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Change in Medicaid drug pricing could save taxpayers $43M, lawmakers say

New regulations passed as part of the state budget will eliminate so-called "spread pricing" by pharmacy benefit managers.

Pharmacy benefits managers, who act as drug distribution

Pharmacy benefits managers, who act as drug distribution middlemen, make money on the difference between what the state pays for drugs and what pharmacies were reimbursed. Photo Credit: Getty Images / iStock / busracavus

New York legislators have passed new regulations that eliminate so-called "spread pricing" on prescription drugs within the Medicaid managed care system, a move they say will save taxpayers about $43 million a year.

The law, part of the $175.5 billion state budget passed Monday, targets pharmacy benefit managers (PBMs), which are third-party administrators of prescription drug programs.

PBMs, such as CVS Caremark and Express Scripts, act as the middle man between health insurers and pharmacies. When a patient fills a prescription, he or she pays a co-pay. The PBM collects the balance of the payment from the insurer, passes a portion of that on to the pharmacy that dispensed the drug, and pockets the rest. The difference between what the PBM collected and what it passed on is the spread. PBMs -- which set both amounts -- do not have to disclose to insurers how much they pass on to pharmacies, or disclose to pharmacies how much they collect from insurers.

The change could save taxpayers much more than the $43 million elected officials project, according to a study earlier this year by the Pharmacists Society of the State of New York, which showed the state was overcharged on Medicaid managed care prescription drug claims by nearly $300 million.

Because the contracts are private, pharmacists and other experts said it's difficult to tell how much PBM regulation would save consumers. But a Bloomberg analysis last year showed that PBMs nationwide received $1.3 billion of the $4.2 billion private Medicaid insurers spent on 90 common drugs in 2017.

"The new law is an exciting and important first step in bringing high prescription drug costs down by shedding new light on the business practices of PBMs," said Elizabeth Lasky, the executive director at Albany-based PSSNY. "For far too long, New Yorkers have seen prescription costs go up while access to medications has gone down."

But PBMs argue that they effectively negotiate savings that are used to lower enrollee premiums and reduce costs for consumers at the pharmacy.

“Criticisms of spread pricing contracts are misguided,"  the Pharmaceutical Care Management Association, a PBM lobbying group in Washington, D.C., said in a statement. "The concept of spread pricing is not unique to the PBM contracts, and the [insurer], as the purchaser of the PBM services, has the final say on the type of compensation terms. It is unclear how the budget plan, as it relates to spread pricing, will reduce prescription drug costs in New York.”

Independent pharmacists have said that in many cases they're being paid less by the PBM than it costs them to purchase the drug. 

"If I do 400 prescriptions in a day, about 100 of those are below cost," said Tom D'Angelo, who owns Franklin Square Pharmacy on Hempstead Turnpike and is an official at the PSSNY. "You have no control over what you're being paid for something you had to buy, and because the contracts are all private, there is no transparency."

The state didn't act on PSSNY's request to regulate PBMs more widely. But Ray Macioci, a PSSNY board member and pharmacy owner in the Bronx, said regulating Medicaid Managed Care is an important step because "in about 99 percent of Medicaid Managed Care claims, pharmacists are paid less than the cost of filling the prescription."

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