CORAOPOLIS, Pennsylvania. – Auditor General Timothy L. DeFoor today released a performance audit showing that Pennsylvania taxpayers paid $7 million more than budgeted for Medicaid prescription drugs in 2022 due to a lack of oversight by the Department of Human Services and disparities in pricing by pharmacy benefit managers (PBMs).

“Our auditors found evidence of spread pricing, inadequate oversight by DHS, and overcharging of taxpayers by PBMs, resulting in a loss of $7 million in taxpayer funds in 2022 alone,” said Auditor General DeFoor. “PBMs rely on no one to review their reporting so they can
get a higher rate and still collect a fee from the pharmacy. We have made recommendations to ensure more accountability and process improvements, but what really needs to happen here is legislative change.”

DHS contracts with managed care organizations (MCOs) to implement the Physical HealthChoices Medicaid program. The MCOs then contract with PBMs to manage the drug benefits for the program. According to DHS, more than 2.8 million Pennsylvania residents use this taxpayer-funded benefit.

Spread pricing occurs when a PBM charges an insurance company more for a prescription drug than the pharmacy pays for that drug. The PBM keeps the fee as an additional source of revenue.

“This is not just a procedural issue,” added Auditor General DeFoor. “Pharmacies are going bankrupt because of the impact of spread pricing. Spread pricing in any form hurts the very people we promised to help.”

The auditors found that DHS did not effectively monitor the HealthChoices program’s $4.6 billion in pharmacy spending in 2022. This resulted in undisclosed spread pricing, where PBMs did not report the transmission fees charged to pharmacies to MCOs and DHS. This lack of transparency
led to inflated pharmacy data.

In addition, auditors found that DHS did not effectively monitor contracts between MCOs and PBMs. DHS did not have written policies and procedures for its contract monitoring efforts and did not verify that PBM contracts complied with the HealthChoices contract.

With regard to PBM PerformRX, auditors found that while the company was transparent with pharmacies about the additional fees, it never shared that information with MCOs or DHS. PerformRX is required by law to inform MCOs and DHS of all fees it charges pharmacies.

“Much work has been done on both sides of the aisle to implement changes to the way PBMs operate in Pennsylvania,” said Auditor General DeFoor. “Now it is time to focus on the taxpayer-funded Medicaid system and close the loophole that allows PBMs to charge pharmacies submittal fees. We need legislative changes to ensure there is no room for spread pricing with our taxpayer dollars, and the law must clearly define that DHS is responsible for the information submitted to it by its contractors.”

The examination objectives were:

• Determine whether DHS has effectively monitored PBMs’ pharmacy claims, including but not limited to the accuracy of pharmacy information used to prepare per capita rates for the HealthChoices Medicaid program.
• Determine whether DHS has effectively monitored PBMs’ contracts to ensure compliance and transparency with the HealthChoices Medicaid program; and
• Determine whether PBM PerformRX complied with 62 PS § 449(h)(3) and (4) of the Human Services Code (as amended by Act 120 of 2020) with respect to costs and charges paid by pharmacies or pharmacy service organizations to PBMs compared to the corresponding amounts billed to the respective HealthChoices MCOs to ensure transparency, compliance, and accountability for the HealthChoices Medicaid program.

For more information about the audit, visit the Be Audit Smart page at www.paauditor.gov.