Pharmacy Reimbursement Trends in Massachusetts

“HPC illustrated clear gaps between what managed care paid for its drugs and what these drugs cost pharmacies to purchase.”

In June 2019, the Massachusetts Health Policy Commission (HPC) published a DataPoints issue titled, “Cracking Open the Black Box of Pharmacy Benefit Managers.” In the report, HPC compared and contrasted drug prices in its Medicaid fee-for-service program with its managed care program, as well as compared generic drug costs to the pharmacy acquisition cost of these same generic drugs, as measured by CMS’ National Average Drug Acquisition Cost (NADAC). HPC illustrated clear gaps between what managed care paid for its drugs and what these drugs cost pharmacies to purchase. However, the true cost of the problem remained unclear. HPC acknowledged that its “methods represent only an approximate indication of how large PBM profits may be on generic drugs,” due to the limitation that “there are no publicly available data on PBM reimbursement rates to pharmacies.”

This was the current state of affairs when the Massachusetts Independent Pharmacists Association (MIPA) commissioned 3 Axis Advisors, LLC (3 Axis) to look into the matter. To provide a better understanding of the magnitude of both pharmacy and PBM profits within the MassHealth Managed Care program, 3 Axis collected de-identified prescription claims data from 43 of the state’s independent and small chain pharmacies. These pharmacies represent approximately 23% of the independent pharmacies and 4% of the overall retail pharmacies in Massachusetts.

Overall, this study presents strong evidence that current pharmacy compensation is, by Massachusetts’ own standards, not appropriate. Between Q3 2018 and Q2 2019, 3 Axis estimated that $4.06 per prescription in spread pricing was taken per claim, equivalent to a 33% markup over the $12.12 per prescription paid by PBMs to Massachusetts pharmacies. Over the same period, 3 Axis also found that pharmacies were reimbursed at a level that provided just $2.88 in margin over acquisition cost. Drilling deeper, 3 Axis found that Massachusetts pharmacies have not been paid the state’s prescribed $10.02 cost to dispense in each of the past eight quarters. Pharmacy margin varied between a low of $1.61 per prescription in Q4 2017 to a high of $6 per prescription in Q2 2018. These dynamics highlight a growing disconnect between the profitability of prescription drug claims within Massachusetts Medicaid.

As part of this study, 3 Axis directly calculated the number of claims in MassHealth Managed Care where reimbursement was below the pharmacy’s acquisition cost (i.e., underwater). We found that the number of underwater claims has increased from just 8% of generic claims in 2016 to 26% of generic claims in 2019. The rise in underwater claims was a key driver of the 59% decline in pharmacy gross margin over the same period.

When 3 Axis investigated the other end of the spectrum, payments pharmacies received for high margin drugs referenced in the HPC study, we found that the two drugs with the most excessive margin opportunity (Valcyte and Xeloda) were not dispensed by any of the 43 pharmacies for patients under Medicaid. This potentially highlights another tactic that PBMs and health plans use to pressure pharmacy reimbursements: They block non-affiliated community pharmacies from dispensing highly profitable prescriptions, leaving them with a disproportionate amount of low-profit prescriptions. This “drug mix” shift can dramatically reduce a pharmacy’s overall profitability.

To investigate this dynamic further, 3 Axis identified the top 10 drugs in Massachusetts managed care that were priced by PBMs at the highest premium to their acquisition cost in 2019. Then 3 Axis modeled the change in profitability at the 43 pharmacies had they received their pro rata share of these top 10 generic drugs. We found that this adjustment would increase claims volume by just 0.02% (20 claims, overall). However, this insignificant uplift to claims volume would have increased total 2019 gross profit for these pharmacies by 19%. In other words, adding just 20 of these high margin claims to the more than 80,000 generic claims dispensed in 2019 by the 43 pharmacies 3 Axis studied would have increased their overall margin from $3 per prescription to $3.56 per prescription.

The transparency on the data and methods, combined with ample education on the inner workings of the drug supply chain provided in this study, should assist Massachusetts in achieving its goal of providing “appropriate compensation for both pharmacies and PBMs.”

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HIGHLIGHTS

We calculate that, for the year represented from Q3 2017 to Q2 2018, the Massachusetts Medicaid managed care program paid a weighted average of $18.03 per oral solid generic prescription. The weighted average NADAC ingredient cost for those claims was $11.19. During this same time frame, $4.16 per prescription went to the pharmacy, while $2.68 per prescription (a 17% markup to pharmacy payment) was retained by the payer segment of the drug supply chain (either the PBM and/or MCO).
In comparison, in the subsequent year, that is from Q3 2018 to Q2 2019, the Massachusetts Medicaid managed care program paid a weighted average of $16.18 per oral solid generic prescription. The weighted average NADAC ingredient cost for those claims was $9.24. During this time, $2.88 per prescription went to the pharmacy, while $4.06 per prescription (a 33% markup to pharmacy payment) was retained by the payer segment of the drug supply chain (either the PBM and/or MCO).

Another way we analyzed pharmacy reimbursement is by looking at the percentage of claims that paid below pharmacy acquisition cost (before a pharmacy’s wholesaler rebates), also known as “underwater claims.” We found that the number of underwater claims has increased from just 8% of generic claims in 2016 to 26% of generic claims in 2019.

As can be seen above, the number of claims significantly above operating cost (i.e., $15 or more in margin) has remained flat at 5% to 6% of claim volume from 2016 through 2019. Similarly, the number of claims in range of operating cost (i.e., $5 to $14.99) has remained between 9% and 12%. These findings highlight that the growth in underwater claims is coming principally from the already low-margin $0-to-$4.99 group of claims.
By understanding that pharmacies are being financially pressured on the majority of their claim volume to a level not previously seen, we can begin to understand why pharmacies keep cash prices high for their drugs.
- In Massachusetts, the United Health Foundation estimates that 97.2% of people have insurance. Because people with insurance far outnumber people paying cash, the incentive structure of PBM reimbursement methods encourages pharmacies to keep cash prices (U&C) high to avoid damaging their primary business: those people with insurance.
- We can demonstrate this by altering the claims data for the 43 pharmacies of our study to illustrate what would happen to pharmacy margin if all pharmacies were to submit a maximum U&C charge of $10.02 above their acquisition cost (based on NADAC) on all their Medicaid managed care claims. This would do nothing to alter the lower reimbursed claims or underwater claims, but lower of reimbursement methodology would ensure the maximum reimbursement for all claims would be fixed at $10.02.
- Altering costs in this way removes $1.1 million in margin over the 2016 to 2019 timeframe, as the previously highly reimbursed claims were reduced to $10.02 above costs (i.e., NADAC). This one change reduces pharmacy margin by 75% during this period.

To investigate this dynamic further, as mentioned above, 3 Axis identified the top 10 drugs in Massachusetts managed care that were priced by PBMs at the highest premium to their acquisition cost in 2019. Then 3 Axis modeled the change in profitability at the 43 pharmacies had they received their pro rata share of these top 10 generic drugs. We found that this adjustment would in- crease claims volume by just 0.02% (20 claims, overall). However, this insignificant uplift to claims volume would have increased total 2019 gross profit for these pharmacies by 19%. In other words, adding just 20 of these high margin claims to the more than 80,000 generic claims dispensed in 2019 by the 43 pharmacies 3 Axis studied would have increased their overall margin from $3 per prescription to $3.56 per prescription.