CMS issues guidance to cut spread pricing in Medicaid

CMS has issued a new guidance to limit the prevalence of spread pricing in Medicaid and the Children’s Health Insurance Program (CHIP) as part of a broader effort to lower prescription drug costs.

Spread pricing contributes to overspending on drugs and can allow pharmacy benefit managers (PBMs) to profit off taxpayers by charging health plans too much. PBMs that are contracted with health plans to manage prescription drug benefits keep a portion of the amount paid to them for prescription drugs instead of passing the full amount on to pharmacies, according to the agency.

“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,” CMS stated in its announcement.

The guidance specifically targets the calculation of a plan’s Medical Loss Ratio (MLR), or the percent of premium revenue that goes toward actual claims and activities that improve healthcare quality rather than administrative costs and profits. Currently, only 15% of revenue for the managed care plan can be for these latter costs, while 85% must be targeted for healthcare costs.

However, CMS sees spread pricing as a problem when managed care plans calculate and report MLRs, the agency said.

The guidance comes after a damning report from earlier this year revealed pharmacy costs are the fastest growing item in the state Medicaid budget in Kentucky, with spread pricing contributing to nearly $124 million of spending kept by PBMs and not paid to pharmacies in 2018. The report also found spread pricing had increased 3.5% from 2017 to 2018.

Spread pricing has reportedly occurred predominantly for generic prescriptions, which PBMs can reimburse on lower benchmarks than those used for Medicaid and CHIP managed care plans.

“The market for prescription drugs is convoluted and opaque,” CMS Administrator Seema Verma said in a statement. “States are increasingly reporting instances of spread pricing in Medicaid, including cases in Ohio and Texas, and I am concerned that spread pricing is inflating prescription drug costs that are borne by beneficiaries and by taxpayers. Today’s guidance will ensure that health plans monitor spread pricing in Medicaid appropriately. PBMs cannot use spread pricing to upcharge health plans and increase costs for states––spread pricing must be monitored and accounted for, and not used to inflate profits.”

The new guidance expands the current regulations for Medicaid and CHIP managed care plans by including any price concession or discount received by the managed care plan or its PBM under the current exclusion of prescription drug rebates from the amount of actual claims costs when calculating an MLR.

In addition to this step, CMS is exploring other approaches to crack down on spread pricing, the agency stated.