Bipartisan House Health Bill Includes Sound Medicaid Drug Pricing Provisions

A bipartisan health price transparency bill — The Lower Costs, More Transparency Act (H.R. 5378) — is scheduled to be considered on the House floor “on suspension” this week.  The bill includes two sound Medicaid provisions related to “spread pricing” in Medicaid managed care and to Medicaid pharmacy reimbursement, which are similar to those included in a bipartisan pharmacy benefits manager (PBM) bill reported out of the Senate Finance Committee in July.  According to the Congressional Budget Office, these two provisions would result in federal Medicaid savings of $1.1 billion over the next ten years.

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 issued 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 their MLRs, 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 better gauge whether or not 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 prohibition of spread pricing in Medicaid managed care included in the bipartisan House bill.

Under section 202(a) of The Lower Costs, More Transparency Act, in Medicaid managed care, payment for outpatient prescription drugs by a pharmacy benefit manager (PBM) or a managed care plan would be limited to the cost of the drug itself, known as the ingredient cost, and a professional dispensing fee.  Such payment would also have to be passed through in its entirety to the pharmacy or provider dispensing the drug.  In addition, federal regulations that currently apply to fee-for-service and state Medicaid programs overall, such as upper limits for multi-source drugs and a requirement that ingredient cost be based on the actual acquisition cost for the drug, would be explicitly extended to PBMs and Medicaid managed care plans (with an exception for certain drugs covered under the 340B drug discount program, subject to reimbursement limits and reporting requirements).  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.  The provision would take effect 18 months after enactment.  By barring spread pricing, the bill would result in federal and state Medicaid savings over time. 

Mandatory drug pricing surveys for Medicaid-participating pharmacies.  Medicaid pharmacy reimbursement consists of two parts: 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.

Under section 202(b) of The Lower Costs, More Transparency Act, state Medicaid programs would have to require that all participating retail community pharmacies — whether in managed care or in fee-for-service and whether the pharmacy is reimbursed by the state, a Medicaid managed care plan or a PBM — respond to the NADAC survey, if such pharmacies are included in the monthly survey’s representative sample of retail community pharmacies.  Information collected through the survey would be made publicly available, including the monthly response rate, the list of pharmacies not in compliance, the sampling frame and number of pharmacies surveyed and information on price concessions to pharmacies.  Pharmacy compliance would be enforced through penalties established by the Secretary of Health and Human Services (HHS) and the HHS Office of Inspector General.  In addition, the Secretary would be required to report to Congress about coverage and reimbursement related to specialty drugs, including the extent to which specialty drugs are captured in the NADAC survey and recommendations on whether specialty pharmacies should be included in the NADAC survey to accurately capture acquisition costs for drugs dispensed through specialty pharmacies.  The provision would be effective 18 months after enactment.

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 requirement would thus produce federal and state Medicaid prescription drug savings over time.

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