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CMS Issues New Guidance Addressing Spread Pricing in Medicaid, Ensures Pharmacy Benefit Managers are not Up-Charging Taxpayers

CMS Issues New Guidance Addressing Spread Pricing in Medicaid, Ensures Pharmacy Benefit Managers are not Up-Charging Taxpayers
Agency issues guidance for Medicaid Managed Care and CHIP health plans that clarifies how current regulations require “spread pricing” to be accounted in the calculation of Medical Loss Ratios (MLRs)

As part of President Trump’s efforts to lower prescription drug costs in Medicaid, CMS today issued guidance for Medicaid and CHIP managed care plans regarding the calculation of a plan’s Medical Loss Ratio (MLR), which represents the percent of premium revenue that goes toward actual claims and activities that improve healthcare quality, as opposed to administrative costs and profits. 

CMS regulations require Medicaid and CHIP managed care plans to report an MLR and use an MLR target of 85 percent in developing rates.  The 85 percent target means that only 15 percent of the revenue for the managed care plan can be for administrative costs and profits.  CMS is concerned that some managed care plans are not accurately reporting pharmacy benefit spread pricing when they calculate and report MLRs.

“The market for prescription drugs is convoluted and opaque,” said CMS Administrator Seema Verma.  “States are increasingly reporting instances of spread pricing in Medicaid, including cases in Ohio and Texas, and I am concerned that spread pricing is inflating prescription drug costs that are borne by beneficiaries and by taxpayers.  Today’s guidance will ensure that health plans monitor spread pricing in Medicaid appropriately.  PBMs cannot use spread pricing to upcharge health plans and increase costs for states – spread pricing must be monitored and accounted for, and not used to inflate profits.”

Spread pricing occurs when health plans contract with pharmacy benefit managers (PBMs) to manage their prescription drug benefits, and PBMs keep a portion of the amount paid to them by the health plans for prescription drugs instead of passing the full payments on to pharmacies.  Thus, there is a spread between the amount that the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription.  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 MLR regulations for Medicaid and CHIP managed care plans currently require them to exclude prescription drug rebates from the amount of actual claims costs used to calculate an MLR.  In today’s guidance CMS is making clear that, for purposes of the MLR regulation, “prescription drug rebates” means any price concession or discount received by the managed care plan or by its PBM, regardless of who pays the rebate or discount.  Some possible examples include payments from pharmaceutical manufacturers, wholesalers, and retail pharmacies.  Therefore, the amount retained by a PBM under spread pricing would have to be excluded from the amount of claims costs used for calculating the managed care plan’s MLR.  The policy underpinning this guidance is that spread pricing should not be used to artificially inflate a Medicaid or CHIP managed care plan’s MLR.

Spread pricing has been reported predominantly for generic prescriptions.  States have raised concerns that PBMs can reimburse pharmacies for generic prescriptions based on lower pricing benchmarks than the benchmarks used for charging Medicaid and CHIP managed care plans for the same prescriptions.  CMS remains concerned about the practice of spread pricing and is exploring additional approaches to addressing this issue.

Today’s guidance does not conflict with the Department of Health and Human Services’ Office of Inspector General’s recent proposed rule regarding the safe harbor for prescription drug rebates, since even if that rule were to be finalized as proposed, today’s guidance would apply to additional items of value that must be deducted from the amount of claims cost used for calculating an MLR.  Today’s guidance builds on other CMS initiatives to execute on President Trump’s Blueprint for reducing prescription drug prices and increasing transparency in the market for prescription drugs, including the overhaul of CMS’s drug dashboards to add pricing data on thousands more drugs.

To read today’s guidance (CMCS informational bulletin), visit the CMS website at:


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