CMS targets spread pricing in new guidance

In an effort to lower prescription drug costs in the U.S., CMS issued a new guidance May 15 to limit the prevalence of spread pricing in Medicaid managed care plans.

The tactic known as spread pricing occurs when pharmacy benefit managers charge health insurers more for a drug than it reimburses a pharmacy to dispense the drug. PBMs often keep a portion of the amount paid to them from the health insurers, instead of passing the full amount to the pharmacy.

The regulatory guidance seeks to limit the practice by helping states better monitor Medicaid and Children's Health Insurance Program managed care plans to identify spread pricing when calculating their medical loss ratio, or the percent of premium revenue that goes toward claims rather than administrative costs and profits.

The guidance clarified that insurers must use a medical loss ratio target of 85 percent, which means just 15 percent of the revenue can be for administrative costs and profits. Additionally, the guidance clarifies that the plans must use a PBM rebate in calculating the medical loss ratio if the PBM used a subcontractor.

Spread pricing has come under fire in recent months after a scathing report from the state of Kentucky that revealed PBMs reaped $124 million in profits from the tactic.

"States are increasingly reporting instances of spread pricing in Medicaid … and I am concerned that spread pricing is inflating prescription drug costs that are borne by beneficiaries and by taxpayers," CMS Administrator Seema Verma said in a statement. "Today’s guidance will ensure that health plans monitor spread pricing in Medicaid appropriately."

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