DSH Alert 1
How does spread pricing affect your Medicaid managed care prescription benefit management programs?

Medicaid Disproportionate Share Hospital (DSH)

January 2019

Does Your State Have an Effective Way to:

  • Perform analyses on prescription claims data to quantify pricing spread within prescription reimbursement?
  • Review pharmacy benefit manager (PBM) contract parameters and other pertinent information to draw appropriate conclusions?
  • Compare prescription claims pricing against national benchmarks to understand the cost basis relationships and reimbursement ranges?
  • Use results of claims and contract analysis to make and support reimbursement and policy decisions?

State of Medicaid Pricing Transparency

As more states move their Medicaid populations into managed care, it is becoming increasingly important that states monitor the managed care organizations (MCOs) and PBMs responsible for delivering prescription benefits to their members in order to have a clear understanding of how prescription claims pricing is established, maintained, and reported. Many state agencies have found it challenging to overcome the lack of transparency within the prices established for prescription drug claims and to understand how “spread pricing” impacts the overall reimbursement rates paid for these claims. The term “spread pricing” is typically used to refer to the margin between the amount charged to a plan sponsor and the amount paid by a PBM to pharmacies for a prescription. When spread pricing models are used, state Medicaid agencies can find it challenging to assess and understand all components of drug pricing, pharmacy reimbursement and administrative costs that are encompassed within their managed care prescription benefit. Often, key pieces of information within spread pricing contract models are obscured, ill-defined, and not reported. This impacts the ability for state agencies to make informed decisions when setting reimbursement policies, to develop MCO contract requirements and to compare benefit design across managed care and fee-for-service programs.

Spread pricing contracts and other PBM practices have also generated significant controversy from pharmacy providers in recent years. In addition to the traditional reimbursement for a prescription claim based on ingredient discount rate and dispensing fees, PBMs have incorporated a number of other reimbursement factors such as pharmacy network access fees, administrative fees, and various forms of performance fee penalties including brand effective rate (BER) and generic effective rate (GER) performance clauses. These performance adjustments may be assessed to network pharmacies for not achieving a goal or benchmark and have been referred to as “clawbacks.” Such adjustments can be highly controversial since pharmacies are often provided with limited information regarding how the performance benchmarks were calculated and they may be applied retrospectively months, or even years, after claims were originally reimbursed.

Recently, state Medicaid and other government agencies have placed added scrutiny on spread pricing models and assessed the impact within their managed care programs. In some cases, states have implemented requirements for transparent pricing practices within PBM contracting in an attempt for increased accountability from their MCOs. Other states have sought to change the current relationships between MCOs and PBMs by requiring the use of a single PBM across all managed care plans within their programs.

In a bulletin issued in 2019, the Centers for Medicare & Medicaid Services (CMS) reminded state Medicaid agencies of requirements for MCOs to accurately report a medical loss ratio (MLR)[1]. Federal regulations define the numerator and denominator of the MLR and responsibilities of MCOs and their third-party vendors (such as PBMs) to disclose the underlying data for those calculations. CMS reminded states of their responsibility to routinely audit MLR calculations and ensure that amounts actually paid for incurred claims are distinct from amounts paid for administrative services, taxes or other activities. Spread pricing and reimbursement adjustments which occur within the relationships between MCOs, PBMs, and their network pharmacies have significant repercussions with respect to accurate MLR calculation and reporting; states must ensure these issues are properly accounted within MLR calculations.

Although there are challenges inherent in obtaining viable data sources and creating uniform data sets for analysis of drug pricing transparency issues, Myers and Stauffer has experienced professionals who can apply procedures and techniques to both qualify and quantify the components of spread pricing included within drug claims so that state agencies can make appropriate reimbursement and contract design decisions and ensure proper MLR reporting.

[1] See CMCS Informational Bulletin, May 15, 2019, “Medical Loss Ratio (MLR) Requirements Related to Third-Party Vendors” (https://www.medicaid.gov/federal-policy-guidance/downloads/cib051519.pdf)

Our Prescription Benefit Experts and Auditors Can Help You

Myers and Stauffer has more than 15 years of firm-wide experience auditing and analyzing prescription claims and price data from the largest MCOs, health plans, PBMs, and TPAs in the country. We offer:

  • Significant experience with Medicaid managed care oversight and Medicaid pharmacy reimbursement policy.
  • Senior management experienced in operational and executive roles within health plans and PBMs in all facets of prescription benefits administration.
  • A network of experts trained in state and federal legislative and regulatory policy available as a resource to our clients.
  • Experience successfully defending our findings and results against scrutiny.