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. Read the original web version with paywall here.

This series won the Associated Press of Tennessee’s 2018 Malcolm Law Award for Investigative Reporting. It also won second place in 2018 for the Tennessee Press Association’s award for Investigative Reporting.

Caption: Pharmacists at City Drug and Lowe’s Drugs, the other two independent pharmacies in town, reported losing money from the county’s health plan over the past year.

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 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 payments to Maryville’s independent pharmacies meant to cover the cost 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.

Meanwhile 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 of Medicaid programs with similar contracts have found a different story. 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 antitrust committee 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. The vast disparity in power manifests through lopsided contracts, leading independent pharmacists 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 Pharmacy. “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.”

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— roughly a quarter of the plan’s total prescription fills. In those transactions, LaFoy lost more than $150,000. 

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.

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 wrote 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.”

Reimbursement rates for a given drug change from day to day and store to store.

“Something as simple as a hurricane hitting the East Coast can change a drug cost,” said Mike Zucarelli, a pharmacy consultant with the county’s brokerage firm.

Many pharmacists also decry what are called “clawback fees.” The PBM, after it reimburses the pharmacy, may collect money through various fees based on multiple factors, from after-sale manufacturer rebates to randomly auditing the pharmacy’s clerical work for mistakes, such as marking a “twice-a-day” prescription as “once every 12 hours.”

Long claims City Drug pharmacy once lost $4,500 from fees for a single patient’s supply of Insulin over a year due to what he described as “minor clerical errors.” 

In principle, Long said, 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,” he said. “But if they were allowed to see what’s going on, the whole industry would be turned upside down.”

The Spread: Undisclosed profits could inflate PBM 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 one year.

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.

But his plan worked. CVS Caremark’s contract had guaranteed roughly $1 million in savings every year, and combined with increases to premiums and deductibles for employees, the county’s health fund narrowly avoided the collapse that consultants expected for the summer of 2016. Since then the fund has risen to its highest level in twenty years. 

“Our goal is to save Blount County and its employees as much as possible,” Harris said. He added that the problems faced by independent pharmacists are not specific to Blount County or CVS Caremark.

“The bottom line is, we’re spending taxpayer money,” Blount County Mayor Ed Mitchell said. “We have to make sure we’re saving and getting the best bang for our buck.” 

Blount County’s plan is self-insured, meaning it pays directly for most claims, instead of going through an insurer. But links between the county’s savings and the pharmacy’s losses are difficult to establish. 

Following the traditional PBM model, CVS Caremark sits over a complicated web of exchanges, reimbursements and rebates between drug manufacturers, pharmacies, and insurers. All are bound by nondisclosure agreements to avoid sharing figures. As a result, the cut taken by the PBM — known as the “spread” — is unknown.

CVS spokeswoman Christine Cramer said many clients request the “spread pricing” model 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 said. “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.”

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

Payment rates from CVS Caremark to other parties involved in the contracting are laid out in other agreements.  Among them: Employer’s Health, a further financial middleman who represents the county alongside hundreds of other clients to CVS Caremark, is paid a 50-cent commission per prescription claim by CVS Caremark. CBIZ also receives a 95-cent per-member, per-month commission from CVS Caremark. 

On the state level, some have accused PBMs of inappropriately profiting off of the model. In Ohio, state auditors last year said PBMs charged the state a spread of more than 31 percent for generic drugs. This was nearly four times the reported average across all drugs. And earlier this year in Arkansas, lawmakers passed a law requiring PBMs to submit to state oversight after reports surfaced that local pharmacies were being systematically under-reimbursed compared to CVS retail stores.

An investigation by Bloomberg 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.

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 claims they make a 100 percent or more margin on,” he said. “They wouldn’t be accepting these contracts if they weren’t making money.”

He added 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 one entity.”

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. “Asking for transparency (in PBMs) only addresses part of the issue of pharmacy pricing and access.”

He points to Harvoni, a drug that effectively wipes Hepatitis C from the body, as an example. It costs over $1,000 in the United States, but $4 in India, where the government takes a more active role in the drug market. Focusing on PBMs, Paduda said, is “like trying to fix a broken-down engine by fixing the spark plug.”

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