Editor’s note: This article is about Kansas’ audit of drug spending related to its state employee health plan. You can read more about the state’s redactions of that audit here.
TOPEKA, Kansas — Kansas paid auditors $100,000 to dig into the more than $160 million it spent in 2018 and 2019 on prescription drugs for state employees, retirees and their families.
But experts who follow the pharmaceutical industry say the resulting 16-page report doesn’t tell Kansas whether the health plan — or rather, the taxpayers and public employees who fund it — got a bargain or got gouged.
Nor does it reveal what role CVS, which manages the health plan’s drug benefits and was the audit’s focus, plays in either keeping down or inflating costs.
The audit “was poorly structured and poorly performed,” New Jersey attorney Linda Cahn, CEO of Pharmacy Benefit Consultants said in an email. Her firm helps public and private health plans avoid contract loopholes that lead to overcharges on drugs. “It does not provide Kansas — or its taxpayers — with the information needed to evaluate just how much money the State wasted.”
Cahn spent more than a decade litigating pharmacy benefit issues and has reviewed hundreds of drug spending contracts like the one Kansas signed with CVS.
Both she and 3 Axis Advisors, a consulting group that investigates prescription drug costs, said the state health plan may have lost millions to ambiguous provisions in its CVS contract.
Antonio Ciaccia, president of 3 Axis Advisors, said even the largest of public and private employers often don’t know how to ask the right questions about the complex world of prescription drug deals.
What they end up with are audits that “leave everything on the cutting room floor that you actually need.”
“Some of the biggest companies in the world are getting taken advantage of,” said Ciaccia, a former lobbyist for pharmacies in Ohio, which sought an investigation in that state. “You have an incredibly opaque and complex system … There's so many opportunities to exploit that complexity.”
By the time Ohio finished digging into the matter, it discovered more than $200 million in Medicaid spending had gone into a byzantine profit model run by the administrative middlemen.
It effectively fired the middlemen companies involved, sued one of them and got an $88 million settlement this summer.
And yet Ohio audited only a slice of what it should have, experts say, leaving unknown the full taxpayer-funded profits that middlemen took home. And that holds lessons for Kansas. Not just for its state health plan, but for its cities, counties, school districts and private employers.
Clear, thorough audits are intended to expose things like overcharges and to keep contractors honest.
In the complex business of managing prescription drugs, the stakes of those audits become even greater.
The opaqueness is compounded by how Kansas, CVS and the auditor handled inquiries from the Kansas News Service.
First, the Kansas Department of Administration redacted large swaths of the audit, saying it needed to protect trade secrets. (Lawyers who reviewed the botched redactions for the Kansas News Service disagree.)
Then the department declined an interview request, saying in an email, “the audit speaks for itself.”
CVS also declined an interview. “We would refer any questions you may have to our client, the state of Kansas,” a spokesman said by email.
And the auditor, PillarRx, said it can’t discuss its findings or even the thoroughness or quality of its work without permission from CVS — the company whose work it was paid to watchdog — and Kansas. A company vice president said her hands are tied “because of our confidentiality statements” with both parties.
PillarRx’s report found more than $1 million in overcharges that CVS paid back, but otherwise concludes that CVS largely handled the health plan’s money appropriately.
The audit conclusion is written by CVS, not the auditor. In it, the company promises to address co-pay issues related to four claims.
After that, “it is our view that we are in compliance with the contract and plan design, and there are no additional material financial discrepancies related to the findings.”
The conclusion left Ciaccia flabbergasted.
“I’ve never heard of the entity being audited having the privilege of writing their own conclusions to the audit,” he said.
Cahn said Kansas should demand to see any confidentiality agreements between PillarRx and CVS. Such agreements often limit what financial documents the auditors get to review in the first place, she said, and how much detail the auditors get to disclose to their clients. They can also grant the company under audit the right to review all drafts and preliminary findings before they reach the client. The state should demand to see all earlier drafts, she said.
“The State should also require PillarRx to provide it with all exchanges that PillarRx had with (CVS) Caremark,” Cahn said, “concerning its audit, and its draft audit reports.”
A quick primer on pharmacy middlemen
The Kansas audit homes in on the same obscure but important part of the drug supply chain that Ohio looked at — the administrators called pharmacy benefit managers.
These middlemen typically negotiate prices with pharmacies, determine what drugs a health plan should cover and process the actual claims. Health plans would struggle to get that done on their own.
So the administrators handle the money flow. They pay the drugstores. And they collect the rebates that drugmakers offer as incentives to include specific medications in their coverage.
It’s lucrative work that sometimes pulls in more money than drugmakers and insurers earn.
Three of the nation’s wealthiest corporations control most of the market: Express Scripts, CVS Caremark and OptumRx.
CVS ranks No. 4 on the Fortune 500. UnitedHealth Group (which owns OptumRx) ranks No. 5. Cigna (which controls Express Scripts) ranks No. 13.
As Fortune magazine wrote, “The company climbed more than 50 spots on the Fortune 500 after completing its merger with pharmacy benefits manager Express Scripts.” It enjoyed “skyrocketing” revenues, and all that pharmacy benefit manager business kept Cigna healthy during the pandemic.
Independent and small-chain pharmacies generally stand at odds with the pharmacy benefit managers that control payments from health plans. That tension has magnified over the years as the corporations that do this administrative work merged with drug stores and insurance companies.
CVS Health, for example, not only owns its ubiquitous drugstore chain, but also functions as an insurance company (Aetna) and a pharmacy benefit manager.
It is the pharmacy benefit manager for the Kansas employee health plan. The plan covers about 80,000 public employees, retirees and dependents. It spends about $80 million on drugs annually.
A consultant told the Kansas Department of Administration that CVS’ latest contract would save the health plan tens of millions of dollars over a three-year period.
But pharmacy middlemen have faced increasing scrutiny over how they contribute to the incredibly high prices that Americans pay for prescriptions. Americans pay more than twice as much as people in other developed countries.
Employers, meanwhile, struggle to see where the money goes, because the middlemen they hire consider vital details of their financial arrangements with drugmakers and pharmacies to be proprietary and even trade secrets.
CVS ‘underperforming’ its contract
In 2015, auditors who work for the Kansas Legislature found state officials weren’t checking up on CVS Caremark.
The state effectively took CVS at its word that the company handles claims correctly, doesn’t steer employees toward pricey medications, and doesn’t increase costs by pocketing money from drugmakers.
The legislative auditors urged a change, and the state agreed. So then-Gov. Sam Brownback’s administration contracted with an external auditor, which subcontracted with another (PillarRx) to conduct regular checks.
The 2018-2019 audit is a 16-page report. The auditors also gave state officials a shorter, 10-page version of the 16-page report. The state redacted large swaths of the audit before giving the full report to the Kansas News Service. But it botched the redactions, so some of the obscured details were ultimately still readable.
A four-page written response from CVS to the auditors is also attached to the audit, which the state blacked out in full.
The audit reveals that the state employee plan didn’t always get the discounts and fees it had been promised.
On that point, the auditors said CVS was “underperforming” its contract with Kansas.
They concluded the company owed about $1.2 million, but that it had already identified much of the overcharges itself. CVS cut checks to Kansas that covered almost the full amount by the time the audit was completed. It agreed to pay back the rest after the audit.
Meanwhile, PillarRx found no evidence that CVS mishandled payments to pharmacies.
Nor did PillarRx find evidence that CVS took any money from drugmakers that should have gone toward keeping down the costs of the health plan.
Audits and researchers in other states have found middlemen using both strategies to fatten their profits.
Kansas Attorney General Derek Schmidt’s office may be investigating similar questions. It has hired the law firm that helped Ohio and another state, Mississippi, land their recent settlements against a pharmacy benefit manager for allegedly overcharging Medicaid.
Concerns about the audit
The Kansas audit says it was designed to check whether CVS complied with its written promises to the state.
Experts say that’s not how to audit PBMs. Health plans should ask auditors to dig much deeper into where the money went.
“When the assessment of the issue is, ‘Did you achieve these contract requirements?’” pharmacist Ben Link said, “it’s kind of like having the answer key to the test before you take the test.”
Link previously worked for pharmacy benefit managers, where he helped them manage public health plans. He joined 3 Axis Advisors in 2019.
For example, the audit concludes that CVS handed over money from drugmakers as required by its contract. Yet a provision in the contract allowed the company to keep “administrative fees” equaling up to 4% of the manufacturer list prices for all the medications that Kansas employees and retirees picked up.
So how much did CVS keep? Figuring that out requires detailed claim information.
But Link offered a rough estimate based on Kansas’ brand-name drug spending — a critical component of the calculation — that the fees could add up to $2.5 million for 2018 and 2019 combined.
That revenue from drugmakers comes on top of the money that Kansas already agreed to pay CVS for its services, such as the 90 cents it got for every prescription that got filled.
The National Academy for State Health Policy recommends writing tight contracts that put a stop to pharmacy benefit managers pocketing drugmaker money in any form, including money labeled with a wide variety of terms such as “administrative fees.”
Squeezing the balloon
Kansas contractually agreed to use auditors mutually approved by CVS.
The academy’s recommendations — drawn from the experiences of several states that have wrestled aggressively with the pharmacy benefit sector — also say states need to ditch deals that give the pharmacy benefit managers sway over who audits them.
“That’s dangerous,” law professor Erin Fuse Brown said. “The (pharmacy benefit) market is extremely consolidated. ... So you could imagine that (pharmacy benefit managers) have their preferred auditors.”
Fuse Brown didn’t review the Kansas contract and audit. But she is director of the Center for Law, Health and Society at Georgia State University, and helped the academy write model contract terms for states to use.
Trying to rein in the profits that pharmacy middlemen take home is like squeezing a water balloon, she said. Press their profits in one area, and the revenues simply shift somewhere else.
“There are lots of different places where (they) can suck out a little bit of revenue here and there,” she said. “And that can add up to a great deal of cost.”
Based on PillarRx’s audit of CVS, Ciaccia and Link couldn’t tell whether CVS treats non-CVS pharmacies fairly.
“That would be almost impossible to derive based on the analysis,” Ciaccia said. “It would take a much more granular look.”
Organizations such as the ERISA Industry Committee and the National Conference of State Legislatures have turned to Ciaccia to help educate private employers and state policymakers on where the money goes.
Cahn, the industry consultant, questioned sample sizes. The number of drugmakers and pharmacies included in the review. The lack of investigation into CVS’ definition of terms such as “generic” and “specialty drug,” and how this relates to its guarantees.
She pointed to a section that says PillarRx “requested reports from CVS to substantiate their performance levels … to determine if CVS had performed at the minimum level required to avoid paying a penalty to the State.”
“This is ludicrous,” Cahn said. “This is like asking a Fox to report on whether it ate the chickens in the chicken coop.”
The National Academy for State Health Policy proposes strengthening contracts to ensure health plans can conduct aggressive audits and checks that go beyond measuring contract compliance.
“Let’s say the state negotiated a not-so-strong contract on its own behalf,” Fuse Brown said. “It’s paying too much … and passing a lot of those costs on to the state employees.”
“You wouldn’t necessarily pick up on that if you were just doing an audit of whether or not the PBM lived up to the contract terms,” she said.
Celia Llopis-Jepsen reports on consumer health for the Kansas News Service. You can follow her on Twitter @celia_LJ or email her at celia (at) kcur (dot) org.
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