We have talked previously on this blog about ongoing efforts by the Administration to reform drug pricing, including efforts to dramatically revamp the way in which health plans and their PBMs (including Medicaid MCOs) negotiate drug discounts. At the state level, PBMs have been under fire in recent years, with several State Medicaid agencies alleging a lack of transparency in contracts with the states. One of the areas of focus at both the state and Federal level is the use of “spread pricing” by PBMs contracting with states and Medicaid managed care organizations. On May 15, 2019, CMS issued a new informational bulletin aimed at the practice of spread pricing, clarifying its treatment for purposes of Medical Loss Ratio reporting by Medicaid MCOs.
But first, what exactly is spread pricing?
In general, health plans (including Medicaid MCOs) are free to negotiate a diversity of contact terms with their PBMs. When negotiating the health plan’s payment to pharmacies, contracts have historically relied on one of two methodologies: (1) pass-through pricing, in which a PBM passes the full value of the payment from the health plan for a drug claim received to the pharmacy and (2) spread pricing, in which the health plan makes capitated payments to the PBM for drug claims. Under a spread pricing arrangement, on a claim-by-claim basis, the PBM may either incur a loss or a profit depending on the payment rate the PBM has negotiated with the pharmacy. Of course, for the Federal government and other stakeholders (retail pharmacies, etc.), spread pricing is of most concern where a PBM retains a portion of the amount paid to the by the health plan instead of passing the full payment through to the pharmacy.
The practice of spread pricing has come under fire in recent years, and is included in current legislative efforts in Congress as part of the larger drug pricing reform debate. The latest to weight into the “spread pricing” debate is the Center for Medicaid & CHIP Services (CMCS). Notably, in its guidance CMCS did not prohibit the use of spread pricing by Medicaid MCOs and their PBMs, but instead, clarified how spread pricing may interact with the detailed Medical Loss Ratio (MLR) reporting requirements. As a result of this guidance, we suspect the use of spread pricing will decline in the Medicaid program.
As CMCS notes in the guidance document:
“Even if the managed care plan pays the PBM a capitated amount in a risk-based arrangement, the managed care plan and PBM must classify and report revenues and expenditures associated with the administration of the Medicaid covered outpatient drug benefit consistent with 42 CFR 438.8. That is, the managed care plan may not use the entire capitated payment to the PBM as incurred claims.”
In other words, in the case of a spread pricing arrangement in which a Medicaid MCO makes a payment to a PBM which is not fully passed through to the pharmacy, the Medicaid MCO may not classify such costs as incurred claims (i.e. the medical side of the MLR ratio), and instead must report any amounts that exceeded the payment to the pharmacy under the administrative portion of the MLR ratio.
So what does this mean for the Medicaid program? We expect Medicaid MCOs will likely take a closer look at their PBM contracts, and gradually shift away from spread pricing arrangements to pass-through arrangements. Frankly, the market is already shifting to a pass-through model, and so the immediate impact may not be a tidal wave. In 2018, about 37 percent of plan sponsors surveyed by the Pharmacy Benefit Management Institute (PBMI), an independent pharmacy benefit research and education organization, chose spread pricing, while 69 percent chose pass-through pricing. In other words, pass-through pricing is already the predominant model in the marketplace.
We note that all Medicaid MCOs may not be thrilled with this announcement. While spread pricing can result in profit for PBMs, it may also provide plans with more predictability. In many cases, drug claims can have negative spreading, meaning that the PBM takes a loss on a particular drug claim. Medicaid MCOs may prefer the predictability of a capitated payment to the PBM. However, we suspect that this latest MLR guidance will likely be the nail in the coffin for manyspread pricing arrangements in the Medicaid marketplace given the important MLR reporting plays for plans.