Published Nov. 18, 2018 in the Maryville Daily Times.
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.
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 exploitative 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 to these mammoths. 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 Pharmacy. “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 as dramatic.
LaFoy, the head pharmacist at Blount Discount Pharmacy, 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 — 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 to be 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 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.
“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 who pushed for the county to adopt CVS Caremark. He said reimbursements sometimes exceed the cost of a drug, benefiting pharmacists.
PBMs have as many ways to come up with reimbursement rates as there are “grains of sand on the beach,” said Joe Paduda, the director of a trade group of small PBMs. Many PBMs including CVS Caremark put a cap on the reimbursements they’ll offer. “The PBMs have such significant buying power, they can force pharmacies to sign these contracts,” he said.
Independent pharmacists say the downward zigzag of reimbursement rates is not the only game PBMs play.
Many also decry what are called “clawback fees.” The PBM, after it reimburses the pharmacy, may collect money back 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, the pharmacist, 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
If your insurance program suffers 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 to consumers.
An aggressive PBM seemed like necessary medicine to Blount County brokers in the summer of 2015. The county’s health insurance pool for employees 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.
CVS Caremark’s contract guaranteed a certain amount of savings to the county. Those savings, Harris said, combined with increases to premiums and deductibles for employees, allowed the county’s health fund to narrowly avoid the collapse that consultants expected for the summer of 2016.
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 is recovering.
Harris has pegged annual savings to the county at $1 million by using CVS Caremark.
He and county officials said they do not know the specifics of the deals CVS Caremark leverages to get its results. They do not need to.
“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 employee health plan is self-insured, meaning it pays directly for most claims, instead of going through an insurer.
“Our goal is to save Blount County and its employees as much as possible,” 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 said.
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.
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.
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.
She said the spread is not wholly profit for the PBM, since they must also cover administrative costs such as benefit services 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.”
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).
Some pharmacists in other parts of the country have taken it into their own hands to determine the spread amount. 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.
Beyond pharmacists, some governments that contract with PBMs have also cried foul. 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.
In Blount County, none of the insurance consultants the county works with say they are fans of PBMs. But if the goal is to reduce costs for all the parties involved — patients, governments, and pharmacies — these financial middlemen are just one component of a supply chain that is far more complicated than it needs to be, said Mike Zucarelli, a pharmacy consultant for CBIZ.
“I think everyone agrees there’s a better way to do this,” said Mike Stull, the chief marketing officer for Employer’s Health, a subcontractor under the county’s arrangement with CVS Caremark.
“There’s no easy fix,” said Joe Paduda, the director of a trade group of small PBMs. “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. Manufacturers charge over $1,000 in the United States, but only $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.”