Report reveals drug middlemen snagged $124M in Kentucky

Drug middlemen gobbled up $123.5 million in hidden costs in Kentucky’s Medicaid program, according to a new report from the Kentucky’s Cabinet for Health and Family Services.

The finding comes at a time when pharmacy benefit managers (PBMs), often referred to as the industry’s middlemen, are coming under fire for their opaque practices. The Trump administration recently proposed eliminating rebates between drug manufacturers and PBMs altogether.

Within the state’s Medicaid budget, pharmacy costs are the fastest growing item, the report found, with the agencies having very little power to control the increases in pharmaceutical prices. Managed care organizations (MCOs) are tasked with administering pharmacy benefits through PBMs.

In 2018, PBMs were paid $957.7 million from the Department for Medicaid Services (DMS), $123.5 million of which was kept by the PBMs and not paid to pharmacies, the report found. In total, DMS spent 3.9 percent more on prescription benefits in 2018 than in 2017. The report looked at spread pricing, where the PBM charges the MCO an agreed price for prescription drugs, but the amount is different from what the PBM pays the pharmacy for the drugs. From 2017 to 2018, the spread increased 3.5 percent in the state, being the highest for retail-chain pharmacies and the lowest for common ownership pharmacies.

In the pricing model, PBMs receive payments from MCOs, beneficiaries who pay a copay, manufacturers and fees from pharmacies. PBMs then send reimbursements, counted as fees paid to the state and federal governments, when they receive negotiated payments for prescriptions. PBMs also reimburse MCOs with a portion of the rebates received from the drug manufacturers.

Under the current structure, some MCOs in the state are already thinking about changing the PBM relationship, such as changing PBMs, bringing the services in-house or other options, the report noted. DMS is actively looking at the relationships between MCOs and PBMs on the Medicaid program, but the overall impact “will need to be quantified,” the report read.

Other states, including Oklahoma, Ohio, Texas and West Virginia, have moved to regulate PBMs, with a focus on savings and new models. In Ohio, all PBM contracts were moved to a pass-through model instead of a spread pricing model after an auditor’s report found an average spread of 8.9 percent.

Based on the data in the report, DMS put forth several recommendations to “increase transparency, promote pharmacy sustainability and ultimately improve the care of Kentucky’s Medicaid population.”