The obscure health care middlemen at the center of an election year policy fight

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

These critics include Republican Tim DeFoor's main general election opponent, state Rep. Malcolm Kenyatta, D-Philadelphia. DeFoor has defended his office's work, saying the audit started with the support of the state Department of Human Services.

"I'm a bit perplexed by the response," he told Spotlight PA.

At issue are pharmacy benefit managers, drug middlemen who regulators say inflate prices to boost their profits.

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

The agency rejected the audit's finding, saying DeFoor was conflating banned spread pricing and allowable (for now) transmission fees.

Spread pricing is the difference between the amount a benefit manager reimburses a pharmacy for a drug, and the amount it charges a health administrator. A benefit manager makes money if the reimbursement it pays is lower than the fee it charges. Transmission fees, meanwhile, are a usually small amount a benefit manager might charge per prescription filled by a pharmacy.

DeFoor's office rejected the distinction, saying the impact is all the same.

"If it acts like spread pricing and functions like spread pricing and has the impact of spread pricing, you can call it whatever you want," lead auditor Peggy Morningstar told Spotlight PA. "But at the end of the day, this is still spread pricing."

The auditor general is one of Pennsylvania's three elected row offices, tasked with monitoring how public dollars are spent to catch waste, fraud and graft. Despite the position's importance, contests for the role typically garner little public interest. A recent Spotlight PA poll found that only 31% of voters are following it very or somewhat closely.

Kenyatta, a young queer lawmaker from Philadelphia first elected in 2018, has pitched himself to voters as a progressive fighter for working people. He has become a national name as a surrogate for President Joe Biden, a frequent cable television guest and after unsuccessfully seeking a U.S. Senate seat in the 2022 primary.

DeFoor was an unknown in state politics before 2020 when he flipped the seat. He's run a low-profile campaign that focuses on his accomplishments in office, pitching himself as a trained auditor who will stick to the basics of the role.

Audits are often politicized. Their results fuel partisan rhetoric and policy debates over everything from the social safety net to election law.

Following the release of the audit, legislative Democrats who focus on health care jumped into the fray. State Rep. Dan Frankel, D-Allegheny, said in a statement he was "genuinely shocked" that DeFoor "could be so easily snookered." State Rep. Jessica Benham, D-Allegheny, a Kenyatta supporter who sponsored a law further regulating benefit manager, called the audit "deeply unserious."

Kenyatta accused DeFoor of timing the release to the approaching election.

"Pennsylvanians deserve better than a politician who pretends to address serious policy issues before an election to score political points," Kenyatta said in a statement.

Joey Mattingly, a former pharmacist who now studies the industry as a professor at the University of Utah, said that spread pricing and transmission fees are distinct. He said that the former helps pharmacy benefit managers profit more than the latter.

However, Mattingly's research has found that after spread pricing is banned, benefit manager still find ways to make money by adding on new fees or techniques and using their market power.

"How else should they get paid?" Mattingly said. "Look, they're a for-profit business too."

What do pharmacy benefit managers do?

How a drug gets from a manufacturer's assembly line to someone's cupboard is a long, complicated process with many middlemen. These include drug manufacturers, which sell to distributors. They then sell to pharmacies, which dispense drugs to patients.

Pharmacy benefit managers, Mattingly said, help insurers and employers decide what drugs to pay for, at what price, and in what circumstances. Their original goal was to keep overall medical benefit costs low for the employers who purchase plans and the workers those plans cover.

But through a series of acquisitions in the past few decades, benefit managers have become part of a handful of health care conglomerates whose size lets them dictate market conditions and drive costs higher rather than lower, regulators say.

According to a July Federal Trade Commission report , the top three benefit managers — 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.

Pharmacy benefit managers counter that the benefits they accrue are passed on to employers and their workers, and argue they keep upfront health care costs down.

DeFoor first announced the audit in the fall of 2023 with the backing of the Democratic Shapiro administration. In a joint statement with DeFoor, Human Services Secretary Val Arkoosh said she was "hopeful that this audit" would help the agency better understand the relationships between the players involved.

DeFoor's inquiry focused on PerformRX, which doesn't have a contract directly with the state. Instead, it is a subcontractor of a handful of large health systems that provide care to low-income Pennsylvanians.

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

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

"The PBMs were not being transparent. Therein lies the problem," DeFoor, a Republican, told Spotlight PA in an interview last month. "DHS wasn't monitoring it."

The department acknowledged it was unaware of the fees, but pinned the blame on PerformRX for not reporting them as required by law.

A spokesperson said transmission fees are not a form of spread pricing because the amount of the fee is known to and agreed upon by a pharmacy when they enter into an agreement with the benefit manager. Spread pricing, meanwhile, is a decision of the benefit manager without input from the health plan or the pharmacies.

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

An ongoing debate

The conflict over DeFoor's audit comes as lawmakers debate how to regulate pharmacy benefit managers and contend with opposition from the health care industry.

Benham, the Allegheny County Democrat, sponsored a law that bans benefit managers from requiring customers to use their affiliated pharmacies or auto-enrolling consumers in mail-order pharmacies.

It also requires benefit managers to reimburse affiliated and unaffiliated pharmacies the same amounts for each prescription. Previously, benefit managers 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 expanded the state's spread pricing ban to private insurers, instead of applying it only to Medicaid. That language passed the state House with near unanimous support, despite opposition from national trade organizations for benefit managers and health insurers, as well as other health care giants like Highmark.

The benefit managers' trade group, the Pharmaceutical Care Management Association, argued in a statement to Spotlight PA that by "significantly restricting the tools PBMs use to lower drug costs and mandating disclosure of information that could give drug companies more power to increase prices, the result of the legislation will be higher drug costs for Pennsylvania health plans and patients."

After a few weeks of closed-door talks alongside budget negotiations, the Republican-controlled state Senate amended the bill to remove the spread pricing language. The legislature approved the amended bill and sent it to Gov. Josh Shapiro's desk. He signed in July.

State Senate Majority Leader Joe Pittman, R-Indiana, told Spotlight PA last month that he considered it "one of the most significant accomplishments we had in the session."

Benham is unapologetic in her allegiances.

"Malcolm's my guy," she told Spotlight PA. They co-chair the state House's LGBTQ Equality Caucus, have fundraised together , and her official statement about the audit was reprinted in a Kenyatta campaign release attacking the timing of DeFoor's report.

Still, she said she tries to approach pharmacy benefit managers in a nonpartisan way and that she worked with a Republican colleague on the issue. She said she agrees with DeFoor that both transmission fees and spread pricing are a problem, but also agrees with the Department of Human Services that they aren't the same.

"We should solve both, but it's much harder to solve both when we conflate them," Benham said.

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