A report issued Wednesday by Pennsylvania Auditor General Tim DeFoor concludes that the state Department of Human Services (DHS) improperly paid nearly $7 million to pharmacy benefit managers in 2022 due to "spread pricing" for drugs purchased under the taxpayer-funded Medicaid program.
The report quickly touched off a political firestorm with Democratic critics defending DHS, arguing that what Republican DeFoor was interpreting as spread pricing actually were “transmission fees,” which have been permitted but will be outlawed starting next year.
PBMs (pharmacy benefit managers) act as intermediaries between insurance providers, drug manufacturers and pharmacies. They have broad power, including determining which drugs are available to patients covered by the plans they administer, as well as where patients can fill their prescriptions.
Spread pricing is a practice in which PBMs overcharge insurers and underpay pharmacies, pocketing the difference.
Report's key findings
DeFoor's report focused on oversight of Physical HealthChoices, Pennsylvania's mandatory managed care programs for Medicaid (Medical Assistance) recipients, and DHS monitoring of contracts with PBMs that serve the program, which serves more than 2.8 million people.
According to the Auditor General's office, DHS contracts with managed care organizations to implement the program, and those MCOs contract with PBMs to manage the prescription drug benefits.
Key findings of DeFoor's report were:
- DHS failed to effectively monitor the HealthChoices program’s pharmacy expenditures of $4.6 billion in 2022. As a result, PBMs were not reporting transmission fees to the MCOs and DHS that were charged to the pharmacies.
- DHS did not effectively monitor contracts between MCOs and PBMs to verify they complied with the HealthChoices contract.
- Auditors found one PBM was transparent with pharmacies regarding the additional fees, but never provided that information to the MCOs or DHS as legally required.
DeFoor said MCOs using that PBM told auditors they weren't charging any additional fees to pharmacies, and "DHS accepted them at their word" without verifying if that was true.
But pharmacies told auditors that they had paid transmission fees, he added.
“PBMs are counting on the fact that no one is checking their reporting so they can get paid a higher rate and still collect a fee from the pharmacy. We made recommendations to ensure more accountability and process improvements, but what really needs to happen here are changes in the law.”
DeFoor noted that "DHS disagreed with most of our findings" and replied "they were following the letter of the law."
'Transmission fees' disputed
State lawmakers who successfully pushed for legislation to hold PBMs accountable also took exception to DeFoor's conclusions.
“This audit appears to view ‘spread pricing’ and ‘transmission fees’ as synonymous and uses this as the foundation for its conclusions," said state Rep. Jessica Benham (D-Allegheny County).
"However, these are not the same, and as prime sponsor of the most significant PBM reform law in the Commonwealth’s history, I would know," Benham added.
She was a driving force behind bipartisan legislation designed to give the Pennsylvania Insurance Department new tools to regulate and investigate PBM practices overall — a separate issue from laws governing Medicaid contracts.
DeFoor acknowledged those efforts, but stood by the contentions in his agency's audit.
“A lot of work has been done on both sides of the aisle to implement changes to how PBMs operate in Pennsylvania,” he said. “Now is the time to focus on the taxpayer-funded Medicaid system and close the loophole that allows PBMs to charge pharmacies transmission fees. We need changes in the law to make sure there is no room for spread pricing to occur with our tax dollars and the law needs to clearly define that DHS is accountable for the information reported to them by their contractors.”
More than 140 pharmacies have closed across Pennsylvania since January, of which more than 70 were independently run. Such closures are increasing the growth of "pharmacy deserts" across the state, where nearest drugstore is at least five miles away.
Rep. Dan Frankel (D-Pittsburgh), the majority House Health Committee chair, said DHS banned spread pricing in Medical Assistance years ago, adding that it is prohibited in contracts.
“Unsurprisingly, PBMs still do find a variety of ways to extract profits from pharmacies, even though they are already barred from doing so through spread pricing specifically," Frankel said, calling PBMs "extremely savvy corporations that excel at finding loopholes and making money off our pharmaceutical distribution system."
Sen. Art Haywood (D-Philadelphia), Democratic chair of the Senate's Health and Human Services Committee, said he was "very disappointed" in what he called DeFoor's "false audit."
“Instead of auditing the federal and state definition of spread pricing, which we prohibit, he is auditing his own definition," Haywood said. "This is an unfortunate abuse of power and unacceptable.”
Specifically asked if he was broadening the definition, DeFoor disagreed.
"A transmission fee is spread pricing," he said.
Republicans praise report
Republicans, meanwhile, defended DeFoor's report and praised him for revealing more "government waste."
House Republican Leader Bryan Cutler (R-Lancaster) and House Republican Appropriations Chairman Seth Grove (R-York) released a statement arguing that DHS wasn't holding PBMs accountable under existing legislation.
Act 120 of 2020 by Rep. Doyle Heffley (R–Carbon County) "eliminated the practice of spread pricing and required transparency on transmission fees charged by the PBMs to pharmacies," Cutler and Grove said.
That legislation specifically dealt with medical assistance (Medicaid) contracts.
"The Auditor General’s report shows that the Department of Human Services failure to fully follow Act 120 is costing taxpayers millions of dollars," they added. "In response to the report, DHS acknowledged that they have the ability to audit PBMs, however, they chose to push that responsibility to the managed care organizations (MCOs)."
What both sides seem to agree on is that PBM practices, whether in the private sector or under Medicaid contracts, are contributing to the financial struggles facing Pennsylvania's pharmacies.
More than 140 pharmacies have closed across Pennsylvania since January, of which more than 70 were independently run. Such closures are increasing the growth of "pharmacy deserts" across the state, where nearest drugstore is at least five miles away.
“This is not just a process issue,” DeFoor said of the audit's findings. “Pharmacies are going out of business because of the impact of spread pricing. Spread pricing in any form is hurting the very people we promised to help.”
The lost $7 million, meanwhile, cannot be recovered, he added.
"The money's spent. There's no way of recouping it," DeFoor said.
