3 things you need to know about drug pricing to understand this week’s Medicaid changes

This week, Ohio Medicaid announced it will be changing the way its managed care plans contract with pharmacy benefit managers to administer prescription benefits.

>> READ THE STORY HERE: Ohio Medicaid to cancel pharmacy middlemen contracts

The change was announced as Auditor of State Dave Yost prepared to release a report, out today, that shows PBMs charged Ohio a 31 percent markup on some drugs or more than $224.8 million in a one-year period through a controversial "spread" pricing model.

This news can be difficult to understand if you don’t know how Medicaid prescription benefits currently work. The Dayton Daily News has been covering the complex system of drug pricing and efforts to make it more transparent for more than a year.

Here are three things you need to know to better understand this week’s news about Medicaid changes:

1. What is a PBM?

Pharmacy benefit managers — or PBMs — are the middlemen between the pharmacy and your health plan and they have influence on many aspects of the consumer prescription experience. 

They determine which drugs are covered or excluded by health plans, which pharmacies patients can use, and play a major role in determining the price everyone along the supply chain will pay.

Health plan sponsors have been contracting with pharmacy benefit managers since the 1970s to run their prescription benefits. They started out as just claims processors, but now wield much more power.


PBMs use the millions of patients they represent as leverage to negotiate rebates from drug makers. If a drug maker agrees to give a big rebate, their drug gets better placement on the formulary that says which drugs are covered by the health plan and which are not.

In this way the PBM industry says it saves employers about 30 percent annually on their prescription drug costs.

The five Ohio Medicaid managed care plans — CareSource is the largest — use PBMs just like private insurance. Four out of the five use CVS Caremark.

>> READ MORE ON PBMs: Who’s really controlling your drug prices

2. How spread pricing impacts your local pharmacy

The difference between what the state’s managed care plans pay the PBMs for prescriptions and what the PBMs pay pharmacies to dispense the drugs is called the “spread” and was the subject of Yost’s review.

For several years now, Ohio pharmacists say they’ve seen their reimbursements from Medicaid plans get smaller.

One Dayton pharmacist said he sometimes gets reimbursed just 15 cents for a drug that cost him $8.50 to dispense.

While pharmacists were taking a loss, the PBMs were keeping millions paid to them from Medicaid managed care plans, according to Yost’s report.

Some independent pharmacies said last year that unless the reimbursement levels increased they could be forced to stop accepting Medicaid customers or shut down completely, leaving consumers with fewer options of where to shop.

The changes announced this week  mean pharmacists will get reimbursed the full amount that the patient’s Medicaid plan pays the PBM.

>> READ MORE ABOUT THE IMPACT ON PHARMACIES HERE:  With small pharmacies disappearing, Medicaid cuts seen as culprit

3. Why does Medicaid use PBMs?

Some readers have asked why Ohio Medicaid plans contract with middlemen at all. Why not just manage pharmacy benefits directly?

It turns out Ohio’s system is actually saving money compared to other states that don’t use PBMs. But pharmacists complained that the spread-pricing model was hurting them and wasn’t transparent enough.

CVS Caremark, one of the pharmacy benefit managers, highlighted that Ohio’s Medicaid spends per prescription 13 percent less than the collective average costs of states that manage their own program instead of having a privately managed system.

Medicaid saved $145 million under the privatized system compared to the former system where the Ohio directly paid fees for services, according to the state.

The changes to PBM contracts announced this week are expected to be cost neutral, meaning taxpayers won’t see any savings. But the changes make the system more transparent and ensure that all the money the state pays for a prescription makes it to the pharmacist who bought and dispensed the drug, Medicaid officials said.

>> READ MORE: DeWine anticipates ‘major litigation’ against pharmacy middlemen

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