Andy Beshear investigating suspected state Medicaid drug price gouging

Attorney General Andy Beshear is launching an investigation into whether industry middlemen, known as pharmacy benefit managers, are overcharging Kentucky's Medicaid program for prescription drugs.

He will also investigate whether those companies are overcharging the state employee health plan.

"I am demanding answers for Kentucky families and community pharmacies who want greater accountability and transparency surrounding the cost of prescription drugs,"
said Beshear, a Democrat who is running for governor.

Beshear said he intends to "recover any profits improperly retained at the expense of the commonwealth and its taxpayers."

The investigation comes as such companies, known as PBMs, are coming under increased scrutiny in Kentucky and other states, including Ohio, amid allegations they are making excessive profits from state Medicaid programs.

Background:Kentucky middlemen reap $123M from Medicaid at pharmacies' expense

Antonio Ciaccia, who works for the Ohio Pharmacists Association, said Kentucky may be surprised to find out how much money is being siphoned from its Medicaid and employee health plans through the use of PBMs.

"If the attorney general is following the rainbow, I think he’s going to find a pot of gold at the end of it," said Ciaccia, who also directs 46Brooklyn, a group that analyzes prescription drug costs.

PBMs are hired by health insurance companies, including those that handle Kentucky's Medicaid business, to manage prescription drug claims and make payments to pharmacists. One of their more controversial practices is "spread pricing," in which PBMs charge a state Medicaid program more than they pay pharmacists to fill prescriptions, keeping the difference as profit.

In Ohio, a state audit found PBMs made $225 million in one year from spread pricing in the state's Medicaid program. Ohio has since banned the use of spread pricing in its Medicaid pharmacy claims, a step Kentucky is considering.

Kentucky last month released a report mandated by state lawmakers that showed PBMs took in at least $123 million in 2018 through spread pricing on Medicaid claims. Lawmakers are skeptical that amount accounts for all the PBM profits in Kentucky and have asked state Medicaid officials for more information.

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Kentucky's pharmacists have been increasingly vocal about what they say are low payments and unfair practices by the PBMs that they say threaten to put many small drugstores out of business.

Lawmakers, inundated with complaints from their hometown pharmacists, have stepped up oversight. The state report released last month on how much money PBMs made in 2018 was the result of legislation enacted last year directing state Medicaid officials to collect and report the information.

Several pharmacists on Thursday welcomed Beshear's investigation, among them Christopher Palutis, president of the Kentucky Pharmacists Association and owner of drugstores in Lexington and Winchester.

"We’re still struggling because nothing's really changed yet," Palutis said. "The good news is that it's coming to light; there’s light that’s going to be shed on it."

Pharmacist Rosemary Smith, who owns six independent drugstores in Eastern Kentucky with her husband, Luther Smith, said she is delighted by an outside investigation.

"That’s fantastic news," she said. "I think it’s really a step in the right direction for the state of Kentucky."

Ciaccia said a thorough investigation may show that far more than $123 million in Medicaid money, as cited in the recent state report, went to PBMs through a maze of complicated — and often confidential — administrative fees, rebates, "clawbacks" of supposed over-payments and other means.

"This is like playing chess against Bobby Fischer," Ciaccia said. "If they think they know all the revenue streams, they don't. They don’t, we don’t, nobody does."

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Pharmacists claim they have little recourse because they operate under contracts with the PBMs on a "take-it-or-leave-it" basis for Medicaid prescriptions, which can provide more than half the business at some pharmacies in low-income or rural areas.

Kentucky Medicaid officials acknowledged they've had difficulty collecting information because the PBMs report to the health insurance companies that hire them but not to the state, which contracts with the insurance company.

For that reason, the details of how PBMs operate have been dubbed "the black box" in Kentucky and other states.

Kentucky Medicaid Commissioner Carol Steckel assured a legislative oversight committee last month that practice will change under new contracts the state is drafting.

"This is a brand new day," Steckel said, whose department falls under the Cabinet for Health and Family Services. "The black box mentality has got to go."

Steckel and her staff told the committee her department's initial report on PBM practices in Kentucky, called "Opening the Black Box," is preliminary and that work will continue to collect more information.

Beshear said he plans to dig deeper.

"Both the legislature and the cabinet have done a good job in outlining the potential problem here," he said. "We intend to build on their work."

Beshear's investigation includes the state Medicaid program, which covers nearly 1.4 million people, and the state employee health plan, which covers another 100,000.

"The complications, the lack of transparency, is one of the major reasons we are taking action," he said. "We believe we have tools to ultimately get to the bottom of it."

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Beshear said that if his office finds the PBMs reaped excessive funds, he will seek to recover the money.

Beshear declined to identify the target of his investigation, but a single national company, CVS Caremark, an affiliate of the drugstore chain, holds contracts with four of the five managed care health insurance companies that handle nearly all of Kentucky's $11 billion-a-year Medicaid business. CVS Caremark also serves as the PBM for the state employee health plan.

A CVS spokeswoman provided the following statement:

"Our role as a PBM is to help reduce overall costs in the health care system and improve health outcomes. We do not comment on active investigations, but we believe any review conducted by the Attorney General will conclude that our business practices and the services we provide to our clients and their beneficiaries have benefited the commonwealth."

Deborah Yetter: 502-582-4228; dyetter@courierjournal.com; Twitter: @d_yetter.