Spread Pricing: The Ignored Budget Savings for MassHealth

Apr 23, 2019

By Zach Stanley, VP of Public Affairs, MassBio

As the Massachusetts House begins debate of their FY2020 budget this week and considers one of the most severe and consequential MassHealth drug reforms imaginable they are ignoring an idea that could save tens of millions of dollars in MassHealth annually without any side effects: eliminating spread pricing. Here’s one data point, as an example: According to the non-profit 46Brooklyn, the aggregate markup of generic drugs in MassHealth MCOs in Q3 2018 (most recent data available) was $9,750,422. Looking back to a full calendar year (2017), markup on all generic drugs in MassHealth MCOs market totaled $28,456,311. Ironically enough, $28 million is the same amount the House estimates it will save by passing its MassHealth price controls language in the budget.

Spread pricing is a practice where a PBM pays a pharmacy one price for a drug but is paid a different, higher price by the payer (in this case state Medicaid managed care organizations). The PBM then keeps the difference as profit or “spread” – without adding any value to the healthcare system or to patients. There’s good reason to believe that most of the “markup” added to prescription drug costs in MassHealth is due to pharmacy benefit manager (PBM) spread pricing.

Recently, many states have conducted thorough examinations of their Medicaid managed care plans and found that spread pricing is a significant source of wasted taxpayer funds. For example, a state audit in Ohio last year found that spread pricing cost their Medicaid managed care program $224.8 million that went to PBMs as profit between Q2 2017 and Q1 2018. The total dollars wasted is shocking enough but consider that $224.8 million is 8.9% of the state’s total (pre-rebate) spending on prescription drugs and 31.4% of all money spent by Ohio Medicaid on generic drugs. In other words, Ohio taxpayers are paying a 31.4% premium on generic drugs that goes straight to PBMs as profit, for no apparent added value to the state or taxpayers.

Ohio is not an outlier here. Kentucky recently did a similar study and found that spread pricing by PBMs added $123 million in 2018 to their Medicaid expenses. Not only that, but they found that amount was a 17% increase over 2017.

All these data point to one thing: the potential for real and lasting cost savings in Medicaid programs, including MassHealth, by eliminating the use of spread pricing. We hope the House and the full Legislature does the right thing by rejecting harmful drug pricing reform proposals and instead adopts more measured but impactful ideas like eliminating spread pricing in MassHealth.

Take action to fight this harmful legislation today. 

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