Drug prices In 2018, fourKentucky insurers in Medicaid paid $957.7 million to four PBMs thatuse the arrangements. Of that, the PBMs kept 13 percent — $123.5million. (Photo: Shutterstock)

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Drug middlemen took $123.5 million in hidden fees from Kentuckyhealth-insurance plans that cover the state's poor, according to areport that follows efforts by other states to find out ifpharmacy-benefit managers are gaming state programs for profits.

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The Kentucky report is the latest to examine acontroversial practice known as spread pricing, in whichpharmacy-benefit managers pay drugstores one price for a treatmentwhile charging a higher one to their health plan clients. Thedifference, or spread, is used to stabilize drug costs, PBMs say —or add to PBM profits, according to critics.

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Related: Pharma middlemen's cut is getting bigger, at leastin NY

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In 2018, four Kentucky insurers in Medicaid paid $957.7 millionto four PBMs that use the arrangements. Of that, the PBMs kept 13percent — $123.5 million — through spread pricing, according to theKentucky report. The size of those spreads rose by more than athird from 2017, the state found.

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“These are taxpayer dollars that we can't identify what is theservice they are being used for,” said Jessin Joseph, director ofpharmacy for Kentucky's Department for Medicaid Services, in aphone interview. Joseph said the state planned to do a moredetailed claim-by-claim analysis of pharmacy spending to determinewhy spreads were going up.

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Companies that run PBMs, including CVS Health Corp. and CignaCorp., say that clients enter into spread-pricing agreementsknowingly. Along with stabilizing drugs costs, the spread money isused to fund benefits for patients, PBMs say.

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Popular practice

The arrangements have become a popular form of administeringdrugs. In Kentucky last year, 58 percent of the 24.7 millionprescriptions in private Medicaid plans were filled throughspread-pricing agreements, according to the state report.

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The practice has come under increasing scrutiny in Medicaid,where many states have outsourced the program to private companiesin order to lower costs and provide better care for low-incomepatients.

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A Bloomberg analysis last year of 90 frequently prescribedgeneric drugs in Medicaid managed-care plans in 31 states foundwide variations in reimbursement and drug costs. In some states,Medicaid plans appeared to be getting a good deal. In other states,plans paid markups of threefold or more on some treatments,Bloomberg found.

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The analysis couldn't tell how much of the markup was going toPBMs and other middlemen, versus how much was going to pharmacies.Nor could it distinguish between health plans whose contractsallowed spread pricing, and plans that used fee-based arrangementswhere drug prices are passed along directly. The Kentucky reportand similar efforts by other states have shed light on thosedetails.

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Kentucky's Joseph said that four of five private Medicaid plansin the state used spread pricing in 2017 and 2018, including threewhose drug benefits were administered by CVS's Caremark, and one byCigna's Express Scripts unit.

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CVS said it is in the process of reviewing Kentucky's report.The spread “is not a PBM's profit. It is used to fund benefitservices provided to plan sponsors as well as clinical programs tosupport patients,” Michael DeAngelis, a spokesman for CVS, said inan email.

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“Spread-pricing arrangements provide predictability, competitiverates, and deliver value for our clients,” said Brian Henry, aspokesman for Cigna, in an email. PBMs help drive down drug costs,he said.

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Pharmacy-benefit managers “are hired to reduce prescription drugcosts and improve the quality of benefits,” said Charles Cote, aspokesman for the Pharmaceutical Care Management Association. “Theplan hiring a PBM always has the final say on contract terms andsome prefer spread pricing arrangements.”

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Ohio pushback

In Ohio, a summary report last year found that CVS and otherPBMs took an 8.8 percent spread on name-brand and generic drugsfrom March 2017 to March 2018. That amounted to an average of $5.70per prescription. Ohio officials told Medicaid plans to terminatespread-pricing agreements this year.

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In Kentucky, the spreads averaged $6.07 per prescription in2017, and $8.70 per prescription in 2018.

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“It is shocking,” said Eric Pachman, a consultant at 3 AxisAdvisors and former pharmacy executive who examined PBM markups inOhio, New York and other states. “I didn't suspect it could be thishigh.”

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The Kentucky report examined retail pharmacies and did notinclude mail-order drugs. It recommended that the state eliminatespread pricing for all private Medicaid plans. It also recommendedthat the state require an annual PBM transparency report for eachprivate Medicaid plan.

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