Pharmaceutical Commerce: What specific pricing practice by pharmacy benefit managers (PBMs) does the Protecting Pharmacies in Medicaid Act aim to address?
Anne Cassity: The Protecting Pharmacies in Medicaid Act really aims at getting rid of spread pricing and the Medicaid managed care programs in every state in the country. Spread pricing is when pharmacy benefit managers (PBMs) charge the plan sponsors—in this case, the states—one price, pays the pharmacies another price, and then pockets the spread.
PBMs also paid fees to administer the program. They're getting revenue in a lot of different ways, and what ultimately happens is that pharmacies are underpaid. We're seeing that quite often, and it's not just Medicaid managed care—it's through all programs—but we're specifically talking about Medicaid in this case.
Over the last eight or nine years, multiple states have found massive amounts of spread pricing in their programs, including Kentucky, Virginia, Maryland, Michigan. I don't think that's an exhausted list, but states have been on the forefront of doing this, and I think Congress has looked and said, this is potentially having an impact on our federal budget and on federal taxpayers—we need to address it. The Protecting Pharmacies in Medicaid Act, also known as S.927, was actually just reintroduced. This is the third Congress that’s it been introduced to, so this is not a new concept. It has a lot of support. We've gotten very close.
Consequences of spread pricing
PC: Why have independent pharmacies—particularly in rural communities—been negatively affected by spread pricing practices, and what impact has this had on their operation?
Cassity: Ultimately, what spread pricing leads to is under reimbursements to pharmacies. When I say under reimbursements, imagine, if you're in another industry, you purchase a product like the pharmacies do the inventory, you dispense the medication, and then you're reimbursed just on the ingredient cost. I'm not talking about anything else that goes into dispensing the medication below what you even paid for acquiring the drug from the wholesaler. It's practically impossible to stay in business doing that, and I don't think it would be allowed in any other industry.
When people talk about drug costs increasing, pharmacies don't get to determine at all what they are paid for the medication. They contract with the PBM. The contracts determine what the pharmacy is reimbursed for the medication.
You also have got to remember that these PBMs are also competitors. They have mail-order pharmacies, and some have retail pharmacies, so you have a competitor determining what you're paid for a medication, or what you're paid for to sell your product, along with which customers can even come into your pharmacy because they're putting together the network. It’s very similar to Walmart determining what Target can charge for a product, and what customers could even walk into Target’s doors. That’s the problem we're facing.
Due to access issues, rural pharmacies are closing, and pharmacy deserts are popping up everywhere. With net closings, where another pharmacy did not open up, between July 2023 and July 2024, we had over 350 independent pharmacies close. In addition to that, a lot of chain drugstores are closing. I think it's three to one in terms of the chains closing.
If these big chains can't survive off these reimbursements from the PBMs, can you imagine a small, independent pharmacy, which has a very small front end? They're not selling a lot in the front end of their store to try to make up for any of those below-cost reimbursements.
It’s also important to point out how this bill gets rid of spread pricing. It requires a full pass through of the payment, so pharmacies are getting paid a fair, reasonable, and transparent reimbursement that actually reflects the cost to acquire and dispense the medication. PBMs in this bill are limited to just an administrative fee, and it saves the taxpayers $2.3 billion. It's a pretty great bill for everyone in my opinion.
Key Takeaways
- The bill (S.927) aims to eliminate spread pricing by requiring PBMs to pass through the full reimbursement to pharmacies, instead of pocketing the difference between what they charge Medicaid and what they pay pharmacies. This change would provide fairer reimbursement to pharmacies and is projected to save taxpayers $2.3 billion.
- Spread pricing results in pharmacies being reimbursed below their cost of acquiring drugs, threatening their financial survival—especially small, independent pharmacies in rural areas. Over 350 independent pharmacies closed in one year (July 2023–2024), highlighting the urgent need for reform.
PC: What other provisions in the bill would increase transparency in drug pricing and ensure that pharmacies are reimbursed fairly for prescription drugs? In what other ways—aside from the introduced bill—can transparency be boosted?
Cassity: This bill also requires all pharmacy and how they come up with the reimbursement something based on the national average drug acquisition cost, or NADAC. In a survey that the Centers for Medicare & Medicaid Services (CMS) does, pharmacies have to report what they acquire the drug at, and then they come up with this NADAC, and that's the ingredient cost. Right now, there's so many types of benchmarks, from average wholesale price (AWP) to wholesale acquisition cost (WAC). NADAC is by far the most transparent of all these payment benchmarks.
PBMs also have to disclose to employers and other plan sponsors the full amount of rebates that they get. I also think another important part of all this is delinking. The premise of delinking is to just provide a flat fee. If there's going to be a fee paid basically to be on a formulary, it's a flat fee; it can't be a percentage, so the PBM wouldn't be incentivized to put the most expensive drug on the formulary when there's a much more financially reasonable drug as an alternative. So those are just some other ways to provide transparency into the market.
Congress has authority to go pass and apply it. It's not just piecemeal, one state after another. They can apply to all states Medicaid managed care programs in one fell swoop.
PC: What step in the process is this Act at currently?
Cassity: Going back to last December, there was a healthcare package that was agreed upon in the end of the year continuing resolution—the CR—and it had some really good PBM reform provisions in there, including the Medicaid spread pricing bill that we're talking about right now, and another one that's a priority for independent pharmacies. It would be a Medicare Part D provision that would require CMS to define what reasonable and relevant contract terms are in Part D.
Both of those, along with delinking some of the commercial transparency provisions I mentioned were all initially included, but due to some complications, they ended up pulling out not just the PBM reform, but the whole healthcare package among other things in the CR that had gotten too big. However, there remains a lot of support on Capitol Hill. We’re hearing about a couple of opportunities out there.
One is about the reconciliation package they've been working on. We've been hearing from Senate and House leadership that this is an avenue they're going to potentially go down, because they're hearing a lot from their members—Democrat and Republican leadership—that PBM reform is a priority for their members.
Another opportunity lies in a standalone bill. I understand that it's very difficult to pass a standalone bill, but we're also urging Congress to pass that the healthcare package that I just mentioned—the one that had been removed from the December CR—because it had support. I think that is a more difficult push, because if you're at all familiar with Congress, not a whole lot of standalone bills pass.
