Report says Kentucky Medicaid could save nearly $240 million by cutting middlemen between drug makers and pharmacists

Kentucky's Medicaid program could save nearly $240 million a year by eliminating pharmacy benefit managers and returning to its old "fee for service" system of reimbursing pharmacists for each prescription, a state report says.

Pharmacy benefit managers are the middlemen between insurance and drug companies. The PBMs have much power; they determine what drugs are offered, how much someone pays for the drug, and the payments to pharmacists.

The report was done by the independent accounting firm Myers and Stauffer, which is a national expert on prescription drug pricing, Deborah Yetter reports for the Louisville Courier Journal.

Kentucky lawmakers have been working on PBM issues for years. Most recently, they called for increased scrutiny of PBMs' pricing practices. The bill's sponsor, Republican Sen. Max Wise of Campbellsville, told Yetter that this report sheds some light into what's in the "black box" as lawmakers look into "unfair practices that are harmful."

Wise was referring to a separate report issued earlier this year, "Medicaid Pharmacy Pricing: Opening the Black Box," which found two PBMs kept $123.5 million last year from the state's Medicaid program by paying pharmacies a lower rate to fill prescriptions, while charging the state more for the same drug, a process that is called "spread pricing."

Wise told the Courier Journal that he didn't know what would result from the report, but said he plans to "take it up with legislative leadership to discuss possible changes in state law," Yetter writes.

Independent pharmacies in Kentucky and around the nation have said for years that the payment practices of PBMs are so bad that they threaten their survival.

Greg Lopes, a spokesman for the Pharmaceutical Care Management Association, a trade group for the PBMs, told Yetter, “Pharmacy benefit managers are hired to reduce prescription drug costs and improve the quality of benefits for consumers, employers, and public programs, including Medicaid."

The report makes no recommendations on what Kentucky should do, and a spokeswoman for the Cabinet for Health and Family Services, which oversees Medicaid, told Yetter that its Department of Medicaid Services, which sought the study, had no recommendation either.

But Kentucky pharmacists were quick to call for reform, Yetter reports.

"The savings estimated in this report demonstrate that overpaying PBMs to administer pharmacy benefits is an untenable situation that must be remedied," Don Kupper, president of the Kentucky Pharmacists Association, said in a statement.

And Rosemary Smith, co-founder of the Kentucky Independent Pharmacists Association, told Yetter that the report provides a much-needed framework to reform the system. Smith and her husband, Luther, own six Eastern Kentucky pharmacies.

"We need to act immediately," Yetter heard from Shannon Stiglitz, vice president of government affairs for the Kentucky Retail Federation. "For many years, the pharmacy benefit managers have told us they save dollars," she said. "Now we know and this report is evidence that those savings go to their bottom line at the expense of patients, taxpayers and providers."

Kentucky Medicaid, which gets about 80% of its money from the federal government, spends about $1.5 billion a year on drugs. The report estimates that eliminating PBMs, it could save about $237.5 million a year — keeping about $45 million for itself, with the rest of the savings being the federal share of the money, Yetter reports.

"That conflicts with the findings of state Medicaid officials in 2018 that a carve-out of prescription drugs could cost the Medicaid program an additional $200 million a year, $36 million of that in state funds," Yetter writes.

Both Smith and Kupper recommend returning to the fee-for-service system, which is already used for patients outside Medicaid managed care, such as nursing home residents and those in special Medicaid programs for people with disabilities, Yetter reports.

"We already have the system in place to take this back," Smith said. "We have the resources. We have the staff and we can save the state all of this money."

The state Medicaid program contracts with five managed care companies that in turn subcontract with PBMs. The PBMs then contract with pharmacies. CVS Caremark, an affiliate of the drugstore chain, has most of the PBM business in Kentucky, handling prescription drug claims for four of the five managed-care companies.