Lawmakers scrutinize “black box of state PBM spending”

A review of five years of data from the state’s major pharmacy benefit managers cataloged more than 63 million claims and nearly $6.7 billion paid to the entities across state-sponsored plans — including Medicaid and the health plan for state employees, according to an analysis presented before lawmakers on Tuesday.

But the benefits of PBM spending remained murky for lawmakers with the Health Care Cost Oversight Task Force, who spent hours listening to presentations about PBM oversight and contracting.

The preliminary version of the audit, performed by RxConnection, LLC, was shared with lawmakers with the caveat that PBM actions hampered data collection efforts, prompting the Office of the Attorney General to file civil investigative demands.

PBMs have made national headlines following federal lawsuits and state legal action as well as studies concluding the companies add to the nation’s growing health care cost burden, which is far more expensive than other wealthy countries.

Sen. Andy Zay, R-Huntington, likened the report to a study on the “black box of state PBM spending,” saying efforts to analyze such spending have been stymied by the lack of transparency.

“Five of the seven state plans are still incomplete, awaiting data from the PBMs,” Zay said. “… almost all (of) the plans had a dramatic increase in overall plan cost (that) was disproportionate to member count growth.

“If the PBMs, by design, were to be saving the state money, they have failed miserably.”

Zay said he compared PBM spending in Medicaid using the state employee plan as a basis, concluding that the state overpaid PBMs by $1.6 billion. However, individuals covered by Medicaid are generally less healthy than their counterparts. He urged his peers to explore unconventional options, pointing to West Virginia’s decision to create its own PBM as an example. Other options could include using PBMs that aren’t linked to the nation’s biggest insurers.

Smaller, mom-and-pop pharmacies reportedly squeezed out of the market by uneven PBM contracting could be saved by mandating all pharmacies be in network, Zay continued. The largest pharmacy chain, CVS Health, also owns a PBM and has long been accused of diverting consumers away from independent pharmacists to its own retail stores.

“Clearly, doing it the same way we have always done it is only costing Hoosier taxpayers more money,” Zay said.

RxConnection and Zay credited the Attorney General’s Office for working to provide unredacted contracts for analysis, though the office didn’t respond to a Tuesday email asking it to confirm the legal action.

What do PBMs do?

The wide-ranging audit, which stems from a 2023 law, included analysis of rebates, formularies, spread pricing and more — presenting reams of technical data that are often shielded from public view.

As the middleman between insurers, drug manufacturers and pharmacies, PBMs develop formularies — or lists of covered medications — that manufacturers pay rebates toward in order to keep their drugs listed. Lawmakers have long contended that those cost savings for PBMs should be passed onto consumers, who pay the final cost at their local pharmacy.

But the contracts setting such rebates and more are closely guarded secrets, complicating efforts to understand why costs go up. Previously, PBMs have pointed to increased drug manufacturing costs as a driver, but that data isn’t usually public either. Tuesday’s review was limited to government-sponsored health plans because, as the policy holder, the state could better obtain the data.

“There’s a lot of trade secrets when it comes to certain contracts with PBMs,” said Ray O’Neel, Sr., the manager of audit services for RxConnection. “There (are) certain aspects, when it comes to non-disclosure and proprietary and confidential (contracts) that we can’t make available to the task force due to litigation that would happen in the millions of dollars in lawsuits. As we all know, PBMs have really good lawyers.”

O’Neel noted that though claims fell by 110,000 from the beginning to the end of the analysis, spending increased as PBMs allegedly prioritized brand name medicines, for which they got a better rebate, over cheaper generic drugs.

PBMs also keep a portion of costs through a practice known as “spread pricing,” or the difference between what PBMs pay and what they are reimbursed by programs like Medicaid in which PBMs keep excessive payments. Ohio reportedly paid $225 million due to PBM use of spread pricing under its managed care program.

In Indiana, such managed care organizations in the Medicaid space include UnitedHealthcare, Caresource, Anthem and MDwise — behemoth insurers that sometimes also own PBMs, clouding the distinction between the entities.

“We did uncover financial performance issues for a majority of PBMs that had financial guarantees within a contract — almost every single PBM did fail to meet those performance guarantees,” O’Neel said.

Indeed, only one entity, MDWise, managed to meet a contractual guarantee, or a PBM commitment to the state on pricing. But “offsetting” contract language still allowed entities to fail in one area to reap rewards by surpassing goals in another.

OptumRX, the PBM owned by United, reduced their penalties due to the state by $322,000 because of this clause, O’Neel said, despite being one of the highest-cost plans.

“We do see this in a lot of different contracts the way that PBMs kind of cover their own butts a little bit and allow them to, again, pocket some of that money that they should have been paying back to you guys,” O’Neel said.

RxConnection made several cost-saving recommendations, including the prohibition of offsetting language in contracts, which O’Neel said didn’t benefit the state of Indiana.

A separate presentation from the Department of Insurance reported that 45 PBMs were now licensed in the state after a state law requiring licensing and reporting. Another seven applications are still pending.

The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.