CMS Issues New Guidance on PBM Up-Charging

Feds spell out how 'spread pricing' is calculated in medical loss ratios.

The Centers for Medicare & Medicaid Services on Wednesday issued new guidelines for medical loss ratios for Medicaid and CHIP managed care plans.

Under existing regulations, MLR regulations for those managed care plans mandate that they exclude prescription drug rebates from the actual claims costs used to calculate an MLR. Federal law requires plans to report MLRs of 85%, with only 15% of the money used for overhead and profits.

The new guidance spells out that "prescription drug rebates" means "any price concession or discount received by the managed care plan or by its PBM, regardless of who pays for it," CMS said. Money kept by PBMs under spread pricing is excluded from the claims costs used to calculate a managed care plan's MLR.

CMS Administrator Seema Verma said the new guidance comes as states raise concerns that Medicaid managed care plans aren’t accurately reporting their pharmacy benefits spread when they calculate MLRs.

"The market for prescription drugs is convoluted and opaque," Verma said in a media release.

"States are increasingly reporting instances of spread pricing in Medicaid, including cases in Ohio and Texas, and I am concerned that spread pricing is inflating prescription drug costs that are borne by beneficiaries and by taxpayers," she said.

The new guidance comes as PBMs find themselves in the crosshairs of the White House. President Donald Trump last year pledged to attack soaring drug costs as part of a broader effort to curb U.S. healthcare spending.

"We're very much eliminating the middlemen," Trump said in May 2018.

Under spread pricing, PBMs keep some of the money paid to them by health plans for prescription drugs instead of passing the full payments on to pharmacies. That creates a spread between the money the health plans pay the PBMs, and the money the PBMs pay pharmacies for beneficiaries' prescriptions.

Middlemen PBMs can charge plans more than what they paid the pharmacy, which the Trump Administration says raises Medicaid costs for taxpayers.

States have also complained that PBMs can pay pharmacies for generic prescriptions based on lower benchmarks than the benchmarks used for charging Medicaid and CHIP managed care plans for the same drugs.   

Verma said the guidance issued Wednesday will ensure that health plans monitor spread pricing appropriately.

"PBMs cannot use spread pricing to upcharge health plans and increase costs for states – spread pricing must be monitored and accounted for, and not used to inflate profits," she said.

CMS said the guidance does not conflict with a recent proposed rule from the Department of Health and Human Services' Office of the Inspector General dealing with safe harbor provisions for prescription drug rebates.

That's because the guidance issued Wednesday would apply only to "items of additional value that must be deducted from the amount of claims cost used for calculating an MLR," CMS said.