Auditor General says DHS failed to oversee pharmacy benefit managers, costing taxpayers

A pharmacy manager retrieves medication. (Photo by Joe Raedle/Getty Images).

Pennsylvania Auditor General Tim DeFoor has released a report detailing how the Department of Human Services failed to adequately oversee pharmacy benefit managers that provide prescription drug services for Pennsylvanians enrolled in Medicaid. The result, DeFoor said, meant Pennsylvanians paid an estimated $7 million more for the Medicaid program in 2022 alone.

The report specifically looked at the actions of the pharmacy benefit manager PerformRX, a Medicaid subcontractor. DeFoor alleged that PerformRX — and likely other pharmacy benefit managers — inaccurately reported profits from fees it charged to pharmacies as health care costs, and DHS never verified their claims.

Those claims ultimately inform how much the state budgets for Medicaid funding in subsequent years.

“PBMs like PerformRX are counting on the fact that no one is checking their reporting so they can get paid a higher rate,” DeFoor said at a Wednesday press conference announcing his findings.

The Department of Human Services, however, disputed the report’s claims. And with DeFoor, a Republican, on the ballot in November, some Democrats have accused him of acting politically.

“The results of this audit are overtly political and substantively wrong,” state House Rep. Malcolm Kenyatta (D-Philadelphia), the Democratic candidate challenging DeFoor, posted on X Wednesday.  “He has had nearly four years to conduct an audit like this, but he never did—until now, an election year.”

What is a PBM

Pharmacy benefit managers are hired by insurance companies to handle the prescription side of their health care plans. In that role, they negotiate drug prices with manufacturers, often receiving kickbacks in exchange for approving coverage of their drugs. They’re also responsible for reimbursing pharmacies when a patient picks up a prescription that’s covered by their insurance.

Many of the largest pharmacy benefit managers have come under intense scrutiny from lawmakers and regulators in both the state and federal government who accuse them of inflating the costs of prescription drugs and making massive profits in the process.

Pharmacists too have long been sounding the alarm. They say that the companies have acted monopolistically to force them into accepting reimbursements that don’t cover the cost of the drugs they’re dispensing.

Prescription for trouble: Pennsylvania pharmacists say PBMs are driving pharmacy closures

Since the beginning of this year, more than 140 pharmacies in Pennsylvania have closed, with the biggest pharmacy trade groups in the state pinning much of the blame on PBMs.

Earlier this year, Gov. Josh Shapiro signed a bill into law intended to rein in pharmacy benefit managers .

‘Spread pricing’ and oversight

Pharmacy benefit managers operating in the Medicaid space are banned from engaging in a  practice called “spread pricing.” That is when pharmacy benefit managers charge insurance providers one price for a drug, reimburse pharmacists at a lower rate, and then profit off the difference.

DeFoor found that PerformRX profited by charging pharmacists a “transmission fee” — a flat fee on every prescription drug transaction. But that was never reported as profit to the Department of Human Services or managed care organizations that work with PerformRX.

The Department of Human Services relies on reports from managed care organizations, which it contracts to oversee Medicaid health insurance plans. Those managed care organizations, in turn, hire pharmacy benefit managers to oversee their prescription drug services.

“DHS accepted them at their word and never verified if this was actually true,” DeFoor said at the press conference Wednesday.

He added that his office was able to verify their claims by reaching out to pharmacists, who informed them of the unreported fee.

PerformRX did not respond to a request for comment from the Capital-Star.

In its official response to the audit’s findings, PerformRX acknowledged that it profited from the transmission fee, but said that it didn’t believe they constituted “spread pricing.” The company said that the fees help “reduce the administrative burden on the MCO (managed care organization) by offsetting some of the cost.”

PerformRX also said they retroactively revised their transparency reports to include the transmission fee.

According to DeFoor, the lack of oversight of pharmacy benefit managers is particularly troubling when they’re often financially related to managed care organizations and insurance companies that contract them.

Perform RX and Two of the managed care organizations that contracted PerformRX to handle Medicaid prescription services, AmeriHealth Caritas and Keystone First, can all tbe connected through subsidiaries to the same parent company, BMH LLC.

“When you have companies that are financially related, legally making money off taxpayers, state oversight even becomes more important,” DeFoor said Wednesday.

Pushback

DeFoor’s critics say that his findings are based on a misunderstanding and that transmission fees should not be included in an account of spread pricing, according to existing practice and federal guidance.

“The Pennsylvania Department of Human Services (DHS) strongly disagrees with the conclusions drawn in this audit – conclusions that are based on a fundamental misunderstanding of spread pricing,” Brandon Cwalina said for the department in an emailed statement. “The report uses ‘spread pricing’ and ‘transmission fees’ interchangeably, which is an inaccurate interpretation that serves as the basis for the audit’s conclusions.”

The department pointed to federal guidance released by the Center for Medicaid Services on how to calculate spread pricing, which did not mention “transmission fees.”

Rep. Jessica Benham (D-Allegheny), another critic of DeFoor’s report, said that the Department of Human Services agreed this spring to ban transmission fees beginning in 2025 after pharmacists raised complaints. Moreover, it had already banned spread pricing by PBMs contracting with Medicaid providers.

“This audit is deeply unserious and misleading,” Benham wrote in a press release Wednesday. “PBM reform is a significant issue, one we have taken a big step to address, and the Auditor General’s problematic approach here detracts from the significance with which we should treat the problem of PBMs.’’

Benham has campaigned with Kenyatta in the auditor general’s race in this year’s election.

“ I need a partner in that office who will help me hold Big Pharma accountable, ensure our schools are using their resources wisely, and wield that auditing power to look into abuses in all industries,” she said in a Facebook post promoting a fundraiser with Kenyatta earlier this month.

Benham was also the lead sponsor of the pharmacy benefit manager reform bill signed by Gov. Shapiro earlier this year, and she would like to go further. The bill did not ban spread pricing for pharmacy benefit managers working with commercial health care plans, despite many pharmacists requesting it.

She worries that the report is pinning blame on the Department of Human Services and Medicaid administration, when the bigger fault lies with pharmacy benefit managers themselves and a lack of regulation.

“Why point fingers at an admin [sic] that’s already taken and taking action?” Benham said in a text message.

Rep. Dan Frankel, the Democratic chair of the House Health Committee, also criticized both the audit and DeFoor.

“ I’m embarrassed for the auditor general, but he’s not the first person to struggle to understand our health care system,” Frankel wrote in a press release. “It’s far too complicated, and these massive companies intentionally use that fact to fleece health care consumers.”

DeFoor’s team, however, sees the distinction between spread pricing and transmission fees as a technicality.

“Whether you call it a transmission fee, or a rebate or a discount, it’s spread pricing,” said Peggy Morningstar, who worked on the audit, at Wednesday’s press conference.

Moreover, Morningstar explained in a phone interview that a 2020 law aimed at regulating pharmacy benefit managers in the Pennsylvania Medicaid market explicitly required them to report the difference between how much they’re paid by a managed care organization and how much they pay a pharmacy.

The Department of Human Services said in their response to the audit that they did not believe transmission fees were part of that equation.

“ The main thing about all this is just one word: transparency,” DeFoor said. “They’re not being transparent.”

April Hutchinson, a spokesperson for the Auditor General’s office, said that audits are not done “to play gotcha or to try to pinpoint blame.”

She added that it’s uncommon for audits to receive so much pushback. She pointed to a report released last month on the Department of Transportation’s bridge inspection process.

“We highlighted similar issues actually with that audit of lack of oversight of state contractors,” Hutchinson said.

That audit found the Department of Transportation was overly reliant on contractors vouching for the certifications of the subcontractors they hired, and not verifying their claims.

“This overarching theme of monitoring and making sure that contractors are reporting accurate information to the state is not something unique here,” she said.

SUBSCRIBE: GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX