A new audit from the Oregon secretary of state’s office found that the current health care structure for Medicaid pharmacy benefit managers lacks transparency and is too complex to properly measure its value. Pharmacy benefit managers are the go-between for drug manufacturers and wholesalers. They are responsible for paying and processing prescription drug claims, creating preferred drug lists, negotiating on behalf of pharmacies and more. Ian Green is the audit manager for the secretary of state’s audits division. He joins us to share more on what his office found and the changes they’re recommending.
Note: This transcript was computer generated and edited by a volunteer.
Dave Miller: From the Gert Boyle Studio at OPB, this is Think Out Loud. I’m Dave Miller. Pharmacy benefit managers, or PBMs, play a huge role in the complicated patchwork system of prescription drugs in this country. They’re like middlemen between drug manufacturers and wholesalers. They’re responsible for paying and processing for prescription drug claims, creating preferred drug lists and negotiating on behalf of pharmacies. A new audit from the Oregon secretary of state’s office found that Oregon’s system of regulating pharmacy benefit managers for the Oregon Health Plan, or Medicaid, lacks transparency and is causing problems for patients and independent pharmacies. Ian Green is an audit manager for the secretary of state audits division, and he joins us once again. Welcome back to the show.
Ian Green: It’s always a pleasure to be here, Dave.
Miller: What exactly do pharmacy benefit managers do?
Green: Pharmacy benefit managers are a middleman between the drug manufacturers and wholesalers and the insurance companies and the independent and national chain pharmacies in the state. So they negotiate contracts with drug manufacturers for how much prices will be for certain drugs. They’ll negotiate reimbursement rates with insurance providers and pharmacies. Over time, they’ve really evolved from this claims processing company to really this vertically integrated component of our health care system where they operate pharmacies, they operate doctors, they operate pharmacy benefit managers and mail-order pharmacies and a whole slew of other services in our health care sector.
Miller: Can you give us just a basic understanding of how big a role they play? I mean, in terms of the prescriptions that people are getting from the doctors and filling at a pharmacy, what’s the likelihood that they’re going through one of these PBMs?
Green: If they’re on the Medicaid program here in the state, most of the prescriptions are filled through a pharmacy benefit manager, which is a subcontractor of coordinated care organizations. On the commercial side of the market, you see a very similar market share for these pharmacy benefit managers. We highlight in our audit report that three companies control 80% of this market.
Miller: Why has it gotten this way? I mean, we’ll get to what the audit found, but why is it that pharmacy benefit managers have become such a gigantic player? I guess I’m just wondering why we need them.
Green: Well, I think that’s an interesting question, Dave. If you look at other advanced economies around the world, they don’t use pharmacy benefit managers. It’s kind of a unique thing in our U.S. health care system.
Miller: What specifically did you look into in this audit?
Green: One of the things we really were trying to identify is what value pharmacy benefit managers provide to the State of Oregon through the Medicaid program. Our key finding was there is limited oversight and regulation of these entities. There is limited transparency and accountability. It’s a very opaque system that is really critical to everybody’s health care.
Miller: What is the relationship between these pharmacy benefit managers and the coordinated care organizations – these regional entities that, as of about 10 years ago or so, became the system for the Oregon Health Plan, the system for Oregon’s version of Medicaid? What’s their relationship to PBMs?
Green: The 16 coordinated care organizations, or CCOs, in the state operate with six different pharmacy benefit managers, but they each have their own contract. And those pharmacy benefit managers, as you mentioned, control that preferred drug list. That’s the list of medications that Medicaid patients have access to. One of the really critical findings that we had in our audit is that there are different lists for each of the CCOs. Those can change monthly. So people can lose access to the medications they have. Suppose, for example, somebody lives in Coos Bay, and they receive a blood pressure medication that works really well for them. It was prescribed by their doctor; it’s been monitored. Now they move to Portland. They have a different CCO, a different PBM and a different preferred drug list. They have to now get a new medication, go through a process known as step therapy to see if that other medication that’s on their preferred drug list works for them. It may or may not. And then they need to work with their provider to get a prior authorization to go back to their old medication. So it has real world impacts on the people of Oregon.
Miller: What was the thinking behind giving CCOs that much control? I mean, it seems like this is an unintended consequence of what was pitched as a good idea, right? Having these sort of quasi-independent CCOs that could overall manage, holistically, the health of their patients in every way. If you do that and if they’re independent to that extent, do they have to also control the way they manage prescription drugs?
Green: One of our key recommendations out of our audit was to move to a single PBM model, where you don’t have different contracts with each of the individual CCOs. The Oregon Health Authority would establish a single preferred drug list for the state through a single PBM and that would provide better access to care and medicine for the people of Oregon.
Miller: One piece of this is access. Another huge piece is cost. If there is just one contract, would economies of scale mean that Oregonians or the state of Oregon were paying less for prescription drugs?
Green: Yes. A number of other audits in other states have identified hundreds of millions of dollars in savings for moving to a single PBM model. So there’s economies of scale and efficiency. It’s also easier to regulate and oversee. Right now, the Oregon Health Authority has to manage 16 different contracts across six PBMs. It’s very difficult, especially when those preferred drug lists change on a monthly basis. If we had a single PBM and a single preferred drug list, it would be so much easier for the Health Authority to ensure that they’re providing value to Medicaid patients.
Miller: That would provide a lot more clarity and standardization for patients. That alone doesn’t seem like it would provide the transparency and the lack of opaqueness that you mentioned earlier. So, first of all, how does that become apparent? I mean, what are the things that you wish you knew about the way prescription drugs are managed for patients on the Oregon Health Plan? What simply don’t you know?
Green: One of the challenges we had with this audit is there’s a lot of proprietary deals between the pharmacy benefit managers and different entities, whether they’re insurance companies or drug manufacturers. That can really enable them to take advantage of their market power and their share. One of the things that we highlight in the audit report is this practice known as spread pricing, where the PBM will negotiate a reimbursement rate with the insurance provider or the CCO and then they’ll go and negotiate a different reimbursement rate with the pharmacy. So, say they get paid $100 from the insurance company and then they go to the pharmacy and say we’re gonna pay you $50. They get to pocket that $50. Right now, the state doesn’t have great detail and insight into how those different pricing mechanisms operate.
Miller: Is that different than the way PBMs are regulated in other states?
Green: It does differ. A number of other states have really leaned into increasing transparency and accountability around pharmacy benefit managers, both in the Medicaid program and in the commercial marketplace. We highlight a number of those practices in our audit report, and we were really pleased this past legislative session that Representative Nathanson and other legislators really focused on addressing some of those issues. One specific one they dealt with was this practice that PBMs would claw back reimbursements from pharmacies on a technicality – where a pharmacy was expecting $100 payment, and they didn’t file the right paperwork and then all of a sudden it’s reduced to $10. And they were losing tremendous amounts of money.
Miller: Just to be clear, you only focused on PBMs and this public market and Medicaid? So not at all the commercial market?
Green: That is correct. There’s a lot of similarities and insights that can be gained from our audit for the commercial marketplace. But in order to limit the scope of our work, we looked solely at the Oregon Health Plan and the Medicaid program.
Miller: You’ve singled out independent pharmacies as being particularly challenged by the current situation with the Oregon Health Plan. First of all, what is an independent pharmacy?
Green: An independent pharmacy is a small, local, community pharmacy in that it is not operated by a national chain. There’s a number of them in rural communities, and they’re really critical access points for our health care system. For example, in John Day, there’s one pharmacy. If that closed because of some of these predatory business practices from PBMs, patients in that community would have to drive farther to get access to their medications. Then the other pharmacies in that area would be unduly burdened by that increase in workload, and everybody would suffer from longer waits for their prescription drugs.
Miller: I should say what you’re talking about there is, they’re not sort of academic just imaginings. We had a conversation last year about very long waits when a pharmacy in one rural area closed and serious fears for patients in those areas. Well, so what are the ways in which independent pharmacies are being harmed right now by PBMs?
Green: One of the critical things that we found in our data analysis was variance in reimbursement rates. The same drug could be reimbursed to one pharmacy with a $50 profit and for another pharmacy a $50 loss. When you look at some of these medications – there’s a particular heart medicine that’s out there that the national pharmacies and the specialty mail-order pharmacies earn several dollars in profit for each prescription that’s filled, and the local independent pharmacies lose several dollars for each prescription filled. And those national chains and those mail-order and specialty pharmacies are generally controlled and owned by pharmacy benefit managers.
Miller: That’s a key point here. You mean they’re actually the same company? PBMs and large retail pharmacy chains have the same parent company? They are the same?
Green: In many instances, yes. We highlight an example in our audit report with CVS. They operate an insurance company. They operate the CVS pharmacies. They operate CVS medical provider clinics in those pharmacies as well as a whole host of other health care services.
Miller: If this is the broader national landscape, then how much of a difference can better regulation at the state level actually make?
Green: What we’ve seen in other states is quite a bit of difference that can be made. There’s also some efforts at the national level. Senator Wyden in particular, is looking at regulating pharmacy benefit managers at a nationwide level.
Miller: So, what are the best practices that you’ve seen? You mentioned one change that you’d like to see: all of the – 16 is it? – coordinated care organizations, instead of negotiating individually with pharmacy benefit managers, there would be one statewide negotiation. What other changes are you calling for?
Green: There’s a number of practices out there. One of the ones we highlight is this concept of reverse auction to identify which pharmacy benefit manager to select. That’s a practice where companies will offer up their lowest bid for a particular good or service that’s out there. Another practice is eliminating that spread pricing…
Miller: Wait, meaning that there would be different pharmacy benefit managers potentially for different medications?
Green: No no…
Miller: Or still it’s just who can give us the best overall price?
Green: Who could give us the best overall price. So, rather than a regular auction where you’re bidding up prices, a reverse auction is who will do it for the lowest price.
Miller: I mean, isn’t that the way government normally bids out requests for proposals? Who can build this building for the lowest price? Ideally? [laughing] Please say yes.
Green: Yeah… It’s a little more complex than that. We do have various contracting practices that try to identify the lowest price, but they don’t all operate under a reverse auction model.
Miller: OK, so that’s one. That’s a way to hopefully get the best price for these services. What else?
Green: Increasing the transparency of these programs, more reporting on what the specific rebates that these companies get from drug manufacturers or insurance companies. That’s one area that you can improve…
Miller: And that’s something that they have agreed to in other states? As opposed to saying these are trade secrets; we don’t have to and we will not give you this information?
Green: Other states have adopted those practices for sure. I think it’s more of the legislatures in those states determining what the appropriate disclosures are.
Miller: My understanding is that for all of your recommendations, whether it’s OHA or others, the executive branch has said: Yes, we agree with these recommendations. We will pursue these.
Green: Yeah, the Oregon Health Authority agreed with our recommendations. One of them that we haven’t talked about yet is improving their contracting practices in contract administration. There’s already tools in their tool kit to help better manage pharmacy benefit managers in the state, and they should leverage those opportunities that they already have at their disposal.
Miller: The audit states that PBM reforms in various states have been a bipartisan policy effort. Do you see an appetite for bipartisan support for legislative changes here in Oregon?
Green: Based on conversations I’ve had with legislators as we brief them on the status of this report, I think there are opportunities for sure. I think we all agree that the people of Oregon deserve fair and equal access to pharmacies and prescription drugs.
Miller: You noted that a lot of the problems that we’re talking about that are specific to the Oregon Health Plan – whether it’s patients on the Oregon Health Plan or independent pharmacies that they may go to – that they’re not that different from some of the pharmacy benefit manager related problems for the rest of the market, for the private market. The reforms that you’re talking about, would they actually impact the private market itself or would there have to be separate reforms for the rest of prescription drugs in this state?
Green: It really depends on how the legislature determines to implement some of our recommendations. One of the ones that gets kind of technical is there’s a definition of who is regulated by the Department of Consumer and Business Services in this state, for pharmacy benefit managers. Currently Medicaid pharmacy benefit managers aren’t included in that definition. If that was added to state law, the Department of Consumer and Business Services would now have regulation and oversight of all pharmacy benefit managers in the state.
Miller: Just to go back to the beginning of our conversation. You noted that the U.S. is a real outlier in terms of even using these. We’re an outlier in a lot of ways in the developed countries in terms of the extent to which people have to pay for health care themselves, as opposed to it being provided in various ways by the government. But is there a world in which Oregon could just say we’re not going to participate in the use of this middleman - we will cut out pharmacy benefit managers and figure out a way to provide prescription drugs to people here without the middleman. Is that even a possibility?
Green: There are ways to do that system. Under the current Medicaid system, there are two distinct populations: one, managed care, which are operated under coordinated care organizations, and this other system known as the ‘open card,’ or fee-for-service. On the fee-for-service side, the Health Authority itself is paying for those drugs. They know all the detail – the pricing, the rebates and everything. So there is a way for the state to implement a fee-for-service model and cut out pharmacy benefit managers.
Miller: Is there enough data to know if that would actually be better for the state and better for patients? I mean, if we have an A-B comparison, can we know if one is better?
Green: There’s a number of pros and cons that we highlight in our audit report, with these various models, whether it’s a single PBM or a fee-for-service model. Policy makers really need to weigh what those pros and cons are and what makes the most sense. But certainly there’s opportunities to improve our existing system.
Miller: Ian Green, thanks very much.
Green: Thank you very much, Dave.
Miller: Ian Green is an audit manager for the Oregon secretary of state audits division. He joined us to talk about their latest audit, which looked into problems with how prescription drugs are managed for the Oregon Health Plan.
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