The federal agency that oversees Medicaid is moving to close a loophole that likely is worth billions to prescription drug middlemen.

The Centers for Medicare and Medicaid Services last week proposed a new rule that it said would help ensure compliance with a requirement under federal law that Medicaid dollars be spent in “proper and efficient” ways. Interested parties will have until late July to comment on the proposal.

At issue is whether the middlemen — known as pharmacy benefit managers, or PBMs — are wrongly mixing profits with what they actually pay for drugs when they bill state Medicaid programs.

If they are, it wouldn’t just be a huge boost to the companies’ bottom lines. It also would be improperly inflating taxpayers’ costs to provide health care to the poor and disabled.

The biggest PBMs are part of some of the biggest corporations in the United States, and the three biggest are estimated to control more than 80% of the marketplace.

The companies contract with insurers — which are often part of the same corporation — to administer prescription drug benefits. They create lists of drugs that are covered, negotiate huge rebates with drugmakers in exchange for putting their drugs on those lists, and they reconcile transactions at the pharmacy counter.

Crucially, PBMs also create pharmacy networks and determine how much to reimburse them for drugs. For years, pharmacies that aren’t under the same corporate roof as the PBMs have complained that they’re forced into “take-it-or-leave-it” contracts under which they often make little or no money. They say they have no real choice about signing the deals because not doing so would cost them most of their business.

Around the country, pharmacies have been complaining that CVS — which owns the largest PBM and the biggest retail chain — uses an opaque system of determining reimbursements to drive competitors out of business. CVS adamantly denies the claim, but the Federal Trade Commission is investigating it and the other big PBMs to see if they’re engaged in anticompetitive practices.

Another practice the big PBMs are known to have engaged in: “spread pricing.” That’s where they reimburse pharmacies at one rate and then turn around and bill the insurer, Medicaid or whomever’s paying another, often substantially higher rate.

A 2018 analysis by The Columbus, Ohio, Dispatch of confidential 2017 reimbursement data determined that CVS’s PBM was charging 12% more for drugs than it was paying pharmacies.

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That prompted the state Department of Medicaid to obtain all the data and subject it to an independent analysis. It found that CVS’s PBM charged taxpayers almost $200 million more for prescription drugs in 2017 than it paid the pharmacies that dispensed them.

CVS denied it was gouging taxpayers, but the analysis concluded it was charging at least triple the going rate.

In the proposed rule, CMS cited a separate investigation that showed that CVS Caremark and OptumRx were inflating costs for generic drugs by almost a third when they billed taxpayers.

“For example, an analysis of Ohio’s Medicaid managed care program by the Ohio Auditor of State revealed $208.4 million of spread within their managed care plan’s PBM transactions for generic drug claims between April 1, 2017, and March 31, 2018,” the proposed rule says. “For the time period analyzed, this amount of PBM spread represented 31.4 percent of total generic drug expenditures within the State’s Medicaid managed care program.”

Ohio Attorney General Yost in March sued the other mammoth PBM, St. Louis-based ExpressScripts, claiming it has engaged in anticompetitive practices.

Now the federal agency that oversees Medicaid is trying to prevent another possible abuse. It has to do with PBMs hiding profits and growing the cost of the program.

The Center for Medicare and Medicaid Services requires Medicaid contractors to adhere to a “medical loss ratio.” Under it, at least 85% of what contractors are charging has to go directly to providing care. That caps profit and administrative charges at 15%.

But how can we know what the PBMs’ actual cost is for drugs if we don’t have all their pricing information, which they regard as trade secrets? In the Ohio case, the PBMs forked one year’s worth over under pressure from state officials amid bad publicity.

In its proposed new rule, CMS cited a lack of transparency as a major obstacle to meeting the legal requirement that program expenditures be as efficient as possible.

“This information deficit results in a lack of accountability and transparency to the Medicaid program, which we believe is contrary to proper and efficient operation of the State Medicaid program and potentially creates conflicts of interest in connection with payment for” prescription drugs, it said.

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Secretly paying pharmacies much less for drugs than they charge Medicaid can create problems beyond allowing PBMs to pocket more profit than the law allows. It also would inflate the overall cost of Medicaid without doing anything to improve the health of poor and disabled Americans.

That’s because falsely labeling profit as a direct expenditure on patient care would be built into the overall cost of care for Medicaid patients in a given year. That amount would be used to set the following year’s “capitation rate” — the per-patient amount a state Medicaid program would pay a managed-care provider.

In other words, the money for hidden profits has to come from the taxpayers somehow, and it would inevitably lead to higher Medicaid costs.

Medical loss ratio “calculations are used to develop capitation rates paid to Medicaid managed care plans, thus their accuracy is critical in assuring that Medicaid payments are reasonable, appropriate and necessary for health care services when using a Medicaid managed care plan,” the proposed CMS rule says.

Even if it is adopted, the rule is unlikely to be sufficient to prevent PBMs from gaming the Medicaid system.

They’re also known to reimburse pharmacists at one rate and then come back and demand that some of the money be refunded. Some Ohio pharmacists have said such “clawbacks” have cost them as much as 7% of their annual revenue.

So what are PBMs reporting when they bill taxpayers and how much are they saying went to patient care and how much to profit? Is it the amount they initially paid pharmacists? The net amount after they’ve clawed some back? Both?

Asked that question at a legislative hearing in late 2021, Ohio Medicaid Director Maureen Corcoran said she didn’t know. Her agency dealt with the lack of transparency by firing the big-three PBMs and moving to a system in which it has direct access to drug-pricing information.

However, the proposed CMS transparency rule doesn’t address the issue.

This story first appeared in the Ohio Capital Journal, a States Newsroom affiliate.