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Reprieve for Kentucky’s independent pharmacies is saving Medicaid millions

State has plowed savings into expanding dental, hearing, vision care

Pharmacist Joel Thornbury said his role is far more than filling prescriptions at the NOVA Pharmacy he owns in Pikeville — he’s a readily accessible source of health services and advice in his community.

“When you call me, you get me,” said Thornbury, a third-generation pharmacist in practice for more than 30 years. “I see you on the street. I’m not some big corporation.”

And Thornbury said his job has become far more manageable, following the state’s decision in 2020 to eliminate multiple corporate middlemen that previously managed the state’s Medicaid prescription drug business — taking a big cut of the proceeds.

“It’s phenomenal,” Thornbury said of the state’s decision to cut out the brokers known as pharmacy benefit managers, or PBMs — private entities that work as subcontractors to health plans and decide how much to pay pharmacies and which drugs to cover.

“You just make my life easier and cut down on the number of people I have to talk within the insurance industry.”

What’s more, it’s saving the state money — a lot of money — by putting Medicaid prescription management under single vendor, Medicaid officials recently told a state legislative committee.

Savings since the change took effect in 2021 amount to about $283 million through 2022, $56.6 million of that in state money, officials told the committee. The rest is savings to the federal government, which pays most of the costs of the federal-state health plan that covers 1.6 million low-income Kentuckians.

Medicaid, with annual expenditures of about $15 billion, is Kentucky’s largest health plan and a major source of income for health providers including hospitals, doctors and pharmacies. It spends about $1.2 billion a year on prescription drugs.

The elimination of outside PBMs brought dire warnings of soaring costs from companies that previously managed Medicaid’s prescription drug business and claimed to keep down expenses. But a state analysis found the opposite, state Medicaid officials Veronica Judy-Cecil and Steve Bechtel told the legislative Health Services Committee on Sept. 27.

As a result, the state has been able to plow some of its savings back into this year’s expansion of Medicaid dental, vision and hearing benefits for adults, Cecil said.

Advocates have said the expanded benefits, especially in dental care, are sorely needed in a state that ranks 49th in oral health.

The new dental, vision and hearing benefits have been controversial with Republican lawmakers who control the legislature and claim Gov. Andy Beshear, a Democrat, exceeded his authority by enacting them.

But lawmakers, who had been increasingly hostile toward the PBMs that handled Medicaid prescription drugs — and enacted legislation to abolish their role — are delighted with the savings.

“Today’s a great day for the Commonwealth of Kentucky,” said Sen. Max Wise, R-Campbellsville, during the legislative committee meeting. Wise sponsored Senate Bill 50, the 2020 law that ended Medicaid work for the six PBMs.

“SB 50 truly saved jobs,” Wise said. “It kept a lot of pharmacies open.”

Committee co-chairman Sen. Steve Meredith, R-Leitchfield, who has been highly critical of the PBMs’ role in Medicaid, recalled warnings from national insurance companies that previously held the contracts, including Caremark, an affiliate of the CVS drugstore giant.

Many PBMs are affiliated with pharmacy chains.

Caremark, after the bill won final passage in 2020, issued a statement warning eliminating PBMs would cost Kentucky millions of dollars in increased prescription drug expenses.

“It’s going to cost our Medicaid program more?” Meredith said, recalling the warning.

“Obviously, that’s not the case.”

Benjamin Mudd, executive director of the Kentucky Pharmacists Association, said the changes have been enormously popular with the state’s pharmacists.

“I think it’s been a phenomenal experience for everyone involved except maybe the PBMs,” Mudd said. “I would say Senate Bill 50 has undoubtedly kept some pharmacies from closing in our state.”

‘Squeeze and buy’

Pharmacists, mostly independent community pharmacists, had become increasingly critical of the PBMs in the years since 2011 when the state switched most of its Medicaid business to outside managed care organizations or MCOs — private insurance companies to handle claims for Medicaid enrollees.

In turn, the MCOs hired PBMs as sub-contractors to manage pharmacy benefits.

That led to vocal complaints from pharmacists that the aggressive price-cutting of PBMs in payments for prescriptions they dispensed were threatening their business. Meanwhile, PBMs charged higher rates to state Medicaid programs and kept the difference as profit, a practice known as “spread pricing,” critics told Kentucky lawmakers.

Another problem: Because Kentucky currently contracts with six MCOs to operate most of its Medicaid program, pharmacists had to deal with six separate PBMs for reimbursement and six different formularies of approved drugs they would cover.

That added to frustration, extra work and costs, said pharmacists including Pikeville’s Thornbury, who said the extra layers of seeking approval and payment for drugs was maddening.

“It’s a gigantic shell game,” he said.

Pharmacies foundering financially were often met with offers from pharmacy chains to buy their business. It especially hurt small, community pharmacies, the owners said.

In Kentucky about 500 of the state’s more than 1,300 drugstores are independently owned.

“I just call it ‘squeeze and buy,’” Rosemary Smith, an independent pharmacist from Eastern Kentucky told legislators in 2018. “They are trying to put us out of business.”

Meanwhile, lawmakers found it deeply frustrating that Kentucky Medicaid officials had virtually no control over the PBMs because they reported to the outside managed care companies that hired them rather than the state.

Complaints, mostly from their hometown pharmacists, resonated with lawmakers even as PBMs were facing scrutiny and new restrictions in other state Medicaid programs including West Virginia and Ohio.

After several years of investigations and review, the General Assembly enacted Wise’s SB 50, which eliminated the role of PBMs as subcontractors in the state Medicaid program.

Instead, it directed the state to hire a single PBM to report to the state Medicaid program, giving it more control over reimbursement to pharmacists and ability to more quickly work out any problems, questions or delays.

“It’s much easier for us to work through a single entity,” Thornbury said. “I call one location. If I have a problem, I call one person.”

The change also put all drugs on the same formulary, meaning pharmacists now can determine immediately which drugs are approved for all Medicaid members. And it eliminated the “spread pricing” critics said enriched PBMs at pharmacists’ expense.

‘Smooth transition’

Judy-Cecil, the state Medicaid deputy commissioner, said Kentucky launched its new system in July 2021 and hired MedImpact, an independent PBM not affiliated with any pharmacy chain, to run its prescription drug business.

“I believe it was a very smooth transition,” she said.

Medicaid expects to release a report soon with more details on the impact of the changes and savings.

Another benefit to pharmacists: SB 50 set a base reimbursement model in which pharmacists get a $10.64 dispensing fee plus the costs of the medication.

Previously, pharmacists had no such guarantee and could end up barely breaking even or losing money on prescriptions they dispensed, Mudd said.

“Stores that were facing closure or were right on the fence. . . that little bump may have helped them stay open,” Mudd said.

That doesn’t mean the outlook is rosy for pharmacists, Mudd and others said.

They are still facing cost pressures from commercial insurance and Medicare. And a handful have closed or sold their businesses, Mudd said.

But changes of the last two years offered a much-needed lifeline, he said.

“Without a doubt, a much larger number of pharmacies would have closed if it weren’t for Senate Bill 50,” he said.

Meanwhile, lawmakers say they will continue to examine the role of PBMs in other health coverage, including the Kentucky employee state health plan.

And Meredith, a former hospital CEO who has long complained the state’s six MCOs are too many — adding to complication, cost and confusion — threw out this idea:

“If we went from six PBMs to one and we save money, do you think there’s any potential to save money if we have fewer MCOs?” he asked. “Just a rhetorical question.”


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