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Kansas Investigates Obscure but Powerful Part of the Drug Supply Chain: Pharmacy Middlemen

(Photo by Celia Llopis-Jepsen, Kansas News Service)
(Photo by Celia Llopis-Jepsen, Kansas News Service)

Kansas Attorney General Derek Schmidt has hired a law firm to investigate pharmacy middlemen, a lucrative business that has a lot of influence over where you can buy your prescriptions -- and what they cost. Kansas News Service editor Stephen Koranda and health reporter Celia Llopis-Jepsen explain. 


After concluding that pharmacy middlemen overcharged Medicaid programs by hundreds of millions of dollars, two states landed tens of millions in settlements from one of the wealthiest companies in the country.

That company has since set aside another $1 billion for future potential payouts.

Now Kansas is investigating that  same industry — one that claims to drive down drug costs but that profits as prices escalate.

Attorney General Derek Schmidt’s office has hired the lawyers who helped land more than  $140 million in settlements for Ohio and Mississippi for alleged overcharges to their Medicaid programs.

Schmidt’s office won’t discuss its work or whether it is specifically exploring if the Kansas Medicaid program got fleeced.

Kansas hasn’t publicly indicated it suspects any overcharges. Nor has it audited its Medicaid drug spending the way a flurry of other states did in recent years.

But the law firm that Schmidt hired — Liston & Deas — represents several states in ongoing settlement negotiations. Schmidt’s office declined to say if Kansas is one of those states. Its contract with Liston says the firm will help Kansas investigate any overcharges and pursue settlement money.

Centene Corp. and its subsidiary, Envolve, which settled with Ohio and Mississippi, didn't respond to a request for comment. But the company has  repeatedly denied any wrongdoing in other states.

Centene will pay Ohio $88 million and Mississippi $55 million. It wrote in a  federal filing this summer that it has also earmarked more than $1 billion for potential settlements with other states, and is in talks with Liston & Deas.

What’s a pharmacy middleman?

Pharmacy middlemen play an obscure but powerful part in the U.S. drug supply chain. They hold incredible sway over the experiences at the pharmacy counter of people on most kinds of health insurance.

That’s because the middlemen typically choose which drugs (and even which specific brands) get covered by an insurance plan. They also negotiate the prices for those drugs with the pharmacies and effectively decide which pharmacies people can go to.

On the back end, the middlemen — companies the industry refers to as “pharmacy benefit managers” — strike deals with drugmakers that badly want their medications on an insurer’s list. Making the cut is critical, so drugmakers pay hefty rebates.

Theoretically, those rebates go to the health plans to lower what they shelled out for the drugs that people picked up at the pharmacy.

Large pharmacy benefit managers argue their vast size gives them the best leverage to get clients the biggest rebates and best deals on drugs.

But the industry finds itself under increasing scrutiny.

Mounting evidence suggests the middlemen that claim to drive down drug prices actually contribute to Americans paying  more than twice what people do in other developed countries.

In recent years, some states and employer health plans discovered their middlemen took far bigger cuts than previously realized. Middlemen do this in many ways. For example, they might pocket more rebate money than a health plan knows, pad pharmacy charges or steer patients to pricier, in-house pharmacies.

Pharmacy middlemen say they stick to their contracts, but critics say some craft those agreements in ways that keep health plans in the dark about the middleman’s true profits.

Dozens of pharmacy benefit managers exist in the U.S. but three big ones stand out. Express Scripts, CVS Caremark and OptumRx serve the  majority of public and private health plans.

Insurer Centene (with its in-house pharmacy benefit manager, Envolve) handles Medicaid programs in 30 states, including Kansas.

Being a middleman in the  $1 trillion-plus pharmaceutical industry is big business. Pharmacy benefit manager companies can even earn more than drugmakers. An article in the  Journal of the American Medical Association says Express Scripts’ 2017 revenue — $100 billion — was nearly double that of pharmaceutical giant Pfizer, putting the pharmacy middleman at No. 22 on the  Fortune 500 that year.

Centene is No. 24 on the Fortune 500. The insurer/pharmacy/pharmacy-middleman conglomerate CVS Health is No. 4, and its similarly consolidated competitor, UnitedHealth Group plus OptumRx, ranks No. 5.

Middlemen in Kansas

Several pharmacy benefit managers have contracts with Kansas, including Centene/Envolve, CVS and OptumRx.

A spokeswoman said the state health department hasn’t done any audits of its Medicaid middlemen in recent years and doesn’t know if Kansas ever has.

It’s not clear whether Schmidt might investigate all of the state’s pharmacy benefit managers. All three served Ohio when that state’s auditor  concluded in 2018 that middlemen charged $225 million more than they paid to pharmacies for drugs and took that money as profit.

Most of that was on generics. This effective markup made up nearly a third of what the state paid for those supposedly cost-effective drugs. Ohio responded by effectively  firing and replacing all of its pharmacy benefit managers.

In some states, that kind of drug markup happens partly because middlemen squeeze pharmacists without those states knowing. But Kansas ties Medicaid drug prices to  a public price list so that both the state and pharmacists can see what should get paid out.

When the payments don’t come through in full, pharmacists pipe up.

“We haven’t received any reimbursement complaints for two or three years,” a spokeswoman for the state health department said.

The Kansas Pharmacists Association confirmed that and said the state had helped resolve complaints whenever they arose in the past.

The National Community Pharmacists Association  holds up the Kansas Medicaid program as an example of a state that carefully dictates what the middlemen should pay to pharmacies, to prevent them from charging one price and paying pharmacies far less.

But Schmidt’s  contract with Liston & Deas indicates the law firm will help Kansas check for more than skimming of pharmacy payments. It’ll also look at a wide array of other ways that middlemen can jack up profits without a health plan knowing.

And the contract says the firm could help the state “recover funds that were improperly charged or diverted by one or more Pharmacy Benefit Managers.” The contract promises the law firm 15% of the first $100 million in settlement money and 10% for anything above that.

Another way

Congress hauled executives of the nation’s biggest pharmacy benefit managers before a committee in 2019 to question their role in the nation’s convoluted drug supply chain and fast-rising spending. The companies said Congress should look elsewhere,  especially at drugmakers.

Over the past four years, states have passed scores of laws to regulate pharmacy middlemen, according to tallies from the  National Academy for State Health Policy.

That includes  transparency laws in some states (though not Kansas) meant to help public and private health plans figure out if middlemen are overcharging.

Some states have dumped their middlemen and switched to competitors among a much smaller but growing group of companies that bill themselves as a kind of countermovement to the biggest market players.

These alternatives have built their brands on a vow to earn their profit through a transparent administrative fee rather than taking a cut of rebates or pharmacy payments. They pitch themselves as outfits that will provide states full access to pricing and payment data to allow regular, thorough audits.

One of those competitors is Navitus Health Solutions, which has won contracts with Wisconsin, Montana, Washington and Oregon.

In its first year after the switch, a ProPublica investigative journalist  wrote, Montana reaped savings averaging $16 per prescription.


Celia Llopis-Jepsen reports on consumer health for the Kansas News Service. Follow her on Twitter @celia_LJ.  The Kansas News Service is a collaboration of Kansas Public Radio, KCUR, KMUW and High Plains Public Radio focused on health, the social determinants of health and their connection to public policy. Kansas News Service stories and photos may be republished by news media at no cost with proper attribution and a link to ksnewsservice.org.

The Kansas News Service produces essential enterprise reporting, diving deep and connecting the dots in tracking the policies, issues and and events that affect the health of Kansans and their communities. The team is based at KCUR and collaborates with public media stations and other news outlets across Kansas. Kansas News Service stories and photos may be republished at no cost with proper attribution and a link back to kcur.org. The Kansas News Service is made possible by a group of funding organizations, led by the Kansas Health Foundation. Other founders include United Methodist Health Ministry Fund, Sunflower Foundation, REACH Healthcare Foundation and the Health Care Foundation of Greater Kansas City.