Spread Pricing – Marking Up Drug Claims

In an effort to increase and maximize their profits, pharmacy benefit managers often engage in a practice known as "spread pricing," or charging a health plan potentially much more than the PBM pays the pharmacy for filling a prescription. Plans are often unaware that this is occurring due to a lack of transparency in contracts. That is, the PBM does not disclose to the plan how much they are actually paying the pharmacy nor that the PBM is pocketing the difference, or spread. The spread price is charged in addition to any agreed-upon maintenance fee between the plan sponsor and the PBM.

According to a report produced by the Creighton University School of Pharmacy and Health Professions, spread pricing generally averages $5.00/prescription but has run as high as $200.00. Because this is charged in addition to the maintenance fee covered by the contract, this increases the cost of the pharmacy benefit. Additionally, because plan sponsors are often unaware of how much a drug costs and how much a PBM should be paying, it is difficult for them to detect this practice.

In fact, during his May 10, 2010 presentation to Congressional staff, Mark Riley, Pharm D, Executive Vice President of the Arkansas Pharmacists Association, noted that he has spoken to over 160 employers and could count on one hand the number who knew that the price they were billed was more than what was paid to the pharmacy. This demonstrates that, when it comes to PBMs, ignorance on behalf of plan sponsors is bliss.

PBMs have faced allegations of "drug switching," that is, increasing their profits by steering patients toward more expensive medications, whose manufacturers pay rebates to the PBMs for promoting their particular medication. Such concerns have been a factor in litigation brought against the major PBMs. The PBMs have paid out $370 million to date to settle such claims.

PBMs operate large mail order facilities that historically have leaned toward dispensing costlier brand-name medications, and fewer lower-cost generic medications, when compared to local pharmacies. In 2010, PBM data indicates that community pharmacies dispensed generics 72.7 percent of the time while the big three PBMs' mail order dispensing facilities' corresponding "generic dispensing rates" ranged from 60.5 to 61.5 percent.

One explanation for this gap may be the big PBMs' pursuit of brand name manufacturer rebates. Industry analyst Linda Cahn has argued in Managed Care Magazine that PBMs reap huge brand drug rebates by manipulating brand and generic drug definitions: "...when it is in PBMs' interests to classify more drugs as generics, they magically recharacterize the drugs as generics. For example, PBMs wanting to make their generic substitution rate appear greater reclassify drugs that they invoiced as brands as generics when calculating the number of generic drugs dispensed. Similarly, if a contract calls for a PBM to pay a specified rebate 'per brand drug claim,' it can reclassify drugs that were invoiced as brands as generics for the purpose of calculating rebates..."

For patients, employers and health plans, that difference adds up quickly. For example, IMS Health concluded that every two percent increase in generic utilization in Medicaid programs saves taxpayers an additional $1 billion annually. More broadly, a one percentage point increase in GDR was associated with a 2.5% reduction in gross pharmacy costs, according to an analysis of plan sponsor data from 2007-2009 for approximately 14 million beneficiaries.

"Besides affecting a client's aggregate drug costs, PBMs' drug misclassification enables them to falsely claim that they are satisfying brand and generic contract guarantees." - "When Is a Brand a Generic? In a Contract With a PBM", Linda Cahn, Managed Care, Sept. 2010

In addition, it is common practice for PBMs to push cost-sharing schemes that encourage patients to use PBM-owned mail order facilities. For example, a PBM may urge an employer or other health plan sponsor to absorb one month of the patient's usual co-payment (or 33 percent of the patients' total cost sharing responsibility) for 90-day supplies of brand-name drugs if the patient uses mail order as opposed to a local pharmacy. When health plan sponsors agree with such recommendations they effectively reduce the financial motivation for mail order patients to move away from expensive brand drugs.