Proposed Congressional Bill Seeks to Ban Spread Pricing in State Medicaid Plans

Earlier this month, House Representative Earl L. (“Buddy”) Carter (R-GA) introduced the Drug Price Transparency in Medicaid Act of 2023 (H.R. 1613) (the “Act”) in an effort to improve transparency and curb abusive practices related to the management of Medicaid pharmacy benefits. If enacted, the Drug Price Transparency Act of 2023 would:

  • Preclude the practice of “spread pricing” in state Medicaid programs;
  • Set specific provider reimbursements in state Medicaid programs;
  • Require the Secretary of the Department of Health and Human Services to conduct surveys of retail pharmacy national average drug acquisition costs; and
  • Require the Secretary to submit a report to Congress examining specialty drug coverage and reimbursement in state Medicaid programs.

The Act therefore presents a significant opportunity to control rampant Medicaid drug prices and ensure that providers are adequately compensated for their services by payors and pharmacy benefit managers (“PBMs”).

The Act Signals an End to Spread Pricing Practices Endemic to State Medicaid Programs

Perhaps the most significant aspect of the Act is its prohibition on the practice of “spread pricing” in state Medicaid programs. “Spread pricing” refers to the practice of a PBM charging payors (like state Medicaid programs) more than they pay the pharmacy for a particular prescription medication. In other words, spread pricing results in costs to the plan sponsor (in many cases, a Medicaid “Managed Care Organization”) greater than the amounts the PBM pays the provider. By charging the plan sponsor more than it pays the pharmacy, the PBM can then retain the difference (i.e. the “spread”) as profit. For example, when a pharmacy fills a prescription for a Medicaid patient, the PBM will adjudicate the claim and inform the pharmacy that the PBM will pay the pharmacy $100 for dispensing the prescription. The PBM then charges the state Medicaid plan $150 for adjudicating the same prescription, creating a “spread” of $50. The PBM pockets this $50 spread as profit. In many cases, the “spread” is not disclosed to either the plan sponsor or the pharmacy provider.

The Act will make it illegal for any PBM (or Managed Care Organization) to engage in spread pricing practices in state Medicaid programs. Specially, the Act will require that payments made by PBMs to providers must be “based on a pass-through pricing model”. In the Act’s pass-through pricing model, the amount the PBM charges the State for a prescription must be “passed through in its entirety” to the provider. The Act also requires that the amounts “passed through” to the provider must include “any post-sale or post-invoice fees, discounts, or related adjustments such as direct and indirect remunerations fees or assessments”. Historically, PBMs have utilized post point-of-sale (i.e. retroactive) adjustments to further bolster the “spread”, and therefore increase their profits, by reducing a provider’s reimbursement long after the PBM charges the plan sponsor the full cost of the prescription (without accounting for these post-sale adjustments). The Act will make the practice of assessing post point-of-sale fees on providers (without corresponding reductions to the amounts the PBM charges the plan sponsor) illegal. Moreover, since the Act will require PBMs to “pass-through” these price concessions assessed on providers to the State Medicaid program, PBMs will likely be disincentivized from engaging in the practice from a financial standpoint.

The Act Will Establish Certain Reimbursement Requirements in State Medicaid Programs

The Act requires that any payments made by PBMs to providers in State Medicaid plans comply with the requirements of Section 1902(a)(30)(A) and the related Code of Federal Regulations. This includes, for example, mandating that provider reimbursements be made in accordance with CMS’s upper limits for multiple source drugs and the actual acquisition cost for certain brand medications. See 42 C.F.R. § 447.512; 42 C.F.R. § 447.514.

Also notable, the Act prohibits PBMs from reducing their reimbursements to 340B Covered Entities and 340B Contract Pharmacies. The Act specifically requires that PBM payments to 340B Covered Entities and Contract Pharmacies “be the same as the payment amount… when dispensed by providers and pharmacies” who are not 340B Covered Entities or Contract Pharmacies. PBMs are also prohibited by the Act from considering the significantly discounted acquisition costs for 340B providers (i.e. the 340B “ceiling price”) when determining provider reimbursement. These important provisions will help ensure that the purposes of the 340B program are achieved and reduce monies from being diverted into the pockets of vertically integrated health care conglomerates.

The Act Seeks to Improve Upon Surveys of National Average Drug Acquisition Costs and Develop Mechanisms to Appropriately Survey and Report Specialty Drug Acquisition Costs and Pricing

Presently, the Social Security Act requires the Secretary (with the assistance of State Medicaid programs) to determine the monthly national average drug acquisition cost (“NADAC”) for covered outpatient drugs. The Drug Price Transparency in Medicaid Act of 2023 will place new requirements on providers to timely and consistently respond to the surveys of retail prices. Specifically, the Act requires that any “retail community pharmacy” that receives payments related to the dispensing of Medicaid prescriptions must “respond to surveys of retail prices conducted”. Previously, participation in these surveys was voluntary.

Previously, these NADAC surveys largely excluded specialty drugs. The Act therefore seeks to create a process whereby the Secretary and State Medicaid programs can capture specialty medication acquisition cost information. Specifically, the Act calls for the Secretary to submit a report to Congress examining specialty drug coverage and reimbursement in State Medicaid programs, including:

  • How State Medicaid programs define specialty drugs and specialty pharmacies;
  • How much State Medicaid programs pay for specialty drugs;
  • How States and managed care plans determine payment for specialty drugs;
  • The settings in which specialty drugs are dispensed (such as retail community pharmacies or specialty pharmacies); and
  • Recommendations as to whether specialty pharmacies should be included in the survey of retail prices to ensure NADACs capture specialty drugs and drugs sold at specialty pharmacies.

How Frier Levitt Can Help

As it is still early in the Act’s “legislative lifecycle”, its overall impact may depend on mechanisms to privately enforce the Act’s provisions. Frier Levitt will continue to monitor the Drug Price Transparency in Medicaid Act of 2023 through the legislative process and will provide further updates as additional information becomes available.

Frier Levitt regularly counsels pharmacies, providers, plan sponsors and associations across the United States in understanding, implementing and (if necessary) challenging proposed legislative action. Contact us to speak with an attorney.