The Squeeze and the Spread: How a Blount County contract to rescue its health care fund is gutting local pharmacies

Published Nov. 18, 2018 in the Maryville Daily Times.

The original web version is behind a paywall on the Daily Times’ website. (1. Intro 2. The Squeeze 3. The Spread)

They’ve made untold billions while devastating mom and pop pharmacies. These financial middlemen of the U.S. health sector are called pharmacy benefit managers, or PBMs, and while they arose decades ago as an ally to insurers fighting rising health care costs, they’ve since developed a playbook of exploitive market games — nondisclosure agreements, blind rates and Rube Goldberg-like financial contraptions — while avoiding any serious oversight or regulation.

And it’s happening in Maryville.

CVS Caremark, a $36.7 billion PBM, has acted through its contract with the Blount County government to plummet reimbursements for Maryville’s independent pharmacies by lowering costs of buying and filling prescription drugs.

As a result, when any one of the roughly 3,800 members of the county’s self-insured health plan — a group that includes firefighters, teachers and other public sector employees — fills a prescription at one of these local pharmacies, that pharmacy often loses money — in some cases $150 or more on a single refill.

Pharmacists at Blount Discount, City Drug Co. and Lowe’s Drugs, the three independent pharmacies in Maryville, all reported significant and unusual losses from the county’s health plan.

The county’s brokers say the millions of dollars saved since the decision to contract with CVS Caremark two years ago helped its starving health fund narrowly avoid financial collapse.

But recent state investigations in Ohio, Arkansas, West Virginia and others lof Medicaid programs with similar contracts have found a different story: spread pricing. PBMs like CVS Caremark mark up the difference between the amount they reimburse pharmacies for a drug and the amount they charge the client health plan. These PBMs arbitrarily slash reimbursement rates and keep the extra savings for themselves.

This is a story about the “squeeze” — the sudden and dramatic pressure leveraged on independent pharmacies — and the “spread” — how CVS Caremark and other PBMs are able to set for themselves secret profit margins at the expense of those pharmacies.

The Squeeze: How PBMs put the foot on local pharmacies

PBMs are big business. Very big business. Through a combination of monopoly and muscle, they have established themselves as the central finance coordinators over a dizzyingly complex drug market.

A 2015 report from the U.S. House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law found that the top three PBMs — Express Scripts, CVS Caremark and OptumRX of UnitedHealth Group — controlled 78 percent of the market, collecting $200 billion a year to cover 290 million enrollees.

Meanwhile, the mom and pop pharmacies that depend on these PBMs to channel money from the rest of the health care market are mice in comparison to these mammoths. The vast disparity in power manifests itself through lopsided contracts, leading independent pharmacists in Maryville and across the country to take a dim view of PBMs.

“They make money off my back and the backs of my employees,” said Phil LaFoy of Blount Discount. “They’re crooked,” said Jeremy Long, a pharmacist who previously worked at City Drug. “Nothing other than a scam,” said Mac Wilhoit of Lowe’s Drugs.

The financial pressure exerted on these small businesses is felt across the state. Tennessee Pharmacists Association Executive Director Micah Cost said his organization has observed a “systematic reduction” of reimbursements from PBMs to independent pharmacies. As a result, many are shuttering their doors, he said. “No one can sit there and take losses on medications like that.”

And nationwide, more than 16 percent of independently owned rural pharmacies closed between 2003-18, according to a policy brief published in July by the Center for Rural Health Policy Analysis at the University of Iowa.

In Blount County, no reimbursements have dropped so hard and so fast as those offered by CVS Caremark through its contract with the county government. Even other local employers that use CVS Caremark for their employee health plans, such as DENSO, have not seen cuts that dramatic.

LaFoy, the head pharmacist at Blount Discount, compiled a spreadsheet of those reimbursements.

From July 2017 to July 2018, his three pharmacy stores filled 13,787 prescriptions for the Blount County government’s health plan. That represents almost a quarter of all prescription fills for Blount County employees, as projected in a 2016 market analysis from Employer’s Health, the intermediary firm that brokered the contract between the county and CVS Caremark.

And although CVS Caremark is supposed to reimburse the pharmacy for the cost of those prescription fills (both buying the drug and the labor involved), more often than not those payments fell far short.

As a result, LaFoy lost more than $150,000 in a 12-month period from 2017 to 2018, he told Blount County commissioners in a special called meeting over the summer. (The meeting, which was attended by local state Reps. Bob Ramsey and Jerome Moon, ultimately saw no action).

Pharmacists at City Drug and Lowe’s Drugs, the other two independent pharmacies in town, also report losing money from the county’s health plan over the past year — creating an arrangement in which these independent pharmacies effectively subsidize drug costs for the county government.

CVS spokeswoman Christine Cramer said the company considers independent pharmacies as important partners in giving members of CVS Caremark-sponsored health plans convenient access to medications. She said independent pharmacies account for about 40 percent of pharmacies in the network, and that the number has grown by more than 2,000 locations, while the number of chain retail pharmacies in the network has stayed “relatively flat.”

She added in an email: “We provide fair reimbursement to all of the pharmacies in our PBM network and we reimburse independent pharmacies at a higher rate on average than the chain pharmacies in our network, including CVS Pharmacy. Pricing is adjusted up or down regularly based on market factors and, in fact, our pharmacy reimbursement has gone up on more than 1,800 drugs this year alone as market factors change.”


The downward zigzag


Reimbursement rates are not set in stone. The rate for a given drug changes from day to day and store to store. PBMs are under no obligation to explain dramatic shifts in rates — even when, as state investigators allege in Arkansas, they are found to disproportionately favor CVS’s own retail stores.

The seemingly arbitrary nature of these zigzagging rates is a source of ire for many independent pharmacists.

Joe Paduda, the director of a trade group of small PBMs for workers’ compensation programs, says PBMs have as many ways to come up with reimbursements rates as there are “grains of sand on the beach.”

That can, and does, include padding profit lines.

“Quite frankly, in other business relationships, it would never even come up, but because PBMs do have significant buying power, they can force pharmacies to sign contracts that have things like MAC (maximum allowable cost) rates in them,” he said, referring to a contracted cap on reimbursements.

LaFoy calls it a blind contract. “There’s a certain amount of faith that a PBM will treat us fairly,” he said.

Proponents point to changing market conditions, which are sometimes rapid, as the cause of these fluctuations. A pharmacist might buy a bulk quantity of an expensive drug in January, but by the time they use the supply to fill prescriptions that summer, its price has dropped — and with it, the reimbursement rate offered by the PBM.

“Something as simple as a hurricane hitting the East Coast can change a drug cost,” said Mike Zacarelli, a pharmacist with CBIZ, the brokerage firm employed by Blount County. He adds that rates also often increase for pharmacists, giving extra returns.

Critics say the downward zigzag of reimbursement rates is not the only game PBMs play.

Many pharmacists also decry what they call “clawback fees.” The PBM, after it reimburses the pharmacy, may collect money through various fees (an umbrella term is direct and indirect remuneration, or DIR fees). The fees can be based on multiple factors, from after-sale manufacturer rebates to random audits of paperwork.

Some of the mistakes they look for include marking a “twice-a-day” prescription as “once every 12 hours.” Pharmacists say these performance metrics are unpredictable.

Long says he has seen pharmacy losses from DIR fees of up to $4,500 for a single patient’s supply of Insulin over a year due to minor clerical errors. These inquiries can reach back through seven years of records to find mistakes.

So why do pharmacists continue to sign these contracts? In principle, a pharmacy could withdraw from a PBM’s network. But doing so effectively would mean pulling out of the market entirely. “I’d be telling half my customers to stick it,” Long said in August.

“If the patients were allowed to see what’s going on, the whole industry would be turned upside down,” he said.

The Spread: Undisclosed profits could inflate PBM costs

If you suffer from a hemorrhaging health fund, talk to your local broker about prescribing P-B-M: a new way of paying pharmacies.

Warning: PBMs are not transparent. Side effects may include secret profits, ruptured local health care retailers and in some documented cases, increased costs.

An aggressive PBM seemed like necessary medicine to Blount County brokers in the summer of 2015. The county’s health insurance pool had been draining for years, and it was quickly getting worse. A fifth of the fund, more than $1 million, had been lost in just 12 months.

Faced with the prospect of a collapsed health fund — a disaster for the thousands of public sector employees and family members who depended on it — the county’s newly hired broker, Cole Harris, of CBIZ Inc., selected CVS Caremark among competing bids to act as the county’s new PBM.

Without CVS Caremark, and other plan adjustments, Harris said the county health fund was on track to be completely drained by the summer of 2016.

Harris’s plan worked. CVS Caremark’s contract guaranteed a certain amount of savings to the county, and combined with increases to premiums and deductibles for employees, the county’s plan narrowly avoided collapse.

Instead, by the middle of 2016, the fund contained $736,416 — a fraction of the $6 million it held just three years prior, but better than nothing. Slowly, the fund recovered.

Harris and CBIZ do not know the specifics of the deals CVS Caremark leverages to get its results. They do not need to. “Our goal is to save Blount County and its employees as much as possible,” he said, later adding that quality is another consideration.

Harris said the county could find another arrangement where the pharmacies make more money, “but that would be on the backs of employees and taxpayers.” He stressed that this is not just a CVS problem or a Blount County problem, but a nationwide problem with PBMs.

“We’re self-insured,” Blount County Mayor Ed Mitchell said in a call last week, “which means we pay for the prescriptions with taxpayer dollars.”

He said he knows local pharmacies have issues with CVS Caremark’s practices, and is frank that he does not fully understand the mechanics of the PBM market. (That’s a confession shared even by some experts, who say the market is unnecessarily complicated).

“But the bottom line is, we’re spending taxpayer money. We have to make sure we’re saving and getting the best bang for our buck,” Mitchell said, adding that he appreciates all that local pharmacies do.

Harris has pegged annual savings to the county at $1 million by using CVS Caremark.

It is difficult, however, to document a link between what the county is charged and what is paid out to the pharmacies. The difference between the two is the “spread,” and that represents the self-determined profit the PBM is taking.

Spread pricing is an acknowledged practice by CVS Caremark.

Against the claim that PBMs are inappropriately profiting from the arrangement, CVS spokeswoman Christine Cramer said many clients request it because it provides more stability and certainty of drug prices. “Under this model, we make money on some drugs, but lose money on others.”

She adds that the spread is not profit, but is actually used to cover administrative costs, such as benefit services to plan sponsors and clinical programs for patients.

“In reality, when these services are accounted for, the net profit per prescription is far lower than what is being reported and is an appropriate, and often lower, margin compared to other industries,” she wrote.


The scattering prism — how PBMs make a money trail hard to follow


Without knowing the profit margin of PBMs, it is impossible to definitively tie the county’s savings to the “squeeze” on local pharmacies.

CVS Caremark and other major PBMs have designed it this way. They sit over a complicated web of exchanges, reimbursements and rebates between drug manufacturers, pharmacies, insurers and other financial middlemen. All are bound by nondisclosure agreements to avoid sharing figures.

In this case, Phil LaFoy of Blount Discount Pharmacy and other pharmacists are not allowed to share with Blount County how much CVS Caremark reimburses them on a given prescription. In turn, Blount County is not allowed to disclose how much they pay CVS Caremark for a particular claim.

A public records request for claims data, which would help efforts to document the spread for the Blount County health plan, were denied on the grounds that it could violate the Health Insurance Portability and Accountability Act (HIPAA).

Few concrete figures are available. Among them: Employer’s Health, another financial middleman whose contract was bundled with CVS Caremark, gets a 50-cent commission per prescription claim that goes through CVS Caremark. Additionally, CBIZ gets a 95-cent per-member, per-month commission fee, which although paid through CVS Caremark, would apply to any PBM used.

Going past CVS Caremark and other PBMs’ blanket use of nondisclosure agreements, there is a second complication to tracing dollars as they pass from health plans to PBMs and then pharmacies: Almost all the contracts work by aggregating hundreds and sometimes thousands of other parties.

Consider that Blount County does not have a contract with CVS Caremark. It instead has a contract with Employers Health, which holds Blount County as a client in a group of 160 entities that collectively have a contract with CVS Caremark. The roughly $5 million that Blount County had in pharmacy spending last year is shuffled in with the millions shared from others in the group.

And on the other side, the local pharmacies also do not deal directly with CVS Caremark. Instead, they deal with an intermediary firm that similarly groups them together by the hundreds.

In the middle, CVS Caremark has the power to play with reimbursement rates to pharmacies while maintaining guaranteed rates to health plans. To balance out uneven returns, they can always take money from one bucket and put it in another.

Think of the PBM as a prism that scatters information. Not only is it impossible to track a given prescription through the reimbursement network, it also is impossible to determine how much profit CVS Caremark is taking.

The only accountability leveraged on PBMs is whether they return the guaranteed savings. There is no audit of the spread.

The potential for problems is not hypothetical.

In Ohio, PBMs charged the state a spread of more than 31 percent for generic drugs, state auditors found. This was nearly four times the reported average across all drugs.

Earlier this year in Arkansas, after reports surfaced that local pharmacies were being systematically under-reimbursed compared to CVS retail stores, lawmakers passed a law requiring PBMs to submit to state oversight.

An investigation by Bloomberg, a financial publication, published in September found markups of $1.3 billion by PBMs on the $4.2 billion spent by state Medicaid insurers on the top 90 best-selling generic drugs. For example, Aripiprazole, an antipsychotic drug, dropped rapidly in price during 2017 to about $20 a month. But state Medicaid programs in New York, Texas and other states continued to pay more than $140 a month for the drug, data showed.

The analysis was, due to constraints outlined above, unable to separate out how much of that markup went to pharmacies and how much was kept by the PBM.

Some pharmacists have taken it into their own hands. Dawn Butterfield, a pharmacist in Florida who is a board member of Pharmacists United for Truth and Transparency, an anti-PBM group, told The Daily Times that through the state Medicaid patient portal, she was able to compile a spreadsheet of drug reimbursements and profits. The most striking difference is between independent pharmacies and those of CVS. For her own pharmacy, she said there was an average spread of $77 per script for reimbursements paid to her by CVS Caremark under the state Medicaid program.

“It’s set up perfectly to make them a boatload of money,” she said.

Mike Zucarelli, a pharmacy consultant with CBIZ, said the conversation over the PBMs and independent pharmacies tends to see a “cherry-picking” of data. “They don’t talk about the claim(s) they make a 100% or more margin on,” he emailed, characterizing the business relation as actually net beneficial for many independent pharmacists. “They wouldn’t be accepting these contracts if they weren’t making money.”

He adds that he is “definitely not” a fan of PBMs. “But I do believe it’s important that everyone (…) continue to understand the full supply chain before targeting 1 entity.”

Mike Stull, the chief marketing officer for Employer’s Health, said the industry is more complicated than it needs to be. “I think everyone agrees there has to be a better way to do this,” he said, “Independent pharmacies are not in an enviable position.”

Joe Paduda, the director of a trade group of small PBMs for workers’ compensation programs, echoed the sentiment.

“There’s no easy fix,” he said. PBMs are entrenched as a near-necessity now for health care providers, and although the push for accountability is a step in the right direction, “asking for transparency only addresses part of the issue of pharmacy pricing and access.”

He points to the fact that life-saving drugs that cost thousands of dollars in the United States are sold for far less in countries where the government takes a more active role in the drug market. He points to Harvoni, a drug that effectively wipes Hepatitis C from the body, costing $1,000 in the United States, but $4 in India.

“It’s like trying to fix a broken-down engine by fixing the spark plug,” he said of the focus on PBMs. “Well that’ll fix the spark plug, but not the engine.”