The Problem
“Spread pricing” is when PBMs charge payers like Medicaid more money than they reimburse a pharmacy for that medication. The PBM keeps the difference, the “spread,” as profit.[1] PBMs have been known to refer to spread pricing as “differential pricing” or “risk mitigation pricing,” even though there is no meaningful way in which this compensation structure manages business risks.
To explain: When a patient goes to fill a prescription, they pay the pharmacy a certain amount, and the rest is covered by insurance, whether a government plan like Medicaid or private health insurance. However, many PBMs reimburse the pharmacy one amount for the insurance’s portion of the costs, but then turn around and charge the patient’s insurance plan more than that as reimbursement for the pharmacist’s services. The PBM keeps the difference. This is one way that PBMs are compensated, with the primary alternative being a transparent administrative fee paid by the insurance plan.
The use of spread pricing is particularly a problem for government healthcare plans like Medicare and Medicaid, in which the insurance plan is often capped by a “medical loss ratio” to a maximum amount of administrative costs and profits relative to patient care and benefits. Insurance plans, however, are allowed to consider the money paid through spread pricing to count as spending on care, allowing the PBM and insurance company to earn excess profits and prevent the state from covering more beneficiaries.
The Solution
PBMs should not be able to charge the insurance plan more for a drug benefit than the amount they reimbursed the pharmacy. This would ideally lead to PBMs being primarily compensated through a straightforward and transparent administration fee from insurance plans.
Model Legislation
Virginia § 38.2-3467 prohibits a carrier or PBM from conducting spread pricing, requiring that the pharmacy must be reimbursed the same amount as was charged to insurance.[2]
Notes
[1] National Community Pharmacists Association, “Spread Pricing 101,” https://ncpa.org/spread-pricing-101.
[2] Code of Virginia § 38.2-3467, https://law.lis.virginia.gov/vacode/title38.2/chapter34/section38.2-3467/.