Pennsylvania Auditor General Eugene DePasquale is recommending ways that the state can better manage a layer of middlemen in its Medicaid program — the pharmacy benefit managers (PBMs) who handle billions in taxpayer funds — and whose profits under the program varied widely in 2017, according to a report his office released Tuesday.

Last year, three PBMs “made between $2 million and nearly $40 million,” the report said. They did this using a business practice called spread pricing, in which the companies charge the state a higher amount for a prescription than what they pay pharmacists for the drug. Through the arrangement, the three PBMs earned “average profits between 28 cents and almost $13 per Medicaid prescription filled.”

“This wide disparity in profit per prescription demonstrates the free rein PBMs have been given,” said the report from DePasquale, who launched his review of the companies in June. “The lack of transparency and government oversight have led to haphazard pricing schedules.”

At a news conference Tuesday inside Royer Pharmacy in Lancaster, DePasquale said he would like the state to contract with PBMs directly, so that they are a ‘fiduciary’ of the state, and not a contractor of the insurers that help administer Medicaid.

Two Republicans – State Rep. Seth Grove and State Sen.-elect Kristin Phillips-Hill, both of York – joined DePasquale, a Democrat, at the event. Grove noted that several measures aimed at PBMs passed unanimously in the House this year, and he called DePasquale’s recommendations a “great starting point” for the next legislative session.

“This has been a bipartisan movement,” Grove said.

PBMs are subcontractors in the state’s Medicaid program, and that means neither the auditor general nor the Department of Human Services can review its contracts, the report said. Taxpayers paid the companies $2.86 billion last year for Medicaid enrollees' drug needs, more than double the $1.41 billion the firms received in 2013. Some of that money covers the “cost of doing business,” the report said, “but because PBMs' business practices are shielded from public or government scrutiny, there’s no way to verify how much was profit.”

PBMs maintain that they save the state money by negotiating better deals with drug companies and pharmacists. And the industry says spread pricing is one strategy that clients choose to compensate PBMs for keeping costs lower.

J.C. Scott, CEO of the Pharmaceutical Care Management Association, went further, saying the report “is highly biased toward one special interest, the independent drugstore lobby. The report omits any mention of how PBMs are reducing prescription drug costs.”

DePasquale’s office requested three data points from five PBMs to calculate the report’s spread pricing figures. These were the number of Medicaid prescriptions that each PBM handled last year, the amount each PBM billed the state for Medicaid-covered prescriptions, and the amount each PBM reimbursed pharmacies for those drugs. Staff declined to release those numbers Tuesday.

DePasquale’s report called for giving the state authority to audit the subcontracts with PBMs each year and to oversee contracts between PBMs and the pharmacies they reimburse.

PBMs handle prescription benefits for employers, health plans, and insurers. They are supposed to tamp down the costs of medications – partly by securing rebates from pharmaceutical firms – which want their drugs to be covered by a health plan — and by getting discounts from pharmacies, which want the sales from belonging to a PBM’s network.

But as prescription drug costs have soared — attracting the attention of lawmakers and President Trump — PBMs and pharmaceutical companies have attacked one another in the debate over how best to lower prices. PBMs argue they are the only check on drugmakers who can charge whatever they want for their patented products. Pharmaceutical companies call PBMs costly middlemen that inflate prices.

Across more than half a dozen states, legislators and regulators have been scrutinizing how PBMs operate within their Medicaid programs, a huge line item in any state’s budget. In neighboring Ohio, the state’s auditor focused on spread pricing, and identified $224.8 million in “spread” going to PBMs in one year. Ohio lawmakers decided to eliminate that payment model in Medicaid contracts.

DePasquale began his review after pharmacists complained about PBMs to state officials and legislators, singling out CVS Caremark. Pharmacists said that they were losing money on some Medicaid prescriptions and that CVS’s retail pharmacy unit sent letters offering to buy up community pharmacists around the same time. In April, lawmakers who chair the community pharmacy caucus asked DePasquale to investigate.

CVS acknowledged that it lowered reimbursements on some drugs in the fall of 2017, and said it later raised those rates based on complaints from pharmacies. The company’s director of government affairs testified at an October Senate committee hearing that the company’s retail side did send out such letters but discontinued the practice. He also testified that CVS has “stringent firewall protections" between its retail and PBM divisions.

On Tuesday, CVS said it reimburses pharmacies fairly, and reduces drug prices for Pennsylvania patients and taxpayers. It blamed the drug manufacturing industry for driving up costs, which CVS noted “is not represented in the auditor general’s report.”

DePasquale is urging the Federal Trade Commission to “investigate whether separation truly exists between the PBM and pharmacy acquisition segments of major companies that operate both.” Absent a federal inquiry, the auditor general’s report said legislators should consider preventing managed care companies “from using a PBM for Medicaid if the PBM is part of a larger company that also owns retail pharmacies.”

The Human Services agency initiated its own changes to contracts with managed care organizations for next year, requiring that reimbursements to pharmacists be reported to the state.

Patricia Epple, CEO of the Pennsylvania Pharmacists Association, said the auditor general’s report shined a light on problems with PBMs, but she is still concerned about how much legislators will embrace the recommendations. PBMs, she said, “have so many dollars riding on this. If they weren’t making so much money, they wouldn’t be fighting it so hard.”​