PBMs May Be Able to Handle Pressure From State Medicaid Programs

By Leslie Small

As states take a hard look at how they can reduce prescription drug spending in their Medicaid programs, they’ve put an already heavily scrutinized type of organization in their crosshairs: PBMs.

Ohio, for example, is forcing PBMs to abandon their current "spread pricing" models — in which PBMs pocket the difference between the amount they reimburse a pharmacy for a drug and the (usually higher) amount they charge a plan sponsor. Instead, they'll move to a "pass-through" model, where PBMs will be paid an administrative fee by the Medicaid program and have to pay pharmacists the same amount that they bill the state for drugs, The Columbus Dispatch reported.

Most recently, Pennsylvania Auditor General Eugene DePasquale (D) released a report that advocates for legislation that would trade a spread-pricing model for a flat-fee model and allow the state's Medicaid program to directly manage its prescription drug benefits instead of contracting with managed care organizations.

It might seem as though PBMs are facing a considerable threat from these moves, but industry experts say they are likely to be able to adjust to states' changing preferences.

"I'd say that the PBMs' business model could definitely change if more payers move toward this pass-through pricing model, but it doesn't necessarily eliminate their role entirely," says Tiernan Meyer, a director at Avalere Health. States can often be strapped for resources, and having a contractor administer pharmacy benefits instead of using their own resources to do so, "can be useful," she adds.

What's more, "the PBMs are very much used to this from other contracts that they hold, and they can certainly make money in a transparent environment," says Robert Ferraro, R.Ph., a principal at the consulting firm Buck's national pharmacy practice. "I think they would prefer a traditional model where their revenue wasn't so easily identified by all their customers, but that doesn't mean they can't earn a very good living in a transparent or pass-through model."

A more transparent approach to PBM contracting also helps smaller PBMs compete with the likes of UnitedHealth Group's OptumRx, CVS Health Corp. and Cigna Corp.-owned Express Scripts Holding Co., because it simplifies the procurement process to an examination of administrative fees, he says.

From RADAR on Drug Benefits