CVS isn't just in the business of operating retail pharmacies: equally important is its prescription administration services, where it buys drugs from independent pharmacies, marks them up, and sells them to government-run programs like Medicare and prisons, using "spread pricing" to determine the markup that it applies to generic drugs.
The actual sums involved are closely held trade secrets. Publicly, CVS insists that it applies reasonable markups, making a loss on some drugs and a profit on others, and that it splits the profits with the local pharmacies it buys from.
But as evidence mounted that CVS was gouging both governments and independent pharmacists, states have begun to publish data that reveals CVS's incredible profit-taking (for example, Wapello County, Iowa pays $198.22 for a medication that the local pharmacist is paid $5.73 for).
Bloomberg analyzed the 90 bestselling generics that supplied by prescription administration services and found that $1.3B of Medicaid's $4.2B is taken in profits by the private-sector suppliers in the supply-chain. The top-end of the gouging beggars belief: some leukemia drugs are marked up by $3,000/dose.
In Ohio, CVS manages drug benefits for four out of five Medicaid managed-care plans, which are run by private insurers and cover roughly 90 percent of the state's 2.8 million full Medicaid beneficiaries.
In July, CVS sued the state to prevent the release of a report on how much spread it received from Medicaid programs there. A summary released in June found that CVS and other PBMs' 8.8 percent spread came to $5.70 per prescription across all brand-name and generic drugs.
Ohio could have gotten the same services for $1.90 per prescription or less by switching to a fee-based model, according to the state-sponsored analysis. The hidden fees Ohio paid amounted to $223.7 million in a 12-month period through March, according to the consultant.
CVS said that revealing pricing details would keep it from getting the best rates, and that money it makes on spreads pays for other services the company provides. CVS said that last year its margins in the PBM business were 3.5 percent, and that overall privatized Medicaid has saved Ohio money.
Following the report, Ohio ordered managed-care plans in the state to terminate their spread pricing contracts for 2019.
The Secret Drug Pricing System Middlemen Use to Rake in Millions [Robert Langreth, David Ingold and Jackie Gu/Bloomberg]
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