Senate Finance Committee PBM Legislation Includes Sound Medicaid Drug Pricing Provisions

On July 26, 2023, on a 26-1 bipartisan vote, the Senate Finance Committee approved the Modernizing and Ensuring PBM Accountability Act.  The bill includes a number of  Medicare provisions related to pharmacy benefit managers (PBMs) and pharmacies but also includes two sound Medicaid provisions related to “spread pricing” in Medicaid managed care and to Medicaid pharmacy reimbursement.

Prohibition on Medicaid managed care spread pricing.  Like in Medicare and in private insurance, spread pricing is a serious problem in Medicaid managed care.  Many Medicaid managed care plans contract with PBMs to administer the pharmacy benefit for their enrollees.  But as states have discovered in recent years, some PBMs have been charging Medicaid managed care plans for pharmacy claims costs well in excess of the actual costs of reimbursing pharmacies for drugs dispensed to beneficiaries, net of any supplemental rebates the PBMs obtain from drug manufacturers.  The PBMs retain the difference, known as the “spread,” as profit.  That, in turn, can artificially inflate the capitation payments that states must pay managed care plans, resulting in higher overall federal and state Medicaid costs.  However, according to KFF and the preamble to a proposed rule from the Centers for Medicare and Medicaid Services (CMS), only 9 to 13 states have enacted legislation prohibiting spread pricing in Medicaid managed care.

Currently, there is no explicit federal prohibition against spread pricing in Medicaid managed care.  In 2019, CMS did issue a Center for Medicaid & CHIP Services (CMCS) Information Bulletin (known as a “CIB”) on May 15, 2019 which was intended to modestly reduce the inappropriate use of spread pricing in managed care.  That CIB required that any drug rebates received and accrued (whether by the plan itself or by a contracted PBM) must be deducted from incurred pharmacy claims for purposes of Medical Loss Ratio (MLR) calculations.  (The MLR is the share of plan payments that goes to enrollees’ claim costs, rather than for administrative costs and profit.)  The CIB stated that PBMs must report to managed care plans all revenue and expenditure information necessary for the plans to calculate its MLR, including accurate reporting of amounts paid to pharmacies minus any rebates.  The CIB better ensured that managed care plans’ MLR calculations reflect their net pharmacy costs even if the prescription drug benefit is administered by a contracted PBM.  By leveraging the MLR requirement to promote greater transparency in this manner, the CIB made it somewhat less likely that PBMs use spread pricing and thereby inflate federal and state Medicaid managed care costs (but did not outright prohibit spread pricing).

Moreover, as I have previously written, a recent CMS proposed rule related to the Medicaid Drug Rebate Program (MDRP) and other Medicaid drug pricing and coverage issues would build on the 2019 guidance by requiring Medicaid managed care plans to structure any contract with subcontractors (i.e., PBMs) for the delivery or administration of the covered outpatient drug benefit so that the subcontractors separately report out incurred claims (including reimbursement for the cost of the prescription drug itself, payments for other patient services and dispensing fees to pharmacies and other providers) and other administrative costs, fees and expenses of the subcontractor.  Essentially, by making PBMs break out their costs, the proposed rule would allow state Medicaid programs to have a better sense of whether spread pricing is occurring.  It would also likely result in more accurate calculation of plan MLRs, which could lower capitation rates to actuarially sound levels.  But even if finalized, the rule, in combination with the existing 2019 guidance, would still have only a modest impact in deterring spread pricing and as a result, it would be far less effective than the explicit, uniform prohibition of spread pricing in Medicaid managed care included in the Senate Finance Committee bill.

Under section 5 of the Modernizing and Ensuring PBM Accountability Act, in Medicaid managed care, PBMs would be subject to a mandatory “pass-through pricing model” under which they could only be reimbursed for the actual amount they pay pharmacies for Medicaid-covered outpatient prescription drugs — with all rebates paid by manufacturers also fully passed back to plans — and for administrative service fees.  Such administrative service fees would also be limited to the fair market value of administering the Medicaid drug benefit on behalf of managed care plans.  (There, however, would be some exceptions for certain entities participating in the 340B drug discount program.)  Any form of spread pricing that exceeds the amount paid to pharmacies or providers would be prohibited, enforced by a disallowance of federal Medicaid matching funds.  State Medicaid programs would also be prohibited from reimbursing managed care plans unless the contract between states and plans complied with these and other federal Medicaid drug rebate and prescription drug requirements.  The provision would take effect 18 months after enactment.  According to preliminary estimates from the Congressional Budget Office, this provision would produce federal Medicaid savings of $313 million over ten years. 

Mandatory drug pricing surveys for Medicaid-participating pharmacies.  Medicaid pharmacy reimbursement consists of two parts: the cost of the drug itself, known as the ingredient cost, and a professional dispensing fee.  Federal regulations require that state Medicaid programs base their ingredient cost payment methodology on “actual acquisition cost,” which is the price a pharmacy pays to acquire a drug dispensed to a Medicaid beneficiary.  State Medicaid programs can use federal pricing survey data as one source to determine this actual acquisition cost although states can also use their own pharmacy drug pricing surveys or other pricing benchmarks such as the Average Manufacturer Price.  The federal pricing data is collected through the ongoing, nationwide National Average Drug Acquisition Cost (NADAC) survey of retail community pharmacies, which is conducted by a vendor on behalf of CMS.

Retail community pharmacies, however, are not required to respond to the NADAC survey.  This may skew the results of the survey if respondents are not representative of pharmacies nationally.  For example, initial data from when the NADAC survey was first implemented indicated that larger chain pharmacies, who likely obtain their drugs at lower prices, were less likely to respond to the NADAC survey than smaller independent pharmacies, who likely obtain their drugs at higher prices.  That would likely have the effect of raising the NADAC price for a drug and lead to states setting higher reimbursement rates that benefit chain pharmacies and other large pharmacies (and offer them a higher margin) when such pharmacies dispense a prescription drug to a Medicaid beneficiary.

Similar to a provision included in the original House-passed Build Back Better reconciliation bill in November 2021, section 6 of the Modernizing and Ensuring PBM Accountability Act would require all Medicaid-participating retail community pharmacies to respond to the NADAC survey, if such pharmacies are included in the monthly survey’s representative sample of retail community pharmacies.  Information on national drug acquisition prices collected through the survey would be made publicly available, along with other specified information and information on price concessions to pharmacies.  Pharmacy compliance would be enforced through civil monetary penalties or full or partial suspension of Medicaid payments to pharmacies.  In addition, state Medicaid programs would be required to report additional information to CMS related to drug dispensing fees and Medicaid managed care payment rates to pharmacies.  The provision would be effective 18 months after enactment.

As a result, under the Senate Finance Committee bill, mandatory participation in the NADAC survey would better ensure a representative sample of pharmacies and a more accurate average acquisition cost for each drug.  Medicaid pharmacy reimbursement would thus likely be increasingly set at amounts that are more appropriately in line with pharmacies’ actual acquisition costs, especially for larger chain pharmacies.  The mandatory survey response provision would thus produce both federal and state Medicaid prescription drug savings over time.  According to preliminary estimates from the Congressional Budget Office, this provision would produce federal Medicaid savings of $722 million over ten years.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.