Prescription for Profit

A new Medicaid outsourcing scheme is putting independent pharmacies out of business, while out-of-state companies reap the benefits.


Patrick Michels

A version of this story ran in the April 2012 issue.

On March 1, Texas ushered in a bold new system to repay pharmacies for their Medicaid customers’ prescriptions.

Used to be, Texas reimbursed all pharmacies at the same rate, based on a price list posted online. For each transaction, pharmacies got a $6.35 dispensing fee. Simple enough.

Under the new plan, the state contracts with a handful of managed care organizations, which, in turn, hire outside companies called pharmacy benefit managers (PBMs) to negotiate lower rates with pharmacies, and pass the savings on to taxpayers. The pharmacy benefit managers act as middlemen in this new system. They, of course, take a little profit for their troubles.

When the Legislature considered the new plan last year, independent pharmacists warned it would run them out of business. They would be backed into money-losing contracts because they can’t buy drugs at the same wholesale rates as big chain stores. But proponents of the new system said the state could save $50 million a year by handing over Medicaid pharmacy reimbursements to managed care. The state Health and Human Services Commission (HHSC) pegged projected savings at $56 million over two years.

With former Rick Perry staffers Mike Toomey, Ann-Marie Price and Victoria Ford lobbying on their behalf, the pharmacy benefit management companies got their way. State officials said there were safeguards in place to ensure that nobody lost coverage and no pharmacies were run out of business. “Any company that sets the rates too low to ensure our clients have that access will end up losing its contract with the state,” HHSC spokesperson Stephanie Goodman told The Dallas Morning News.

Even after the program’s first week, results were impressive.

In South Texas, a few independents like Mom’s Pharmacy in Weslaco shut down after the program’s first day of implementation. The McAllen Monitor has been following the closings in the Rio Grande Valley, where 400,000 of the state’s 3.2 million Medicaid patients live.

John Calvillo, a pharmacist in Mission who leads the Rio Grande Valley Independent Pharmacy Association, says he’s heard of independent pharmacies receiving dispensing fees from $2 to 50 cents.

“The PBMs have great lobbyists, they can use smoke and mirrors and make them believe they’re going to save a lot of money,” Calvillo says. He says the new system is far more complex than the old one, and incredibly opaque. He’s seen a single PBM using 75 different reimbursement rates, depending on which pharmacy it’s doing business with.

“We honestly do not know what we’re going to be paid. They send us a take-it-or-leave-it contract,” Calvillo says, and “they never negotiate with us, even though they told the state they would.”

When pharmacists descended on a hearing at the Capitol in January, House Public Health Committee Chair Lois Kolkhorst conceded the new system was basically a “black box.” The next month, pharmacists tried to block the program with a pair of federal suits. In the Valley, state Sen. Juan Hinojosa, D-McAllen, and state Rep. Sergio Muñoz Jr., D-Palmview, have taken up the cause. Hinojosa called the reimbursement rates “unacceptable,” and has met with HHSC commissioner Tom Suehs about the program.

At a March 24 meeting, Suehs told a group of angry pharmacists that just three pharmacy closings in the Rio Grande Valley this month were directly tied to the new policy.

Calvillo says the logic used to support this new program—cutting costs by adding extra players between pharmacies and the state—is flawed. “How are they going to save money by inserting two for-profit companies between us? It doesn’t make sense,” he says. The margins those pharmacy benefit managers are trimming off the prescription costs are ending up in California, Rhode Island and Wisconsin, where the management companies are based.

“They’re really throwing us into the deep end,” he says. “I don’t think the state realizes what they’ve done.”