Shadowy health care middlemen at the center of an election year political battle

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By Stephen Caruso | Spotlight PA

Democratic lawmakers are accusing Pennsylvania's auditor general of releasing a misleading report that unfairly criticized the Shapiro administration for a lack of oversight.

Those critics include Republican Tim DeFoor's primary opponent in the general election, Rep. Malcolm Kenyatta (D., Philadelphia). DeFoor has defended his office's work, pointing out that the audit was begun with assistance from the state Department of Human Services.

“I’m a bit confused by the reaction,” he told Spotlight PA.

It's about pharmacy benefit managers, drug middlemen who, regulators say, raise prices to boost their own profits.

DeFoor's report focused on PerformRx, which helps process drug prescriptions for 2.8 million state Medicaid recipients in Pennsylvania each year. The audit found that the PBM billed taxpayers $7 million in undisclosed fees in 2022 despite a ban on such fees and blamed weak oversight by the Pennsylvania Department of Human Services.

The agency rejected the audit's findings, saying DeFoor was confusing prohibited spread pricing with permissible (for now) transfer fees.

The spread price is the difference between the amount a PBM reimburses a pharmacy for a drug and the amount it bills a healthcare manager. A PBM makes money when the reimbursement it pays is less than the fee it charges. Submission fees are typically a small amount that a PBM may charge per prescription filled by a pharmacy.

DeFoor's office rejected the distinction, saying the effects were all the same.

“If it behaves like spread pricing and works like spread pricing and has the effect of spread pricing, you can call it whatever you want,” lead examiner Peggy Morningstar told Spotlight PA. “But at the end of the day it’s still spread pricing.”

The auditor general is one of three elected ranks in Pennsylvania and is tasked with overseeing how public money is spent to detect waste, fraud and bribery. Despite the importance of the position, competitions for the position typically attract little public interest. A recent Spotlight PA poll found that only 31% of voters are paying close or somewhat attention to this.

Kenyatta, a young queer lawmaker from Philadelphia who was first elected in 2018, has presented himself to voters as a progressive fighter for working people. He has made a name for himself across the country as a deputy to President Joe Biden, a frequent guest on cable television, and after an unsuccessful bid for a U.S. Senate seat in the 2022 primary.

DeFoor was an unknown in state politics before 2020, when he flipped the seat. He is running a low-profile campaign focused on his performance in office and portraying himself as a trained accountant who sticks to the basics of his role.

Exams are often politicized. Their findings are fueling partisan rhetoric and political debates about everything from the social safety net to voting rights.

After the audit was released, legislative Democrats focused on health care entered the fray. State Rep. Dan Frankel (D., Allegheny) said in a statement that he was “truly shocked” that DeFoor “could be tricked so easily.” State Rep. Jessica Benham (D., Allegheny), a Kenyatta supporter who sponsored legislation to further regulate PBMs, called the audit “deeply frivolous.”

Kenyatta accused DeFoor of timing the publication to coincide with the upcoming election.

“Pennsylvanians deserve better than a politician who pretends to raise serious political issues before an election to score political points,” Kenyatta said in a statement.

Joey Mattingly, a former pharmacist who now covers the industry as a professor at the University of Utah, said spread prices and transfer fees vary. He added that the former helps PBMs profit more than the latter.

However, Mattingly's research finds that after spread pricing is banned, PBMs are still finding ways to make money by adding new fees or techniques and leveraging their market power.

“How else are they going to get paid?” Mattingly said. “Look, they’re a for-profit company too.”

What do pharmacy benefit managers do?

How a drug gets from a manufacturer's assembly line to the cabinet is a long, complicated process with many middlemen. This includes drug manufacturers who sell to distributors. They then sell to pharmacies that dispense medications to patients.

Mattingly says pharmacy benefit managers help insurers and employers decide which drugs to pay for, at what price, and under what circumstances. Their original goal was to keep the overall cost of medical benefits low for employers who purchase plans and the employees those plans cover.

But through a series of acquisitions over the past few decades, PBMs have become part of a handful of health care groups whose size allows them to dictate market conditions and drive costs up rather than down, regulators say.

According to a Federal Trade Commission report in July, the top three PBMs — CVS Caremark (which owns CVS Pharmacy), Express Scripts and OptumRx — processed 80% of the 6.6 billion prescriptions dispensed to Americans in 2023.

“The result is that the dominant PBMs can often exercise significant control over which drugs are available, at what price, and which pharmacies patients can use to access their prescribed medications,” the report said.

PBMs counter that the benefits they generate are passed on to employers and their employees, arguing that they keep up-front health care costs low.

DeFoor first announced the PBM audit in fall 2023 with support from the Democratic Shapiro administration. In a joint statement with DeFoor, DHS Secretary Val Arkoosh said she was “confident that this review” would help the agency better understand the relationships between the players involved.

DeFoor's investigation focused on PerformRX, which does not have a direct contract with the state. Instead, it is a subcontractor to a handful of large health systems that serve low-income people in Pennsylvania.

In addition to the $7 million in fees, the audit found that PerformRX failed to report transfer fees to the Pennsylvania Department of Human Services, as required by a 2020 law.

DeFoor says the department didn't notice until his office reviewed the contract.

“The PBMs were not transparent. Therein lies the problem,” DeFoor, a Republican, said in an interview with Spotlight PA last month. “The DHS didn’t monitor it.”

DHS acknowledged that it was not aware of the charges but blamed PerformRX for failing to report them as required by law.

A spokesperson added that transfer fees are not a form of price banding as the amount of the fee is known and agreed upon by the pharmacy when entering into an agreement with the PBM. Spread pricing, on the other hand, is a decision made by the PBM without the involvement of health insurance or pharmacies.

Still, the agency said it plans to eliminate such fees from its contracts starting in 2025.

An ongoing debate

The conflict over DeFoor's review comes as lawmakers debate how to regulate PBMs — and face fierce opposition from the health care industry.

Benham, the Allegheny County Democrat, supported legislation that would ban PBMs from requiring customers to use their affiliated pharmacies or from automatically enrolling consumers in mail-order pharmacies.

Additionally, PBMs must reimburse affiliated and nonaffiliated pharmacies the same amounts for each prescription. Previously, PBMs could reimburse independent pharmacies less for the same drug than they gave to a pharmacy under the same corporate umbrella.

Benham's original bill included a provision that would have extended the state's spread pricing ban to private insurers instead of applying it only to Medicaid. This proposal passed almost unanimously in the House of Representatives, despite opposition from national trade groups for PBMs and health insurers, as well as other healthcare giants such as Highmark.

The PBMs' trade group, the Pharmaceutical Care Management Association, argued in a statement to Spotlight PA that the result was “a significant limitation on the tools PBMs use to reduce drug costs and a requirement to disclose information that gives pharmaceutical companies more power.” “The impact of the legislation will result in higher drug costs for insurers and patients in Pennsylvania.”

After several weeks of closed-door budget negotiations, the Republican-controlled state Senate amended the bill to remove the spread pricing. Lawmakers approved the amended bill and sent it to Gov. Josh Shapiro's desk. He signed in July.

State Senate Majority Leader Joe Pittman (R., Ind.) told Spotlight PA last month that he considers this “one of the most significant accomplishments of our session.”

For her part, Benham makes no apologies for her loyalty.

“Malcolm is my guy,” she told Spotlight PA. They are co-chairs of the state House of Representatives LGBTQ Equality Caucus, have raised funds together, and their official statement on the audit was printed in a Kenyatta campaign release attacking the timing of DeFoor's report.

Still, she said she tries to approach PBMs impartially, noting that she has worked with a Republican colleague on the issue. She said she agreed with DeFoor that both transmission fees and spread pricing are an issue, but also agreed with DHS that they are not the same thing.

“We should solve both, but it’s much harder to solve both when we merge them,” Benham said.

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