OPA leads the charge on Medicaid managed care drug spending reform

For more than two years, the Ohio Pharmacists Association (OPA) has been hearing from members of erratic generic drug reimbursements from Ohio's Medicaid managed care organization (MCO) pharmacy benefit managers (PBMs). Pharmacists have reported deep, unsustainable drops in gross margins on medications dispensed to Medicaid MCO patients, and in certain time frames throughout the year, reimbursements for a majority of generic medications actually fell well below the pharmacy's cost to acquire the drugs.

The results of these cuts have been devastating to Ohio pharmacies. Over a two-year span, Ohio lost a net of more than 165 community pharmacies - the sharpest decline ever recorded. The Dayton Daily News covered the ongoing problem in late summer 2017: "With small pharmacies disappearing, Medicaid cuts seen as culprit."

Despite over a year of working to address these issues directly with the Ohio Department of Medicaid, there has been promising dialogue, but little substantive action to address the problem (in fact, the MCO PBMs only lowered reimbursement as we worked with the Department), and thus, we have decided to move to the legislature to force the issue.

As pharmacies (big and small) continue to report Medicaid MCO reimbursement rates that are completely out of line with the rest of the marketplace, OPA has engaged Rep. Scott Lipps (R-Franklin) and Rep. Kyle Koehler (R-Springfield) on their newly-introduced legislation, HB 465, to cut out the middleman and move Medicaid drug benefits back to the fee-for-service system.

Throughout the halls of the Statehouse; lobbyists and lawmakers are buzzing over the introduction of the bill, "a shot across the bow" to our broken, dysfunctional Medicaid managed care system. Pharmacists continue to report staggering losses when dispensing medications to Medicaid patients — most recently on Tamiflu prescriptions.

The impact has been substantial. In recent months, more pharmacies have decreased support hours, laid off staff, or closed their doors for good.

But here's the kicker. As pharmacies have reported gross margin declines of 60-80% in the last two years within the Medicaid MCO space, generic drug prices have also plummeted significantly in that same time (see here and here). Given the pharmacy cuts, along with the fact that generic drugs account for about 80% of all the drugs dispensed to Medicaid patients, you'd think that overall state spending on prescription drugs would be down considerably. It hasn't; it has increased by nearly 20% in two years (see slide 14).

Sounds like we have a middleman problem.

HB 465 would work to solve that problem: cut out the middleman, save taxpayer money, cover pharmacy dispensing costs, and restore transparency and predictability in the pharmacy marketplace.

With pharmacies continuing to report unprecedented losses in the Medicaid managed care program, and recent reports of alleged 'squeeze and buy' tactics driving pharmacies out of the Ohio market, we must get our Medicaid program back on track. To learn more about what's happening in the marketplace, read the American Prospect piece, "Abusing drugs: How CVS uses its market power to destroy competing independent pharmacies."

Let's be clear. The anti-competitive nature of these cuts, and the MCO pharmacy program as a whole, threatens every community pharmacy practice (big or small) in Ohio, which in turns threatens patient choice and access.

With HB 465, pharmacy spending and reimbursement would be transparent, predictable, and most importantly, they would cover the cost of actually providing the service.

Thanks to Rep. Hambley, Rep. Thompson, Rep. Riedel, Rep. Vitale, Rep. Smith, Rep. Retherford, Rep. Hill, Rep. Johnson, Rep. Roegner, Rep. Scherer, Rep. Becker, Rep. DeVitis, Rep. Butler, and Rep. Perales for serving as lead co-sponsors on the bill!

For further details on the legislation, MCO reimbursements, see below.

What's the cost to fill a prescription in Ohio?
Every two years, the state of Ohio requires every pharmacy by law to complete a biennial Cost of Dispensing survey from the Ohio Department of Medicaid. That lengthy survey requires pharmacists to disclose nearly every nook and cranny of their business to the state, and then Medicaid has used and aggregated that data to determine the average cost to fill a prescription in our state. Historically, that number has increased over time, yet has never been reflected in the actual dispensing fees paid to pharmacies. For example, the 2014 Cost of Dispensing survey found that the average cost to fill a prescription was $9.22. The dispensing fee at that time was $1.80 - second lowest in the country.

Now obviously, a $1.80 margin would put many pharmacies out of business, but pharmacy reimbursement comes in two parts: ingredient cost (the cost of the drug) and professional dispensing fee (the cost of the prescription filling service). So while the $1.80 was low, like many other Medicaid programs, they tended to reimburse the ingredient cost a little bit higher than acquisition cost to alleviate some of the losses. Fast forward to today, and the 2016 survey showed that the cost fill a prescription had increased to an average of $10.49.

Because pharmacy dispensing fees are now determined in administrative rule (rather than through the legislature), most lawmakers aren't aware that Medicaid fee-for-service moved to a tiered dispensing fee model to better reflect economies of scale and buying power that larger pharmacies have over smaller ones. When splitting up pharmacies based upon volume, Medicaid found that the average cost to fill a prescription varied greatly from a small to a large pharmacy. In an effort to reduce overall costs to the Department and to better reflect the true cost to dispense for pharmacies, Medicaid moved to have the fee structure altered to reflect the inherent realities of the pharmacy market. The differentials between each pharmacy size are reflected below, and ultimately, Medicaid advanced rules to reflect these numbers into their fee structure for pharmacies:

Pharmacy costs are increasing, but are Medicaid reimbursements keeping up?
Under the tiered fee-for-service model that was advanced through rule and is currently in place, Medicaid projected significant savings once the ingredient cost cuts are factored in (Medicaid is using National Average Drug Acquisition Cost - NADAC - to determine ingredient cost now, which is largely considered the lowest floor for ingredient cost reimbursement). When both pharmacy reimbursement changes (increased dispensing fee and the NADAC ingredient cost cuts) were factored in, Medicaid projected nearly $13 million in net savings for the fee-for-service program (phrased a different way, $13 million cut for pharmacies).

So while the cost to fill a prescription has increased by more than a dollar on average in the last couple years, Ohio Medicaid fee-for-service program cut their net reimbursement by $10-13 million in the budget - all while the Board of Pharmacy increased license fees and regulatory requirements.

At the time, we felt it would be disingenuous to oppose a ~$10.49 margin on prescriptions in the fee-for-service program, when in fact it is the reimbursements within the Medicaid managed care programs that have decimated pharmacies over the course of the last two years.

Just as we warned back when Medicaid carved in pharmacy into managed care years ago, the costs and risks associated with prescription drug coverage within the Medicaid program have been shifted to the backs of community pharmacists across the state of Ohio. The reimbursements have gotten so bad over the last two years, that now Medicaid's MCOs are by far the worst payors in the marketplace, with pharmacies reporting wildly unpredictable margins that are completely detached from nearly every other plan in the market.

What are pharmacy reimbursements in Medicaid managed care vs all other plans?
Catching trends in reimbursement changes is not as easy as you might think. Claims are paid by different plans & PBMs at different speeds and in different ways, and often there could be differences between how reimbursements occur even within the same plan. Reimbursements can be so complicated, that OPA has found an emerging vendor class in the pharmacy space - forensic accountants. Many pharmacies must now seek out professional expertise just to ensure the inputs and outputs match up on the balance sheet, as a result of opaque pricing models used by PBMs.

Because of the complexity in reimbursement, not all pharmacies have a great sense of what specific plans are doing at any given time. So as the calls began pouring into our office in mid-2016 about substantial losses incurred within the managed care world, we began to work with pharmacies to get a better sense just how bad the problem was. In speaking with members at some of the largest pharmacy chains in the country, hospital pharmacies, and independent pharmacies, the message became one big repetitive echo: "In 2016, the bottom fell out in pharmacy reimbursements within managed care, and neither the plans, nor their PBMs, had any real explanation for why and how it happened. It then happened again in fall of 2017"

As pharmacies explained to us, contract terms never changed, but reimbursements did - significantly.

For example, several pharmacies communicated to OPA that reimbursements began falling well below what Medicaid had defined as the break-even point for those pharmacies. As explained above, Medicaid determined that in order for a small pharmacy to just break even, they need to average more than $13 per prescription in margin (revenue beyond the reimbursement for the ingredient cost).  Despite issues with some outlier plans and pharmacy benefit managers (PBMs) operating in the private sector, when it comes to all plans besides Medicaid MCOs, pharmacies saw two things generally happen from 2016 to today: 1) Pharmacies consistently maintained break-even points or better; and 2) Net margins generally trended with the pharmacy's ingredient cost, so when prices dropped, reimbursements dropped, and vice versa. This is good: the margins are fairly predictable, and the pharmacy made just enough for a small profit.

In a majority of non-MCO plans, from a margin perspective, pharmacies are generally heavily incentivized to dispense more brand name drugs. However these warped incentives are even more dramatic in the Medicaid MCO spaces, where pharmacies are far more incentivized to dispense brand name products than generic. Of course, this means that pharmacies are losing considerable money on generic prescriptions through the Medicaid MCOs, and have to rely on inflated brand name reimbursements in order to keep the lights on and continue serving Medicaid patients. A warped incentive, for sure.

The losses were so dramatic in the MCO generic drug space that some pharmacies reported net reimbursements in the negative in summer 2016 and fall 2017, meaning that not only did they not get paid for the service, but they lost money on the drug cost as well. The margins within the managed care program not only dipped by nearly 90 percent for pharmacies over a 6-month stretch in 2016, but pharmacies reported that the trends seen in all other plans had no resemblance to what occurred in managed care. What occurred in managed care in 2016, and what is still occurring today, is completely removed from where the rest of the market is.

What's been the net effect to pharmacies serving Medicaid MCO patients?
When further digging into the Medicaid MCO pharmacy numbers, several things jump out. Generally speaking, from 2016 to today, Medicaid has not paid much less in drug costs versus what they paid in 2015. So while pharmacies saw cuts as deep as 90+% in summer 2016 and fall 2017, was Medicaid seeing sharp reductions in drug spend? The answer is "no." Which begs the question of where all that taxpayer money ended up going?

In 2017, the state of Louisiana asked the same question of their Medicaid program, and after digging deep into the issue, the findings were shocking. In Louisiana, which has less than half of the number of Medicaid beneficiaries than Ohio, an independent task force found that Medicaid MCO PBMs were responsible for at least $42 million in inflated (money pocketed by the PBM as "spread," the difference between what the PBM charges versus what is actually paid to the pharmacy) costs to the Medicaid program. Extrapolated to Ohio Medicaid, these numbers would approach nearly $100 million in our state.

Besides resulting in massive cuts in pharmacy staffing spend in 2016 and now in 2017, this problem has occurred during a time when Ohio saw the steepest drop in pharmacies in decades. From 2015 to 2017, Ohio lost a net of 164 community pharmacies, and as reimbursements within the program have continued down a negative path, we know of other pending closures that are in progress. Further alarming is the ramped-up push of PBM-owned pharmacy chains buying and subsequently closing their competitor pharmacies. A January report in The Capitol Forum allege 'squeze and buy' tactics that demand the attention of state insurance regulators, state attorney generals, and the Federal Trade Commission. For pharmacies operating in high-Medicaid areas, the problem is exacerbated, which increases the financial pressure on those pharmacies.

What needs to be done?
As mentioned above, every two years Ohio Medicaid determines what the average cost to fill a prescription is in our state. Between utilizing NADAC to estimate true ingredient cost, plus the professional fee that is set by using the survey results, the Ohio Medicaid fee-for-service program has found a way to bring pharmacies as close to a break-even point as possible, using independently created, transparent means - without the need for high-priced middlemen that are headquartered outside Ohio.

Even though it should not be unreasonable to expect businesses to make some level of profit when providing service to our state, we understand the pressures of the Medicaid program, and at this point, pharmacies are pleading just to find a break-even point. Through HB 465, we are currently working to bring prescription drug reimbursements back under the fee-for-service umbrella, which would make prescription drug transactions transparent, give Medicaid maximum negotiating power with pharmaceutical companies, cut unnecessary waste, and essentially guarantee that the cost of filling a prescription is covered for pharmacies.

Get pharmacy spending under better control, and keep local Medicaid pharmacy services alive
As many of our pharmacist members live locally, buy locally, hire locally, and pay taxes locally, they ultimately pay into the system that has now taken that money and lined the pockets of competitors (PBM-affiliated pharmacies) at their own expense. This is not about propping up pharmacies; it's about not taking advantage of them.

The managed care model was supposed to be one built on competition between plans to achieve better outcomes and lower costs. Prescription drug spending continues to be a major cost driver for the program, and at a time when local pharmacies saw their MCO margins slashed by more than half over the last two years, Medicaid and taxpayers have not seen the savings on their end. Perhaps part of the reason is that when it comes to pharmacy benefits, the MCOs have sent a signal through their actions that they'd rather not compete against one another within that sector of business. There are two PBMs that are servicing the entire MCO program, with most of the plans using the same PBM.

From our vantage point, MCOs and PBMs have benefited from the current Medicaid pharmacy model, but pharmacies, communities, and taxpayers have received the short end of the stick. As mentioned above, Ohio lost more than 165 pharmacies in the last two years, and our discussions with members lead us to believe more are on the way - especially in high Medicaid areas. Our pharmacies have reported that the Medicaid MCO PBMs are paying well below the break-even point for pharmacies, thus threatening the viability of those pharmacies, but also their ability to provide services safely and better monitor and prevent diversion and medication misuse.

The state and insurers continue to raise the cost to provide pharmacy services - we are simply requesting that Medicaid reimbursements reflect those realities.

OPA thanks Reps. Lipps & Koehler for their leadership, and we call on the legislature to act on HB 465 to restore objectivity and sanity into the Medicaid managed care pharmacy space.