Policy and Regulation News

CMS Addresses Prescription Drug Price Spreading Issues

The guidance requires Medicaid managed care plans to account for price spreading when calculating its medical claims spending.

price spreading

By Sara Heath

- New guidance from CMS addresses the issue of prescription drug price spreading and reiterates Medicaid and CHIP managed care program obligations to account for the practice when calculating certain expenditures.

Specifically, the guidance addresses the managed care program medical loss ratio (MLR), which is the proportion of premiums revenue that a health plans spends on medical claims as opposed to overhead, taxes, and other administrative costs.

CMS is working to tamp down on artificially high MLRs that do not take into account certain cost savings for prescription drugs. Prescription drug price spreading, for example, must be considered when calculating the MLR, CMS stated.

Price spreading occurs when a pharmacy benefits manager (PBM) keeps a certain amount of the price that a managed care plan pays for a prescription drug rather than passing along those savings to the pharmacy. This means there is a discrepancy between how much a PBM pays for a drug and how much the pharmacy is reimbursed for that drug, and that the PBM profits off of the sale of that drug.

When a managed care plan does not account for price spreading when calculating its MLR, that ratio will be inaccurately high.

If the PBM and managed care plan agree on a drug price of $50, and then the PBM sells the drug to the pharmacy for $40, the PBM will profit $10 while the managed care plan still reports a $50 drug cost.

This, in turn, racks up a higher bill for taxpayers who fund stated Medicaid programs.

CMS has some concerns about this process.

“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.”

This latest guidance does not change requirements for Medicaid and CHIP managed care programs, but rather clarifies and reiterates current regulations around calculating the MLR.

CMS currently requires Medicaid and CHIP managed care plans to account for any prescription drug rebates when it calculates its MLR. This means that the managed care plan would account for any cost savings, ensuring that the MLR is not “artificially inflated,” CMS said.

This most recent guidance asserts that price spreading is included in those rebates. Medicaid and CHIP managed care plans must account for any drug price rebate received by the plan for the PBM, regardless of who pays for that rebate.

This means that a managed care plan must report when a PBM saves costs when selling a prescription drug to a pharmacy. In the example above, the managed care plan will report a $40 expense for the drug when calculating its MLR, not the $50 expense.

Price spreading is most commonly reported with generic prescription drugs, CMS explained. States have expressed concern that PBMs are setting pharmacy prices based on lower benchmarks than they use to negotiate prices with Medicaid programs, ultimately shortchanging those pharmacies and health plans alike.

These concerns sparked the attention of CMS as well, leading to this latest guidance.