Pennsylvania Auditor General Tim DeFoor released a report detailing how the Department of Human Services failed to adequately oversee pharmacy benefit managers who provide prescription drug services to Pennsylvanians enrolled in Medicaid. As a result, DeFoor said, Pennsylvanians paid an estimated $7 million more for the Medicaid program in 2022 alone.
The report specifically focused on the actions of pharmacy benefit manager PerformRX, a Medicaid subcontractor. DeFoor alleged that PerformRX — and likely other pharmacy benefit managers — misreported profits from fees charged to pharmacies as health care costs, and that DHS never verified those allegations.
These claims ultimately determine how much money in state budgets will be allocated to fund the Medicaid program in future years.
“PBMs like PerformRX are counting on no one checking their reports so they can make more money,” DeFoor said at a news conference Wednesday announcing his findings.
But the Department of Human Services disputed the report’s claims. And since DeFoor, a Republican, was on the November ballot, some Democrats have accused him of politically motivated conduct.
“The results of this audit are blatantly political and fundamentally flawed,” said Rep. Malcolm Kenyatta (D-Philadelphia), the Democratic candidate challenging DeFoor, published on Wednesday X. “He had almost four years to conduct such an audit, but he never did it — until now, in an election year.”
What is PBM
Pharmacy benefit managers are hired by insurance companies to handle the prescription side of their health plans. In this role, they negotiate drug prices with manufacturers, often receiving kickbacks in exchange for approval to cover their drugs. They are also responsible for reimbursing pharmacies when a patient fills a covered prescription.
Many of the largest pharmacy benefit managers have come under scrutiny from lawmakers and regulators at both the state and federal levels, who accuse them of inflating prescription drug costs while making huge profits.
Pharmacists have also long been sounding the alarm, saying the companies have acted monopolistically to force them to accept returns that do not cover the cost of the drugs they dispense.
Prescription for Trouble: Pennsylvania Pharmacists Say PBMs Are Causing Pharmacy Closures
More than 140 pharmacies have closed in Pennsylvania since the beginning of this year, and the state’s largest pharmaceutical industry groups are blaming PBMs (pharmaceutical manufacturing companies).
Earlier this year, Governor Josh Shapiro signed the bill into law aimed at limiting the powers of pharmaceutical benefits managers.
“Price range” and supervision
Medicaid pharmacy benefit managers are prohibited from engaging in a practice known as “spread pricing.” This practice involves pharmacy benefit managers charging insurance providers one price for a drug, reimbursing pharmacists at a lower rate, and then profiting from the difference.
DeFoor found that PerformRX profited by charging pharmacists a “transmission fee” — a flat fee for each prescription drug transaction. But that was never reported as a profit to the Department of Human Services or the managed care organizations that work with PerformRX.
The Department of Human Services relies on reports from managed care organizations that it contracts to oversee Medicaid health insurance plans. These managed care organizations, in turn, employ pharmacy benefit managers to oversee prescription drug services.
“DHS took them at their word and never verified whether that was actually true,” DeFoor said at a news conference Wednesday.
He added that his office was able to verify their claims by contacting pharmacists who informed them about the unreported charge.
PerformRX did not respond to Capital-Star’s request for comment.
In its official response to the audit findings, PerformRX acknowledged that it made money from the transmission fee but said it did not believe it constituted “pricing.” The company said the fees assist “reduce the administrative burden on MCOs (managed care organizations) by offsetting some of the costs.”
PerformRX also said it had retroactively adjusted its transparency reports to include the transmission fee.
The lack of oversight of pharmacy benefit managers is particularly troubling, DeFoor said, because they are often financially tied to managed care organizations and insurance companies that contract with them.
Perform RX and two of the managed care organizations that contract with PerformRX to provide Medicaid prescribing services, AmeriHealth Caritas and Keystone First, may be connected through subsidiaries to the same parent company, BMH LLC.
“When you have companies that are financially connected and are legally making money off taxpayers, government oversight becomes even more important,” DeFoor said Wednesday.
Rejection
DeFoor’s critics argue that his findings are based on a misunderstanding and that transmission fees should not be included in spread prices under current practice and federal guidelines.
“The Pennsylvania Department of Human Services (DHS) strongly disagrees with the conclusions reached in this audit — conclusions based on a fundamental misunderstanding of spread pricing,” Brandon Cwalina, a spokesperson for the department, said in an emailed statement. “The report uses ‘spread pricing’ and ‘transmission fees’ interchangeably, which is an inaccurate interpretation that is the basis for the audit conclusions.”
The Department pointed out federal guidelines published by the Centers for Medicaid Services on how spread pricing is calculated, which does not mention “transmission fees.”
Rep. Jessica Benham (D-Allegheny), another critic of DeFoor’s report, said the Department of Human Services agreed this spring to ban transmission fees starting in 2025 after pharmacists raised complaints. It had already banned spread pricing by PBMs that contract with Medicaid providers.
“This audit is deeply frivolous and misleading,” Benham wrote in press release Wednesday. “PBM reform is a serious issue that we have undertaken to address, and the Auditor General’s problematic approach to this matter distracts from the importance with which we should treat the PBM issue.”
Benham campaigned alongside Kenyatta for auditor general in this year’s election.
““I need a partner in this office who will help me hold Big Pharma accountable, ensure that our schools are using their resources wisely, and can use that auditing power to investigate wrongdoing across all industries,” she said in a statement. Facebook post promoting a fundraiser with Kenyatta earlier this month.
Benham was also a prime sponsor of the pharmacy benefit manager reform bill signed by Gov. Shapiro earlier this year, and she would like to see it go further. The bill did not prohibit spread pricing for pharmacy benefit managers working with commercial health plans, even though many pharmacists had asked for it.
He worries the report places blame on the Department of Human Services and the Medicaid administration, when more blame lies with pharmacy benefit managers and a lack of regulation.
“Why point the finger at the administrator? [sic] What has been done so far and is any action being taken?” Benham said in a text message.
Representative Dan Frankel, the Democratic chairman of the House Health Committee, also criticized both the audit and DeFoor.
““I’m ashamed of the auditor general, but he’s not the first person to have trouble understanding our health care system,” Frankel wrote in a press release. “It’s way too complicated, and these huge companies are deliberately exploiting that fact to deceive health care consumers.”
However, DeFoor’s team believes that the distinction between spread pricing and transmission fees is a technical issue.
“Whether you call it a transmission fee, a rebate or a discount, it’s about spread pricing,” Peggy Morningstar, who worked on the audit, said at a Wednesday news conference.
In addition, Morningstar explained in a telephone interview that Law 2020 The law, which was intended to regulate the management of pharmacy benefits in Pennsylvania’s Medicaid market, explicitly required them to report the difference between the amount they receive from the managed care organization and the amount they pay the pharmacy.
The Department of Human Services, in its response to the audit, said it believed transmission fees had nothing to do with the equation.
“The most important thing in all of this is just one word: transparency,” DeFoor said. “They are not transparent.”
April Hutchinson, a spokeswoman for the Auditor General’s office, said the audits are not intended to “catch anyone or find someone to blame.”
She added that it is occasional for audits to be met with so much resistance. She cited a report published last month on the Department of Transport’s bridge inspection process.
“We saw similar issues during our audit of the lack of oversight of government contractors,” Hutchinson said.
The audit found that the Department of Transport relied excessively on contractors to vouch for the certificates of subcontractors they hired, rather than verifying their claims.
“This overarching goal of monitoring and making sure contractors are providing accurate information to the state is not unique here,” she said.
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