Ohio Changes Medicaid Drug Pricing System

Published September 19, 2018

Managed-care operators (MCOs) administering Ohio’s Medicaid program will terminate their contracts with pharmacy benefit managers (PBM) and negotiate new agreements to meet the mandate. Managed care operators are private companies that provide contractors who work with states to administer Medicaid for specified populations.

In pass-through pricing, MCOs purchase drugs for the exact amount the PBM paid for the prescription itself plus associated dispensing fees. In spread pricing, MCOs purchase drugs using the difference between retail prices and a PBM’s negotiated rate.

Ohio Department of Medicaid Press Secretary Tom Betti told the press the new pricing structure announced August 13 will add transparency and fairness to the government’s prescription drug purchases.

“Ohio Medicaid’s focus is to ensure that Medicaid enrollees have access to quality health care, including pharmacy benefits, and taxpayers get a fair price,” Betti said in a press statement. “Therefore, we are now taking aggressive action to ensure full transparency for the greater good of the public interest.”

Clarifying Compensation

Rae Hederman, executive director of the Economic Research Center and vice president of policy at the Buckeye Institute, says the move to a pass-through model will increase awareness of the compensation PBMs are receiving for providing prescription drugs.

“Essentially, the ‘spread’ in spread pricing is the difference between what the MCOs pay the PBMs for prescriptions and what the PBMs pay pharmacies to dispense the drugs,” Hederman said. “However, there is not much transparency in this model, which has raised concerns that PBMs are pocketing more than they should for the services they provide.

“Overall, it appears that managed care is saving the state significant costs in the Medicaid program, but the question is whether changing the pricing model for pharmaceuticals could save even more,” Hederman said. “Many legislators, the [Ohio]Auditor of State, and Medicaid officials obviously feel they can obtain even greater savings by switching to a different pricing model, namely a fee-based model where the PBM charges the MCO only what they paid to acquire the drugs plus specific dispensing and administrative fees. This is intended to be more transparent because it eliminates worry about things like rebates from pharmaceutical manufacturers.”

States began using PBMs in the 1980s to hold down escalating drug costs. Their use has grown dramatically since then, and they have been adopted by most states that have a Medicaid managed care program because PBMs have the reputation, deserved or not, of helping control costs.

Even More Transparency

Betti says the decision to change the pricing structure came after a June audit by a state-commissioned consulting company, HealthPlan Data Solutions (HDS).

“The recommendation for the pass-through model was made in a report released in mid-June, and this action is the natural next step to bring greater transparency to the market,” Betti said in his statement. “Ohio Medicaid intended to publicly release this report to the public for transparency, but that is currently being blocked by a lawsuit from CVS and OptumRX. The lawsuit had no impact on our decision.”

Although the pass-through model is a start, states should be on the lookout for even more transparent partnership options to control drug costs in taxpayer-funded programs, Hederman says.

“States should look for as much transparency in their model as they can find, so there are no questions about the model they use,” Hederman said. “The effect of questions like that conceivably leads to throwing the baby out with the bathwater, or completely removing pharmacy benefits from managed care. That could eventually cost the states and taxpayers more. Transparent competition and pricing models, however, reduce prices and improve quality.”