The secret drug pricing system middlemen use to make millions

This week Bloomberg did a story, "The Secret Drug Pricing System Middlemen Use to Rake in Millions" on PBM spread pricing. It highlighted just how convoluted the current pharmacy payment system has become. Bottom line: Plan sponsors like federal and state governments (i.e., taxpayers) are spending lots of money on the spread.

Spread pricing is a practice that’s most common with generic drugs, which make up almost 90 percent of all prescriptions dispensed in the U.S. Generic pills often cost pennies on the dollar compared with brand-name versions, and promoting them has been the focus of U.S. efforts to keep drug costs under control—especially in insurance programs like Medicaid that provide care to millions of lower-income people.

Yet critics argue the practice of spread pricing may actually be propping up costs as middlemen divert fees and markups to themselves, undercutting the savings generics are supposed to offer.

Bloomberg's story highlighted pharmacist Mark Frahm, a community pharmacist from Ottumwa, Iowa, who provides services for the county jail. In the "legal notices" published by the local newspaper, Frahm noticed that what the jail was paying to the county's PBM (Caremark) for prescriptions was far different than what he was being paid.

From the Bloomberg story:

"As he compared the newspaper notice with his own records, and then with the county's, Frahm saw that for a bottle of generic antipsychotic pills, CVS had billed Wapello County $198.22. But South Side Drug was reimbursed just $5.73."

In an analysis of pharmacy and PBM markups in Medicaid plans around the country, Bloomberg found big spreads on dozens of drugs, and evidence that the spreads are growing. For many widely used generic drugs, state insurance plans are collectively paying millions of dollars in fees to private companies. More than 40% of the operating income for CVS comes from administering prescription drug benefits for companies and governments. Bloomberg examined the prices of 90 of the best-selling generic drugs used by Medicaid managed-care plans. Markups on these commonly prescribed generic drugs are growing, with huge markups on some well-known medicines.

Despite the pushback, critics of the industry don’t think that spread pricing will stop.

“The PBMs have found they can do it and get away with it,” says Stephen Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota. “The way that spread pricing is being done these days, generics don’t always save you money.”

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