Audit faults Oregon’s overly complex Medicaid drug system

SALEM, Ore. (KGW) — Oregon relies on a complicated web of companies to distribute prescription drugs to pharmacies and Medicaid patients, and the overly complex and low-transparency system leads to inconsistent drug pricing and reimbursement rates that harm consumers and small pharmacies, according to an audit released Monday by the secretary of state’s office.

The state’s regulation of the system is lackluster, the audit found, particularly when it comes to oversight of Pharmacy Benefit Managers (PBMs), the third-party companies that serve as intermediaries between pharmacies, insurers and wholesale prescription drug sellers. Drug prices and reimbursement rates are inconsistent throughout the state, and national pharmacy chains tend to get larger reimbursements than independent pharmacies for the same drugs.

The audit recommends that Oregon follow the lead of other states that have adopted legislation aimed at increasing PBM transparency and protecting pharmacies and patients, as well as strengthening contract language between PBMs and the Coordinated Care Organizations that provide health care services under the Oregon Health Plan, Oregon’s Medicaid program.

The role of PBMs

Public ire over rising prescription drug prices — as well as Oregon’s own legislative efforts to increase drug price transparency — has tended to focus on manufacturing companies, the audit found, but PBMs also wield enormous influence on the distribution and pricing system and haven’t gotten the same level of attention.

The intermediary companies emerged in the 1960s when private health insurance plans began covering large amounts of prescription drugs, creating a huge new workload to process claims. PBMs were born as a way to provide administrative support to insurers to get the job done, according to the audit, but they grew over the years into a critical piece of the distribution system, offering services like electronic claims processing, mail orders and pharmacy networks.

Today, PMBs are often responsible for processing prescription drug claims, negotiating prices with drug manufacturers, contracting with pharmacies and pharmacy networks, and creating lists of drugs that particular health plans will cover for beneficiaries, according to the audit. PBMs began consolidating in the 1990s, and the largest of them have merged with big health insurance companies and pharmacy chains, which is why they have so much influence over which drugs are covered and which pharmacies consumers can use.

The widespread integration and involvement of PBMs in the industry can make it difficult for outside observers to understand how much prescription drugs actually cost, according to the audit, and makes it difficult to verify whether reported cost savings are accurate.

The impact on Oregon Medicaid

Oregon’s Medicaid program is the single biggest government spending area in the state, according to the audit, accounting for 68% of the Oregon Health Authority’s $32 billion biennial budget — and the state uses six PBMs for most of the pharmacy services of the 16 Coordinated Care Organizations that provide the vast majority of health care under the Oregon Health Plan.

OHA pays CCOs predetermined monthly amounts for each Medicaid client, and the CCOs pay PBMs and other contractors for services, sending their transaction data back to OHA to help the agency determine future monthly payment rates, according to the audit. About 14% of those monthly payments go to prescription drugs, totaling about $767 million per year.

Prescription drug claims in general are increasing, but specialty drugs — as opposed to generic medications — are responsible for a disproportionate share of Oregon Medicaid’s total drug costs, the audit found, adding that “there is no single agreed-upon definition of a specialty drug between PBMs and insurers.”

The true cost of prescription drugs can be difficult to pin down, the audit found, because the nature of distribution system obscures them, and PBMs often use nondisclosure agreements to hide information about prices paid to drug makers and reimbursement rates to pharmacies.

“While increased transparency in prescription drug prices may not directly lower costs, it will help policymakers better understand which prescription drugs and which portion of the supply chain are cost drivers,” the audit’s authors wrote.

Regulatory oversight of PBMs falls to the Oregon Department of Consumer and Business Services, which also oversees the insurance industry, but the audit reported that department staff said there have been few complaints about PMBs in recent years and no major investigations, and pharmacists said the complaint process felt ineffective.

Audit recommendations

The audit concludes with several recommendations directed at the Oregon Health Authority and the legislature based on examples from other states that have tackled the issue, including the creation of a universal preferred drug list for Medicaid, a requirement for PBMs to disclose cost information and a restructuring of the PBM model in the state’s Medicaid program.

The audit also found that “pharmacy reimbursements vary significantly between drugs, pharmacy type, and PBM,” with local and independent pharmacies often getting the short end of the stick. The unequal reimbursement rates are contributing to Oregon’s shrinking number of independent pharmacies, the audit found, and urged the legislature to take action to address the disparities.

The report argues that prescription drugs ought to be treated more like utilities, where the government accepts industry monopolies in order to improve efficiency of an essential service, but heavily regulates the industry in order to protect consumers.

As an example, it points to other states that have begun requiring PBMs to sign “fiduciary clauses” that obligate them to act in the best interest of not just their contracted insurers, but the beneficiaries of those insurers. The audit also pointed to other states that have passed laws requiring PBMs to disclose more of their pricing, cost and administrative fee information.

Oregon has taken one notable positive step, the audit noted: the state created the Oregon Prescription Drug Program in 2003 — essentially a state-run PBM — and the program has formed a consortium with similar entities from Washington and Nevada, giving it more power to negotiate drug prices. However, only one Coordinated Care Organization uses it.

The Oregon Health Authority should also consider switching away from the current model in which every Coordinated Care Organization can choose its own PBM, moving either to a single PBM for all Medicaid drugs or a model where OHA directly takes over administration of drug benefits, the audit recommended.

In the shorter term, the audit recommended that the agency strengthen its contracts with Coordinated Care Organizations, putting in more requirements for the contracts that the CCOs in turn establish with PBMs, and assigning more OHA staff to monitor for compliance.

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