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Drug plan middle men under scrutiny

CVS Health profits have been spurred, in part, by its pharmacy benefit management side.MANDEL NGAN/AFP/GETTY IMAGES

They are the secret middlemen in the chain of rising prescription drug costs. Now there’s a substantial body of evidence that pharmacy benefit managers are costing public and private health insurance policies — and consumers — untold millions.

A new report from the state’s Health Policy Commission, the office charged with riding herd on health care costs, documents part of the problem. Its title, “Cracking Open the Black Box of Pharmacy Benefit Managers,” tells us much of what we know — or, frankly, what we don’t know — about the role these middlemen play and the pressing need to shine some light on that dark corner.


PBMs negotiate prices and rebates with drug companies on behalf of health plans. They work for both employer-sponsored plans and public payers like Medicaid. But they are compensated in one of two ways.

Under Medicaid fee-for-service plans, it’s simple: They get a flat fee per prescription to cover administrative costs.

However, under the increasingly popular managed-care plans (to which the state has been attempting to move more MassHealth recipients) and under employer-covered group plans, the PBMs are allowed to use “spread pricing.” In other words, they charge the payer — public or private — more than they pay to the pharmacy for the cost of the drug and pocket that difference.

“The extent to which PBMs profit from this practice, and on which drugs, remains largely hidden from payers and the public,” the commission report said.

But here’s what the commission did find out in its analysis of generic drug prices for the last quarter of 2018: Prices charged Medicaid managed-care organizations were higher than prices charged to fee-for-service plans (which, don’t forget, include that administrative flat fee) for 42 percent of the drugs surveyed — and by substantial amounts.


The report cited the antiviral medication Valganciclovir, which on average costs $1,134 more for each prescription filled for a managed-care organization than under fee-for-service plans. Buprenorphine-naloxone (Suboxone), used to treat opioid dependence, costs $83.70 more under a managed care plan — in the aggregate, costing $252,536 more for MassHealth clients than it should.

There is no denying that a real cost disparity exists — only the scope of it and the level of profits being amassed by pharmacy benefit managers remains a mystery. Governor Charlie Baker, the House, and the Senate, in their respective budgets, have all assumed that getting a handle on the problem could save the state $10 million in MassHealth drug costs. Baker’s budget calls for more transparency in contracts with PBMs and limits on their profit margins.

The Senate includes language directing the state auditor to “investigate and develop a report regarding methods for increasing transparency on pharmacy services provided by pharmacy benefit managers to Medicaid managed care organizations and Medicaid accountable care organizations.”

The commission notes in its report that several other states have also introduced legislation requiring PBMs to be licensed by the state and disclose information on pricing, rebates, and reimbursements to pharmacies. Ohio documented that PBM profits accounted for 31.4 percent — about $208 million — of generic drugs costs paid by Medicaid managed care organizations. It then moved to ban “spread pricing” in all Medicaid contracts — a model Massachusetts could certainly follow.

PBMs have long pointed to drug companies as the real source of price hikes — and pharmaceutical companies are now pointing right back. That explains why the head of the Massachusetts Biotechnology Council, Robert Coughlin, said in a statement, “There’s no doubt ‘spread pricing’ by PBMs in MassHealth’s managed care program is costing the state millions of dollars a year in excess expense in return for zero added value.”


That’s a case of pot-meet-kettle: Surely both drug companies and pharmaceutical middlemen contribute to the problem of spiraling drug costs.

Really, the state needs to crack down on both. If indeed PBMs are profiteering, they are doing so at the expense not just of MassHealth, but also of millions of Massachusetts consumers. It’s high time for the Legislature to blow the lid off that “black box” on behalf of all of them.