freedom of Information Act Request to the Agency for Health Care Administration (AHCA), which gave us the most robust dataset to study how all funds related to outpatient prescription drugs flow through Medicaid. This dataset gave us the ability to definitively see what each managed care organization (MCO) reported paying for each drug, to each pharmacy. We could for the first time, fully analyze and disclose to the public the state’s view of who was collecting the funds that it was entrusting its MCOs to distribute to the pharmacy providers serving its Medicaid patients. Realizing this, we accepted this project with FPA and APCI with the agreement that the project would have a completely open-ended scope. Limiting the scope of our work to only an analysis of spread pricing would be a disservice to the learnings that could be gleaned from such a robust dataset and would be inconsistent with our mission of bringing better transparency to the very opaque manner in which the U.S. prescription drug supply chain operates.

Overall, our five-month exploration of Florida Medicaid claims data, which has produced this 200+ page document, leaves us with the following realization: The evolution of the prescription drug supply chain, which has undergone substantial vertical integration in recent years, puts the vertically integrated companies that control Medicaid benefits in the best position to thrive. Meanwhile, players across the supply chain that are not vertically integrated are put at a disadvantage. As such, an increasingly consolidated supply chain may be able to, in the near-term, deliver a less expensive “product” due to numerous service-line cross-subsidies. Florida has displayed this with razor thin MCO pharmacy margins ($2.72 per claim in 2018). But what is the long-term cost of this to the state?

Is it in the best interest of Medicaid to hand over prescription drug management to insurance companies that also own the PBM and pharmacy functions, without closely monitoring their interactions? Or should we return to the original benefit of the managed care model – where each function can, in an unconflicted manner, act as a check and balance on the other, forming a market-driven “invisible hand” that can competitively drive down costs without sacrificing service quality?

Our Florida claims analysis sheds light on some glaring structural concerns embedded at the core of all state managed care programs. We hope it is helpful in advancing the national dialogue towards creating the most pro-competitive Medicaid delivery system that creates the best value for our taxpayer dollars at the lowest long-term risk to our states and their beneficiaries.

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HIGHLIGHTS

As mentioned above, our previous work to date has highlighted drug pricing issues in other states related to spread pricing and the added costs it places on Medicaid programs. Despite one Florida MCO demonstrating large spreads of an estimated $8.27 per prescription in 2018, we are pleased to report that as of 2019, spread pricing appears to have been eliminated in Florida Medicaid managed care. As spread pricing is eliminated from more state programs, this report highlights how PBMs and MCOs pivot their pricing and management of pharmacy benefits in a post-spread world.
First, our analysis of MCO compliance with the state single Preferred Drug List (PDL) showed that some plans are performing better than others, with compliance ranging from 96% down to 83%. This non-compliance raises net drug costs to the state due to lost drug manufacturer rebates. We also found that 8% of drugs dispensed through managed care were not part of the Medicaid Drug Rebate Program, further adding excess costs to the state. That 8% rate was double the amount of the state FFS program. These inefficiencies could lead to more than $30 million of added annual costs to the Medicaid program.
Managed care plans have collectively cut their reported generic drug pharmacy margins to $2.78 per claim in 2019, which is 27% of a pharmacy’s break-even cost of dispensing.

We found that 50% of all the margin on generics was doled out on 9% of all the generic drugs (171 drugs). Of those “high margin” drugs, average pharmacy reimbursement margins were $93.84 per prescription vs $1.58 per prescription on all other generic drugs. The wild discrepancies in pharmacy margins from drug to drug are deserving of further scrutiny from the state, and regardless of PBM intent, these differential margins insert warped incentives into the pharmacy marketplace that prioritize some treatments over others, and thus, some patients over others.

High margin FL drug margin over NADAC.jpg

Within this analysis, we found 83 small pharmacies that were averaging below-cost reimbursements, highlighting the subjectivity of profitability across pharmacies. The data also suggests that high-Medicaid pharmacies that serve the most underserved parts of the state are facing the most difficult financial troubles.

Within the details of generic drugs, there were wild disparities in reported payments from pharmacy to pharmacy, and plan to plan – even plans sharing the same PBM. We found that while Staywell/WellCare was paying small pharmacies better than others, Sunshine/Centene was paying CVS pharmacies more than others. Both plans are managed by the PBM, CVS Caremark. Beyond the odd pricing behavior, the recent acquisition of WellCare by Centene could result in significant small pharmacy margin compression, further straining providers and adding risk to pharmacy access in Florida.

modeled 2019 pharamcy margin with Centene rates for Wellcare.jpg

CVS Caremark appears to be subjectively overcharging the state on certain dermatological products through Staywell/WellCare, but not through the other plans they manage. CVS’ overpayments drove some pharmacies to dispense more of the product, temporarily boosting pharmacy margins. One pharmacy dispensed so much calcipotriene cream that their profitability on that one drug equaled the overall Medicaid managed care generic profitability of 980 small pharmacies combined. It is our understanding from our channel checks that CVS Caremark may have clawed much of this excess money back retroactively via an obscure practice typically referred to as a generic effective rate “true-up” that the state neither sees, benefits from, nor includes in their future capitation rate calculations. This practice, and other forms of “clawbacks” vaguely defined in PBM contracts with pharmacies, can increase state Medicaid drug spending to the benefit of PBMs and MCOs. This report spends considerable time laying out exactly how PBMs are able to execute on such clawbacks to collect “spread” in a pass-through contract.

On the brand drug side, reported pharmacy margins went from $20.94/prescription in 2014 to $7.07/prescription in 2019 (non-340B). Claims dispensed at retail pharmacy groups are being reported at a weighted average margin of $2-4 per prescription. Meanwhile, claims dispensed at PBM/MCO-owned specialty pharmacies (e.g. Acaria, Exactus, Briova, Accredo) are being reported with a weighted average margin of up to $200 per prescription. We also identified growing trends of expensive brand prescriptions being steered to PBM/MCO-affiliated pharmacies, and once dispensed at those affiliated pharmacies, the claims appear to be more expensive than those filled at other pharmacies.

While the Florida’s Medicaid profit “pie” is shrinking, it is also getting redistributed to the pharmacies that handle of the bulk of Medicaid’s vastly more expensive specialty drugs. Despite only accounting for 0.4% of the prescription claim volume, specialty pharmacies affiliated with MCOs and/or PBMs captured 28% of the available pharmacy dispensing margin in 2018, suggesting the growing pressure on non-MCO/PBM-affiliated pharmacy providers, as well as the lack of incentives that exist for affiliated pharmacies to contain costs to the state on specialty drugs – the biggest cost driver in the state’s drug program.