CMS targets ‘spread pricing’ to help lower drug costs


The Centers for Medicare & Medicaid Services is clarifying how Medicaid and Children’s Health Insurance Program (CHIP) managed care plans calculate the medical loss ratio in a effort to reign in drug costs.

A pillbox spilling capsules wrapped in paper money Dynamic Graphics/Thinkstockphotos.com

The medical loss ratio is set at 85%, meaning that managed care plans can spend only 15% of revenue on administrative costs and profits, with 85% being used for beneficiary care, including paying for claims, expenditures for activities that improve health care quality, and fraud prevention activities.

But CMS officials said they are concerned that managed care plans are not properly accounting for “spread pricing” in their medical loss ratio calculations. Spread pricing occurs when pharmacy benefit managers (PBMs) keep a portion of money paid by the managed care plan instead of passing the payment to the pharmacy for filling the prescription on behalf of the beneficiary.

“If spread pricing is not appropriately monitored and accounted for, a PBM can profit from charging health plans an excess amount above the amount paid to the pharmacy dispensing a drug, which increases Medicaid costs for taxpayers,” the agency said in a statement issued May 15 in conjunction with new guidance on calculating the medical loss ratio to account for spread pricing.

Regulations require Medicaid and CHIP managed care plans to exclude drug rebates from actual claims costs used to calculate the medical loss ratio. The new guidance clarifies the definition of a drug rebate to include “any price concession or discount received by the managed care plan or its PBM, regardless of who pays the rebate or discount,” the agency said. “Therefore, the amount retained by the PBM under spread pricing would have to be excluded from the amount of claims costs used for calculating the managed care plan’s [medical loss ratio].”

CMS added that the reason for this is that spread pricing “should not be used to artificially inflate a Medicaid or CHIP managed care plan’s [medical loss ratio].”

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